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research report

Taking Offshoring to the Next LevelThe 2009 Offshoring Research Network Corporate Client Survey Report

In collaboration with

Duke UniversityOffshoring Research Network

Taking Offshoring to the Next LevelThe 2009 Offshoring Research Network Corporate Client Survey ReportRESEARCH REPORT R-1473-11-RR

by Arie Y. Lewin, Nidthida Perm-Ajchariyawong, and Jeff Russell

contents

3 Executive Summary

5 Results from the 2009 Offshoring Research NetworkCorporate Client Survey

5 Has There Been a Shift away from Captive Operations?

7 The Puzzle of Declining Average Savings

9 Data Security and Internal Resistance Viewed as Increasingly Important Risks

12 New Influences at Work in Offshore Location Decisions

14 The Trickle-Down Effect of Offshoring Strategy

14 The Globalization of Innovation Services Continues

21 Domestic Employment and Global Sourcing

23 Looking Ahead: The Shifting Geography of Offshoring

26 Research Methodology

27 About the Offshoring Research Network (ORN)

28 The Duke Center for International Business Education and Research (CIBER)

29 About the Authors

29 Acknowledgments

The Global Offshoring Research Network (ORN) was establishedat Duke University’s Fuqua School of Business in 2004. ORN is anetwork of research partner universities, scholars, and practitionersthat has become the most recognized international research networktracking the globalization of services over time.

Executive Summary

The Current State of AffairsA change in service-delivery preferences The results

of the 2009 ORN survey indicate that manufacturers and

high-tech/telecommunication companies are less likely to

use captive entities for their initial offshoring ventures

than previous survey respondents from those sectors, and

2009 respondents from those industries are more likely

to use third-party vendors.

Risks influencing offshoring While “service quality” is

just as important for respondents to the 2009 survey as it

was for participants in the 2007/2008 survey, the former

also consider “data security” and “lack of acceptance

from internal clients” to be important offshoring risks.

Drivers differ by sector Financial services and manu-

facturing companies consider “labor cost savings” the

most important driver of their offshoring initiatives, while

retail and consumer goods companies view “organiza-

tional flexibility” as their most important driver.

The presence of providers in new locations areinfluencing offshore location choice Companies are

broadening the range of factors that influence their selection

of an offshore location to include such factors as “location

of the best service provider” and “quality of infrastructure”

(e.g., telecommunications, power, and transportation) at

offshore locations. These considerations are a reflection of

the entrance into the offshoring market of several emerging

economies that can actively compete with more established

destination countries.

Offshoring outcomes In spite of placing a high priority

on cost savings and labor arbitrage, findings from the

2009 ORN survey document that average achieved cost

savings offshore have declined for some functions.

For example, IT services and software development have

experienced consistent declines over the past five years.

On the other hand, average achieved savings have

increased for administrative and innovation services.

The impact of offshoring on domestic markets Survey

participants indicate that the offshoring of administrative

services and contact centers has had the highest impact on

the loss of domestic jobs. The ratios of offshoring employ-

ment to domestic employment for several functions are

much higher in the United States than they are in Europe.

The offshoring expansion will continue Over half of

the survey companies expect to expand their offshoring

initiatives over the next 18–36 months. European com-

panies in particular report aggressive plans to expand their

operations. Conversely, very few companies say they are

going to relocate or transfer existing operations during

the same time period. Both suppliers and providers are

expecting growth to be concentrated in information

technology, software development, and innovation.

3 TAKING OFFSHORING TO THE NEXT LEVEL w w w.conferenceboard .org

2009 Corporate Client Survey ProfileIn the 2009 corporate client survey, 44 percent of partici-pating companies are from North America, 35 percent fromEurope, 15 percent from Australia, and 6 percent fromother parts of the world (e.g., Asia and South America)(Chart 1). The survey was conducted across a significantrange of industries (Chart 2), allowing for observations oftrends and any heterogeneity of offshoring. (While the surveycovers the offshoring of a number of functions — contactcenters, finance and accounting, human resources, legalservices, procurement, and innovation work — it does notcover offshore outsourcing of manufacturing activities.)In terms of number of employees, the majority of partici-pating companies in the 2009 survey are either large or mid-size companies (Chart 3). For more information on themethodology used in this report, please see page 26.

