Drain Pain

Businesses expect to save less by offshoring labor
April 1, 2011
 

Most American companies shipping jobs overseas say a shortage of skilled domestic employees—not cost cutting—is their primary motivation, according to new research from the Fuqua School of Business. The recent study is part of an ongoing research effort at Duke into the effects of offshoring trends on American competitiveness. Offshoring is defined as “the process of sourcing any business functions supporting domestic and global operations abroad, in particular from lower-cost emerging economies,” according to information from Fuqua.

Businesses don’t expect to cut their overall costs with offshoring as much as they have in past years because average cost-savings as a result of offshoring has steadily declined, researchers say. This means businesses are broadening the range of factors that influence their selection of overseas sites.

For instance, the software industry in the U.S. has the highest ratio of offshore employees to domestic employees: For every 100 workers in the U.S., there are thirteen overseas. Researchers say this may be owing to a scarcity of domestic science and engineering graduates.

Companies new to offshoring discover there are a number of hidden costs involved in the practice, including expenses for training, staff recruitment and retention, and government and vendor relations. One of the managers surveyed for the study noted it has taken his company several years to discover that the benefit of offshoring labor disappears in fewer than three years. Most firms also see a decline in overall efficiency with overseas expansion, which may lead to increased management and coordination costs.