Of the more than 500 senior finance and HR executives surveyed by Hewitt Associates, more than four in 10 (45%) indicate that their firms are currently using a global sourcing model or are considering implementing one within the next three years. While finding a cheaper place in which to conduct business is the primary driver (92%) and most often-used means of judging success (95%), leaders are often overlooking many people-related costs, according to the study.
For example, Hewitt said that fewer than half of companies analyze the tax environments of considered countries, only three-fourths measure the impact on supply chain costs and only 34% assess the cost of plant or office shutdown.
“It’s economics 101,” said Mark Arian, Hewitt’s Corporate Restructuring and Change practice leader in a statement. “In the early rush to migrate to lower cost centers, companies have been grabbing people to fill seats where the supply of workers greatly exceeds demand, but, demand will quickly catch up. As their operations mature, companies that have invested heavily in offshore markets will see projected profits disappear if they haven’t fully examined issues around scaling, as well as future opportunities for labor arbitrage, developing leaders and retaining workers.”
Examining Other Issues
People-related expenses, including training and local cultural issues, are also typically not properly examined when companies decide whether and where to locate their work according to Hewitt’s survey.
Not surprisingly, most companies (88%) evaluate labor costs and analyze potential return on investment (79%). However, fewer than 4 in 10 analyze the local economic/political climate and only one-third routinely examine the impact of global sourcing initiatives on the community or other stakeholders (34%). Just over three in 10 (32%) evaluate the impact of employee/union representation considerations at home or in the location to which they will be moving operations.
“Global sourcing decisions are made primarily by finance and the c-suite, with HR usually being brought in after the fact,” noted Arian. “However, companies can minimize hidden costs and maximize return by enabling HR to have a seat at the table early so they can carefully address issues, such as skill and language requirements, labor costs by market, alternative talent pools, workforce training, retention and change management at both ends of the global sourcing spectrum – those being displaced and those receiving the work.”
Finance executives indicated that managing change/transition is their biggest global sourcing challenge (64%) followed by keeping up corporate culture and values (58%) and people management (55%). HR executives had similar rankings but were more focused on legal and regulatory challenges. Cultural barriers, labor pool quality and backlash from home country employees were also cited as key issues.
Hewitt’s study showed that the percentage of jobs being moved offshore will roughly double in the next three years, with an average of 13% of jobs at each company currently relocated and an additional 12% being considered for relocation within the next three years. Of those who are currently moving work to other countries, 29% began doing so in the years 1995-1999, and 43% began in 2000-2003. Of those who do not currently use that HR model, 71% plan to start doing so by 2005.
IT operations is the functional area most frequently globally sourced (67%), followed by customer relations (49%), manufacturing (42%) and supply chain (41%). IT will remain most popular for the next three years (63%) with companies increasing their level of interest in moving work offshore in finance and accounting (43%), customer relations (40%) and HR (31%).
Drivers Other than Cost
After cost reduction, the most often-cited drivers of moving work around the world include:
- productivity improvement (54%)
- focus on core competencies (49%)
- increased flexibility (45%)
- 24/7 staffing (38%).
Only 40% of firms surveyed work with an external consultant to develop their global HR strategy and 59% of respondents said that it took or will take two years or less to plan, prepare and execute their strategy in this area.
Other survey highlights include:
- The top locations used for global sourcing from the finance group include India (60%), China (36%), Mexico (32%), Canada (15%) and Ireland (14%).
- The areas of greatest global sourcing expansion over the next three years will be Eastern Europe and Southeast Asia.
- The top areas of need for special skill or knowledge training in another country include language training (52%), quality assurance (46%), customer service skills (40%), technical skills (35%) and timeliness (33%).
- Twenty-three percent of respondents indicated that their global sourcing efforts had a positive impact on their brand and 11% indicated that it had hurt.
- Some 47% of companies reported no change in morale in a new sourcing location and 48% reported no change in the home country, while 19% and 30% indicated a negative change in morale in the new and home countries respectively.