Offshoring: Hidden Costs Come Home to Roost

As the new year began, the news was full of American companies expanding their outsourcing investments in India, China and elsewhere. Cheap materials and cheaper labor make offshoring a no-brainer for everyone from service providers to manufacturers. And so CIOs have had to think about readying their enterprise infrastructures to make the most of those opportunities.

But now they have to think about something else: the Customs-Trade Partnership Against Terrorism, or C-TPAT, which requires that companies take responsibility for the security of their supply chains. Anyone bringing shiploads or truckloads of anything into the United States needs to be able to account for the status and whereabouts of their goods at all times, even “if the container is in the custody of a trucker in China or a longshoreman in Rio de Janeiro,” reports Senior Writer Ben Worthen in our cover story, “Customs Rattles the Supply Chain,” Page 40.

Right now, participation in the C-TPAT program is voluntary, with the government offering the incentive of expedited Customs clearance for those who comply. But through a nifty bit of digging, Worthen has discovered that the government is moving vigorously and swiftly in the direction of making compliance mandatory for all companies bringing goods into the United States. “There’s no doubt that this is going to happen,” Kevin Smith, general director of global customs of General Motors, told Worthen. “This is an inevitability.”

As you read Worthen’s story, you will naturally reflect on all the work and all the money that C-TPAT compliance is going to cost. Securing your supply chain will require a ton of IT, especially, as is usually the case, when your offshore partner is not as technologically advanced as you are and is not collecting the data that Customs will require. And perhaps you will be reminded of the Sarbanes-Oxley Act, which demands that you take responsibility for the accuracy and security of your company’s financial reporting. That burden, too, falls heavily upon CIOs.

But before you begin railing about government interference in commerce, and before you begin questioning how effective C-TPAT will eventually be in mitigating risk (and whether or not that degree of safety is worth the expense), remember this: Just as Sarbanes-Oxley ultimately was the price of the accounting scandals and executive malfeasance that brought us Enron, Global Crossing, Tyco, WorldCom, Adelphi and the rest, C-TPAT is the price of offshoring. It is the price of the risk you assume when you go out into an increasingly hostile and insecure world to harvest all those cheap materials and all that cheap labor. It is a hidden cost but no less real for that. And no matter what you conclude about offshoring’s risks and benefits, one thing is for certain:

The cost is about to go up.