Pros and cons of global outsourcing

Outsourcing, in general, is the strategy of contracting with a third party to add significant value to your standard products. The primary reason companies outsource is the dictum, “Do what you do best, and leave everything else to the rest.” Put more succinctly by one of my management professors, David Bohm: “Stick to your knitting!” Outsourcing makes it possible to ass...

12/01/2006


Outsourcing, in general, is the strategy of contracting with a third party to add significant value to your standard products. The primary reason companies outsource is the dictum, “Do what you do best, and leave everything else to the rest.” Put more succinctly by one of my management professors, David Bohm: “Stick to your knitting!”

Outsourcing makes it possible to assemble a team of companies, each doing what they do best, that together create the best product at the best price. As technology advances, this team approach becomes increasingly necessary because the mix of skills needed to produce even a simple household appliance (such as, say, a microprocessor controlled dishwasher) exceeds what any one company can assemble—or, more importantly, manage.

Global outsourcing allows high-technology companies to widen the skills available in their teams. For example, semiconductor design is best done in countries with exceptional technical education systems. Fabricating those semiconductors, however, is best done in developing countries where the cost of mass production tends to be low.

A second reason to engage in global outsourcing is to improve customer support programs. U.S. based machine-vision-camera manufacturer Imperx, for example, partnered with a Moscow-based software company to provide technical support for its cameras in Europe and Asia. Moscow’s location near the center of the Eurasian supercontinent meant the new office could handle daytime inquiries from all the relevant time zones simply by extending its business hours. The same geography allows them to rapidly ship hardware throughout the region.

Another important consideration is skill with local languages, laws and customs. The idea that VCRs were impossible to program came not from poorly designed user interfaces, but from poor Japanese-to-English translations of directions. The new stuff is almost intuitive to use, because technology companies now expend so much effort to localize their products.

German electronics manufacturer Kontron’s forte is providing embedded-computer hardware for automakers, appliance manufacturers, and telecommunications providers. The fact that a large fraction of Kontron’s output goes to multinational companies with assembly plants around the world, however, has forced the company to develop serious international distribution expertise.

A North American company that wants to penetrate the overseas markets for, say, police in-vehicle data communications equipment, would be well advised to consult Kontron about telecommunications regulations, customs laws, and so forth in that that country. That expertise might even be a good reason to choose Kontron as a hardware supplier over another company that lacks the international expertise.

Seek experience

Swedish manufacturer SKF, on the other hand, sought IT expertise through outsourcing. “We used to write all of our own software and manage all of our own data systems,” says Jon Stevens, vice president of industrial marketing at SKF USA. “Five to seven years ago we contracted with EDS in Plano, TX [to maintain and expand those systems]. They [are now] globally responsible for all of our information technology infrastructure, software development, and hardware. We’re not in the business-software business. We’re a knowledge engineering company for [technology associated with] bearings, sealing, and lubrication.”

SKF has not, in fact, swapped out any business-critical systems. What they outsourced was maintenance of their existing infrastructure. EDS is responsible for understanding what SKF wants, and doing all the work necessary to meet SKF’s needs and standards.

This points out one of two elements embedded system development consultant Jack Ganssle says any company intending to engage in outsourcing activity must have in place. Those two elements are:

  • Near-perfect specification documentation, including all deliverables, documents, media, design notes, build scripts, and tool compatibility requirements;

  • More sophisticated monitoring than when using in-house resources.

Ganssle was talking specifically about embedded-system development projects, but equivalent elements are needed for any ongoing outsourcing relationship. He says the two most dangerous outsourcing pitfalls are: poor oversight, which always creates problems, and sacrificing core competencies.

SKF avoided these pitfalls by being very clear about what they considered their core competencies and hanging on to them, and by being explicit about what they expected their outsourcing partner to be responsible for.

Global outsourcing presents these same pitfalls, but in a more virulent form. Just as home-sourced documentation can be cryptic to foreign users, agreements and contracts with overseas partners can be misinterpreted as well. The danger of sacrificing core competencies is also exacerbated. Intellectual property laws, for example, differ from country to country. In general, it is important to know the laws governing your prospective outsourcing partner.

Finding partners, resources

Your best source of this information is, of course, your oursourcing partner. But that assumes you have already selected an outsourcing partner and developed a relationship of trust. So what do you do to find a partner in the first place?

Assuming that you are a naïve outsourcer—one that is new to outsourcing in general and/or the particular outsourcing situation you envision—your best source of information is many sources of information.

Start with other companies that you deal with who have previous outsourcing experience. For example, if you are already buying embedded computers from Kontron, ask them for advice about your outsourcing needs. Most people with whom you have a business relationship will answer honestly to the best of their ability. They are unlikely to deliberately steer you wrong, but you cover that possibility by asking multiple sources. Through this strategy, you will soon assemble a list of potential candidates along with some information about their competence.

Check with international trade commissions and those representing the prospective partners’ home countries. Country-specific trade commissions are definitely not disinterested sources—their stated objective is to attract business activity to their home countries—but they can identify relevant local laws and procedures. They probably won’t recommend specific outsourcing partners, but likely can provide lists of companies actively seeking U.S. partners.

Finally, there are companies set up specifically to help businesses find and work with overseas partners. Francois Freres ( www.francois-freres.com ), for example, is located in Guangdong province, PRC (People’s Republic of China) and offers services for companies needing to establish a business presence in mainland China. Services vary from localization of your website content to renting manufacturing space.

Outsourcing, in general, is the strategy of contracting with a third party to provide significant value added for your standard products. Global outsourcing can help even the smallest company provide the best product at the lowest price while tapping the fastest developing markets. To be successful, however, you have to do a lot of legwork to find the right partner, then be very, very clear on what you expect them to do.


Author Information

Charlie Masi is senior editor at Control Engineering . For a list of links to additional outsourcing resources, view this article online at




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