Chart 1

Survey participants by company headquarters

020 40 60 80

100%

44% 35 15 6

North America Europe Australia Other

Chart 2

Survey participants by industry

0 20 40 60 80 100%

23% 12 12 9

Finance andinsurance OtherSoftware

Manufacturing

9

High techand

telecom

Retail andconsumer

goods

8

Professionaland technical

services

27

Note: Industries in the “other category” include wholesale, health care,

utilities, and oil and gas.

Chart 3

Survey participants by company size

020 40 60 80

100%

47% 32 21

Large(over 20,000employees)

Source: Duke University/The Conference Board

Offshoring Research Network 2009 Survey.

Midsize(500–20,000employees)

Small(under 500employees)


Has There Been a Shift Awayfrom Captive Operations?The past few years have been a defining period for business.

In response to the global financial crisis, many companies

have had to tighten their belts and enhance their operational

efficiency. A reflection of these concerns may be glimpsed

in companies’ service delivery model preferences. For

example, when results for the launch of new offshoring

projects are cut by industry, there were far fewer captive

launches by manufacturing companies and high-tech and

telecommunications firms in 2007–2009 than during any

previous survey period (Chart 4). In both industries, there

has been some shift toward local providers, although the

high-tech/telecommunications sector is making greater

use of this option than manufacturing companies.

One possible explanation for this phenomenon is the

higher operational risks and costs associated with captive

offshoring. According to follow-up interviews with

participating executives, several companies have found it

extremely challenging to match the same economies of scale

and scope achieved by third-party service providers, who

are able to pull together demand from different clients and

develop synergies that create efficiencies in their operations.

One interviewee noted that, after three years of running a

captive, his company invited vendors to make presentations.

Through these meetings, the company recognized that

providers could offer significant benefits of scale as well

as the opportunity to “share best practices.”1

The turn away from captives may also be influenced

by the size of an organization. Most of the “successful”

captive operations in the ORN database, which includes

shared service centers, belong to large multinational

companies that have large transaction volumes and

international footprints.2

Companies with high transaction volumes can more easily

achieve economies of scale and shorten the payback period

on their captive investment. Nevertheless, as companies

steadily expand the scope of their offshoring, they face the

added challenge of efficiently managing geographically

dispersed units that have complex processes and require

a deep understanding of local cultures. As one executive

from a leading U.S. financial services company noted

in a follow-up interview, “We learned the hard way that

managing captive back office services in Costa Rica is

not our core competence.”

Results from the 2009 Offshoring ResearchNetwork Corporate Client Survey

Chart 4

Preference for service delivery model in initial offshoring: manufacturing and high tech/telecom(by launch year)

Sources: Duke University/The Conference Board Offshoring Research Network 2007/2008 Survey and Duke University/The Conference Board


20

40

60

8056% 52

61

27

3

157

3911

27

4

33

613

45

Pre-2001 2001–

2003

2004–

2006

2007–

2009

0

20

40

60

80

100%

Pre-2001 2001–

2003

2004–

2006

2007–

2009

High tech and telecomManufacturing

Captive

Domestic provider

International provider

Joint venture

Local provider

Other

66%

16

122

2

50

32

18

54

29

58

3

1

47

12

24

6

12

2

Due to rounding, percentages

may not add up to 100 percent.

2 For the purposes of this report, “successful” captive operations are those thathave achieved higher than average cost savings and have taken less time thanaverage to achieve target service levels.

1 The Offshoring Research Network guarantees confidentiality to all participants,which extends to follow-up interviews and roundtable workshops. Written permis-sion is required to mention a specific executive and/or company. The ORN veryrarely receives permission to attribute quotes to individual executives or companies.


