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The New Calculus of Offshoring

For years the offshoring boom was driven by one factor: savings. Today the decision is much more complicated.

Even before Ajit Singh made a formal announcement about his company’s offshoring plans, employees knew what he would say. “The more I talked,” recalls the CEO of Bioimagene, a maker of computer-aided diagnostic tools, “the more I think they could see my rationale.”

True, some voiced concern about the restructuring scheme, most of which would play out 8,000 miles and nine time zones away from the company’s Silicon Valley headquarters. There, in the city of Pune, India, the company employed dozens of software developers — about twice as many employees as in the United States — and they cost about 75% less than their American counterparts.

Those Indian employees had been with the company from its 2004 start, as a way to help Bioimagene stretch its initial funding as far as possible. Singh, a 20-year Siemens veteran who joined Bioimagene last fall, took immediate note of the Indian operation, making monthly visits there.

By December, with the economy sinking, Singh was ready to act. Five key employees would have to move halfway around the world. Another 65 would be let go. The decision? To close the company’s Indian office, in order to become more competitive.

But wait. Wasn’t that the same argument that so many companies — one-third of the Fortune 500, in fact — had given for transferring functions abroad in the first place? For about 10 years (earlier, in the case of manufacturers), U.S. businesses had been shipping jobs overseas as eagerly as a prize-hungry kid mails in box tops. From data-entry and customer-service jobs on up the value chain to human resources, engineering, and finance, offshoring became a fundamental tenet of globalization: Let the lower-wage workers overseas handle the labor-intensive stuff, leaving workers (albeit fewer of them) back home to lavish their talents on value-creating analytics.

Pressed for profits, what CFO could resist, especially when it promised quick cost reductions of 40% or more where large quantities of administrative work could be moved to low-cost locations, such as India and the Philippines? Put simply, “CFOs are looking to hold on to market share,” says David Poole, head of Americas Business Process Outsourcing at Paris-based consulting firm Capgemini. “Huge shifts in markets are taking shape.”

As formulas go, offshoring looked both elegant and simple. “Outsourcing was cost-cutting by a different name,” says veteran industry strategist Ram Iyer, founder and president of The Midmarket Institute, an association in Princeton, New Jersey. “Once companies saw the savings they could achieve through labor arbitrage, the decision was made.”

As wage inflation has set in — in India, annual raises of 15% have become the norm — some companies have been prompted to broaden their horizons. Fresh supplies of low-cost labor beckon from countries like the Philippines and China, to name but two of an exploding roster of options. Yet even when wages do move up, improving productivity and training keeps offshoring costs attractive. Therefore, “outsourcing isn’t about making one decision anymore,” says Poole “It’s become a portfolio of choices.”

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