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  • CFO Magazine

Offshoring Spreads Its Wings

From East Asia to Eastern Europe, offshore outsourcing is taking off.

Tom Byrne, CFO at Novi, Michigan-based BrassCraft Manufacturing, a maker of plumbing supplies with $350 million in revenue last year, says the key to a successful offshoring arrangement lies almost entirely in the communication process. He cites the example of a sink part — a drain basket — that began generating complaints from customers who were cutting their fingers on it. BrassCraft had failed to specify that the Chinese manufacturer should round the edge, so the rim was left “razor-sharp,” says Byrne.

Now, says Byrne, “we reconfirm many times what we have communicated. Many people working with offshore partners assume that they can’t hear us or understand us, but the truth is, very often we’re not telling them.”

Passage Beyond India

Vendors, too, have learned a lot in the last few years. The large Indian outsourcing providers, such as Tata Consulting Group, Wipro Technologies, and Infosys, are expanding their service offerings and improving their grasp of U.S. business practices. Sharma of THL Partners says he is working with a portfolio company that is seriously considering a bid on an enterprise software project from an Indian company alongside bids from global accounting firms.

As offshoring has matured, India’s success in developing the industry has both created challenges for Indian firms and drawn competition from many other regions hoping to cash in on the trend. Faced with high turnover, the depreciation of the dollar, and double-digit annual wage increases, Indian providers themselves are looking to open shops in lower-cost locations. Wipro has a joint venture in Saudi Arabia and has announced plans for a center in Egypt. Tata is planning a location in Morocco to serve French speakers. Vendors are also moving to lower-cost locations within India, expanding from their bases in cities like Bangalore into cities with less labor turnover and lower wage rates.

U.S. companies are also looking further afield. Nearly a quarter of the respondents to CFO’s survey have relocated their offshore operations — to achieve greater cost savings, diversify their operations to reduce risk, or tap into a more diverse labor pool. Eastern Europe has emerged as a destination of choice, particularly for European companies in need of extensive language skills. The Philippines, and to a lesser extent Malaysia, Thailand, Indonesia, and Vietnam, are providing other options in Asia, while some experts point to Latin America, Africa, and the Middle East as emerging locations in various stages of readiness.

Still, with its educated, English-speaking, business-savvy workforce and business-friendly government, India maintains its reputation for providing the highest-quality offshore service available. “Clients complain that they don’t want to go to India, because of the wage inflation; then we take them to other places and they get a little spooked,” says Couto. “The cost escalations in India have been matched by an improvement in the quality of the labor supply.” Some companies are coping with this by sending noncore functions that don’t require English-language sensitivity to lower-cost areas.

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