Another factor in the move toward third-party operations

is that the shift is part of a larger strategy. Several survey

companies revealed that they used captive offshoring as

an intermediate step toward full offshore outsourcing.

In particular, captive offshoring helps companies lessen fears

about the loss of managerial control, thereby establishing

a comfort level with offshoring.3 As one survey participant

said in a follow-up interview, the choice of a captive delivery

operation was initially made to “diffuse internal objections

to offshoring.” By starting with a captive, companies are

also able to build up their experience and capabilities.

The case for a shift in service delivery model preference is

supported by a series of major captive spinoffs that have

taken place since 2008 (Table 1). These spinoffs reflect the

priority that some companies have placed on monetizing their

captives. The declining preference for captive operations

may also be influenced by the diminishing effects of labor

arbitrage due to rising wage inflation in several destination

countries (e.g., salary increases in India are projected to be

10.6 percent in 2010).4 Under these conditions, a third-party

provider has much greater flexibility to take actions to keep

costs down (e.g., move operations from India to China).


Date

April 8, 2008

April 10, 2008

July 10, 2008

October 7, 2008

October 8, 2008

November 3, 2008

November 13, 2008

November 17, 2008

December 23, 2008

July 7, 2009

October 1, 2009

October 15, 2009

March 1, 2010

Buyer

Capgemini

Quatrro

WNS

Nomura Holdings

TCS

Fiserv

Bravura Solution

SCM (Satyam)

Wipro

EXL Service Holdings

MphasiS

Cognizant Technology

Solutions

EXL Service Holdings

Seller

Unilever

RSM McGladrey

Aviva

Lehman Brothers

Citigroup

Compass Bank

Citigroup

Motorola

Citigroup

Schneider National

American International Group

UBS

American Express

Acquired Unit

Financial shared service

centers in Chile and Brazil

Indian accounting unit

Indian outsourcing units

(customer service and BPO)

Operational support

(BPO and IT) in India

Citigroup global services

in India

A data center based

in Texas

Information systems division

in Poland

Malaysian software

development unit

Citi technology services

Schneider logistics

AIG systems solutions (ITO)

in India

UBS India Service Centre

American Express’s Global

Travel Service Center

Size of Deal

Undisclosed

Undisclosed

$230 million

Undisclosed

$505 million

Undisclosed

$31.5 million

Undisclosed

$127 million

Undisclosed

Undisclosed

$75 million

$30 million

Table 1

Captive spinoff examples

3 Howard Gospel and Mari Sako, “The unbundling of corporate functions:the evolution of shared services and outsourcing in human resourcemanagement,” Industrial and Corporate Change, March 2010, pp. 1–30.

4 Source: “Hewitt Associates Salary Increase Study Reveals Double Digit Incrementsfor India Inc.” Hewitt Associates, March 4, 2010 (www.hewittassociates.com/Intl/NA/en-US/AboutHewitt/Newsroom/Press ReleaseDetail.aspx?cid=8198).

Sources: “Capgemini, Unilever Expand Relationship,” Consultingmag.com, April 8, 2008; “RSM McGladrey Sells BPO Unit,” Cpatrendlines.com, April 11, 2008; PP Thimmaya& Boby Kurian, “WNS acquires Aviva BPO for $230 mn,” Economic Times, July 10, 2008; Julia Werdigier, “In Wake of an Asian Deal, Nomura Acquires More LehmanBusinesses,” New York Times, September 23, 2008; “India’s TCS Buys Citigroup,” United Press International, October 9, 2008; Paul Gores, “Fiserv acquires the Data Centerfrom Compass Bank,” Milwaukee Journal Sentinel, November 3, 2008; John Ribeiro, “Satyam Acquires Motorola Development Center in Malaysia,” PCWorld.com, November10, 2008; “Bravura Solutions Expands with Polish Acquisition,” Smart Company (website), November 13, 2008; Paul McDougall, “Troubled Citigroup Sells IT Service’s Arm toIndia’s Wipro,” InformationWeek (website), December 23, 2008; Rupal Patel, “EXL Acquires Schneider Logistics’ Operations In Czech Republic,” Business Standard, July 8,2009; Pankaj Lakhotia, “Mphasis completes acquisition AIG Systems Solution,” Stock Watch, October 1, 2009; John Ribeiro, “Outsourcer Cognizant Acquiring UBS’ IndianSubsidiary,” PC World (website), October 15, 2009; and “EXL acquires AmEx’s travel services captive in India for $30 mn,” Economic Times, November 7, 2009.

