The Real Difference Between Globalization and Outsourcing

There is a big difference, strategically, between the kind of globalization we’re seeing most U.S. companies do today, which boils down to little more than labor arbitrage to low-cost countries, and true globalization. There’s no strategy and not much more skill needed to offload work to low-cost destinations. It’s a winning short-term balance sheet move, with potentially disastrous long-term implications if the relationship isn’t more than skin deep. For example, when companies offload manufacturing, and increasingly, R&D, to lower-cost countries, they can cut prices and offer bigger product selections here in the United States. But if all those relationships are arm’s-length, it’s only a matter of time before those offshore suppliers eat their parents alive. They acquire U.S.-funded manufacturing and design capabilities now and add the marketing later (it’s way easier to acquire than most companies let on—yet another myth of U.S. corporate superiority). These companies can build a brand base in their local markets and then come back into the U.S. market under their own name at a lower price point. Worse, in a pure outsourcing strategy, the emphasis is almost invariably upon the U.S. market. There’s little attempt to use the relationship with the supplier to enter growing foreign markets around the world—to develop a global selling network in addition to a global labor network—for when the U.S. market is no longer dominant.

Don’t get me wrong. I’m not condemning global labor sourcing. It’s inevitable. But the focus for many companies today is pretty short sighted.

A new study from Deloitte doesn’t address the outsourcing-versus-globalization issue; it wasn’t the focus or intent of the work (so don’t consider Deloitte to be with or against my arguments here). But the study does address the gap indirectly, by pointing out how fractured and sub-optimized most global companies consider themselves to be today. The report also tries to address what it takes for companies to become truly global, to manage the complexity of multiple markets and myriad suppliers around the world, while also being profitable.

Good, profitable global companies have good visibility into their operations across the world and with suppliers, implying a tighter, more effective relationship. These companies can determine their true distribution and logistics costs (which are invariably higher as you globalize), they can calculate profitability by customer and by product and they do scenario planning across the different functions and divisions to test the true effects of a global strategy across the company. For example, the report offers a sobering story about a Dutch company that thought it would save 5 percent by moving assembly to China, where it already sourced parts. But the company failed to research the import implications and eventually discovered that the assemblies cost 10 percent more from China, because of a 14 percent import duty on foreign-assembled products in the Netherlands.

These top companies also collaborate better both internally and externally, with suppliers and customers. They create cross-functional internal design teams, they collaborate with customers on product requirements, they use formal product lifecycle program methodologies and they collaborate with suppliers to develop production processes. This last bit is important. Processes developed jointly are more likely to keep suppliers loyal and pre-supposes some investment into the process from both entities. There is more potential for retaining a unique competitive advantage in this sort of relationship than there is in simply farming things out to a supplier. Everyone remains invested in learning and contributing to products and sales. That’s global.

Finally, the top companies use more IT on a global basis. They are much more likely to use transportation management systems, e-sourcing/e-procurement, CRM, advanced planning and scheduling and product lifecycle management applications. “This suggests strongly that IT capabilities indeed matter to ’unlocking’ the value of the global corporation,” says Peter Koudal, Deloitte’s director of research. “I think there are few (if any) global companies that could be managed without a heavy dose of IT. Yet, our results show that most companies still have a long way to go in implementing core IT capabilities.”

Indeed, the study found that companies across most industries rated themselves near or at the bottom in their ability to create effective global supply chain network structures. IT can play a key role in improving those structures, and in making companies truly global, instead of being mere outsourcers.