Is Outsourcing Cost-Effective?

CIO — For years now, companies have rushed to find cheap labor and increased profits in foreign lands. The move was a play to make bottom-lines blacker, company coffers deeper and corporations safer. The thinking was that global corporations would be more secure and more profitable if their operations were spread amongst many economies rather than anchored to one. But given the domino failures in economies worldwide, has offshore outsourcing helped or harmed enterprises in the final count?

"Globalization created so many hyper-competitive markets that many imploded," says Dan Brown, adjunct professor in the Segal Design Institute, McCormick School of Engineering and Design at Northwestern University. He is also founder and president of Loggerhead Tools. "The continuous drive to lower prices is harmful to the company and the market."

But therein lies the rub. Under severe economic pressures, consumers often demand unreasonably low prices which beleaguered companies most often achieve by outsourcing offshore. This leads to job loss which leads to more consumer demand for even lower prices. Margins then disappear and companies fold. The fear is that this chicken and the egg dilemma may leave everybody's goose cooked.

Brain Freeze

For the moment, the dilemma is frozen in time. "Since September 2008, Canadian outsourcing transactions have not increased, but neither have they decreased," says Mark Schrutt, director of Outsourcing Services at IDC Canada. "There is a lot of interest in increasing offshore outsourcing, but no movement, as companies are waiting to see what settles out."

The situation is much the same worldwide, including in the U.S. As heads of state charge to battle, stoked by populist demands, and banks continue to hoard cash and credit, leaders of companies everywhere are frozen in confusion. "A lot of executives are stalled out and not making a decision," says Frank J. Casale, founder and chief executive officer of the Outsourcing Institute (OI), a professional outsourcing association.

The Outsourcing Institute conducted a recent poll of 50 leading advisers, representing over 500 outsourcing deals. When asked the main reason why most outsourcing deals have become stuck over the past six months, the majority, 38 percent, said executives are not willing to make any major commitment at this time. Another 24 percent cited the economic situation while 14 percent said there were "too many distractions/too much going on to be able to focus." In other words, chaos reigns.

Sooner or later though, the heat applied by so many outside forces will thaw corporate honchos and force them into action.

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