Offshoring Now Seen as Growth Driver, Not Just Cost Cutter

Duke/Archstone Consulting study finds corporations turning to offshoring for new product development, R&D and qualified personnel

Duke/Archstone Consulting study finds corporations turning to offshoring for new product development, R&D and qualified personnel

Stamford, CT  October 17, 2005  In addition to reducing expenses, Fortune 500 companies are turning to offshoring for new product development, research and development, and access to qualified personnel, according to the second Duke University CIBER/Archstone Consulting study that examined the results and offshoring initiatives of 96 large companies with average revenues of $25 billion.

The survey found that 73 percent of the companies surveyed considered offshoring an important part of their overall growth strategy as well as a way to reduce administrative costs. Product innovation and design, research and development and engineering services were all cited as key initiatives that corporations were looking to move offshore.

Of the Forbes 2000 companies surveyed, 71 percent cited access to qualified personnel as a major driver when considering offshoring (up from 54 percent in the last survey) and industry expertise as the top motivator in considering offshoring locations (74 percent).

Shift in Offshored Functions

Archstone Consulting and Duke University's Center for International Business, Education and Research (CIBER) teamed up in 2004 to develop and launch a study aimed at developing data and tracking changes in how companies use offshoring. The study surveyed Fortune 500 and Forbes 2000 companies in sectors including financial services, automotive, airline, consumer products, pharmaceutical, energy, retail, hospitality and high tech.

"With this biannual survey, we are able to track trends and provide firm level data versus studies that are anecdotal in nature," said Professor Arie Y. Lewin, director of Duke/CIBER. "Besides the types of functions being offshored, we are also tracking where companies are looking to offshore."

"We are seeing a shift in the types of offshore functions, which is a shift in the mindset of how top executives are looking at ways to generate new business," said Todd Lavieri, CEO and President of Archstone Consulting. "New product engineering, research and development and additional administrative functions are being more fully integrated into strategic plans."

China Rising

While India still has the largest number of offshore implementations among the survey participants, China is clearly the fastest growing location (46 percent growth rate compared to 26 percent in the survey completed in fall of 2004). China's growth is being driven by functions that support manufacturing; specifically, engineering services and product development that are extensions and can be integrated with existing manufacturing locations.

India remains a favorite choice when it comes to IT and back office activities. The Philippines is another location cited by companies that are establishing contact centers (36 percent) and back office activities (25 percent) as a result of its strong language capabilities.

The study is the second in a series of biannual surveys designed to gain insight into strategic drivers, offshore operating models and financial results of FORTUNE 500 and Forbes 2000 companies, as well as privately held organizations. Industries represented include financial services, manufacturing, technology, computer technology, media, software and programming, energy, aerospace and defense, and automotive.

Importance of Buy-in

Other key survey findings:

  • Disaster Recovery and Data Security  As companies gain hands-on experience with offshoring, they are developing an appreciation for the business continuity risks in these locations, such as natural disasters and risks to data security. The number of survey participants who cited Disaster Recovery as a risk when considering whether or not to offshore grew to 43 percent from 26 percent in the first survey, while concerns about Data Security increased to 56 percent from 46 percent.

  • IT Still the Leader  IT is still the leading offshore implementation for the majority of surveyed organizations (54 percent). However the fastest growing functions to be launched for new offshore implementations are administrative/back office functions, such as HR and finance/accounting with a 60 percent growth rate.

  • Corporate Culture Buy-in Still Critical  Of the companies surveyed that are not offshoring, 78 percent point to corporate culture buy-in as the main reason; other top factors include employee morale (70 percent) and quality of service (74 percent).

  • Better than Expected Cost Savings Continued  Similar to the first study, 78 percent of offshore implementations met or exceeded expected savings within the first year, with 30 percent achieving their service level goals within the first five months. When comparing Forbes 2000 with small and medium sized companies, Forbes 2000 companies achieved 37 percent savings while small and medium sized companies achieved 55 percent.
"A surprising new trend is that small and medium-sized companies are aggressively using offshoring as a growth strategy (91 percent) compared to Forbes 2000 companies (65 percent)," said Lewin. "The survey indicated that 50 percent of jobs offshored by small and medium companies are in product and process development positions such as engineering, product design and R & D."

Archstone and Duke said that the study will be expanded to include European companies in 2006 to provide further insights and correlations between U.S. and European experiences.

Additional Articles of Interest

 For more information on the challenges and opportunities presented by increasingly global supply chains, see the special in-depth report in the August/September 2004 issue of Supply & Demand Chain Executive, which includes the following articles:

 For more information on the global supply chain, with a focus on security issues, see "Building the Secure Supply Chain," the Net Best Thing article in the June/July 2003 issue of iSource Business (now Supply & Demand Chain Executive) magazine.