The Puzzle of Declining Average SavingsThe effects of a changing business environment can also

be seen in the survey results for cost savings. Despite the

various approaches taken by companies to rein in costs

during the economic downturn, 2009 survey participants

have lower estimations of average achieved cost savings

in several offshoring functions, and especially those that

have been commoditized, than respondents to previous

surveys. Information technology and software develop-

ment offshoring have experienced the largest declines

among all offshoring functions (Chart 5). On the other hand,

survey participants reveal that administrative and innovation

offshoring operations launched during the 2007-2009

period achieved higher cost savings than those launched

during the 2004-2006 period.

Reasons for declining savings:hidden costs and high hopesCase studies and interviews conducted by ORN point to a

number of possible causes for the decline in cost savings.

Companies new to offshoring may not anticipate some

hidden costs, including sending executives to visit potential

providers, training boundary spanners, and establishing

a focal organization offshore (national or regional) to

coordinate a complex network of dispersed units and

functions, not to mention local recruitment, staff retention,

and government and vendor relations. Also, as the scope

of offshoring grows and the number of service providers

and offshore locations increases, the management of

provider selection and oversight becomes much more

complicated, requiring companies to acquire and develop

the organizational competencies needed to manage and

globally coordinate dispersed organizational units.

Another factor behind declining cost savings may be the

types of functions initially outsourced. ORN case studies,

analyses of initial offshoring initiatives, and interviews

with participants at the International Association of

Offshoring Professionals (IAOP) and The Conference

Board conferences reveal that both bottom-up initiatives

and top-down experiments almost always involve well-

documented, highly standardized functions (e.g., outsourcing

of stability studies). These initial implementations almost

always exceed expectations for cost savings.

While it is clear from both previous surveys and the latest

survey results that cost savings will most likely remain a

crucial driver of outsourcing and offshoring, the potential

for cost reduction alone is no longer enough to justify

moving operations. As one participant interviewed after

the survey said, “It has taken us several years to discover

that the impact of labor arbitrage disappears in less than

three years.” Comments from other interviewees and

the survey results strongly suggest that companies are

shifting from cost-driven offshoring to a multidimensional

value proposition for their offshore operations. For

example, the same interviewee pointed to factors other

than cost that drive offshoring, saying, “In Manila we

experience higher inbound call satisfaction scores and

much lower turnover.”

Chart 5

Savings achieved by launch year and function

Source: Duke University/The Conference Board Offshoring Research Network 2009 Survey.

0

0

0

0

40

0

60Pre 2001 2001 – 2003 2004 – 2006 2007 – 2009

34%

37

30

42

20

33 33

25

38

33

2927

35 34

43 42

31

3533

36 37 3735

27

Administrative

services

Contact

centers

Information

technology

Knowledge

services

Innovation Software

development

(average percentage reported)



As companies continue to expand their offshoring activitiesby increasing scale and/or offshoring more diverse andcomplex functions, some organizations experience a declinein the overall efficiency of their offshoring processes asmeasured by average cost savings across all offshoredfunctions.a Discussions at Duke ORN Financial Servicesand Manufacturing Roundtables reveal that only a handfulof companies have put in place the corporate-wide offshoringstrategies and organizational capabilities that optimizeoffshoring processes and operations.b The over-the-counterdivision of one major pharmaceutical company shifted 105full-time employees working in R&D support functions toseveral providers in India. The immediate effect was asavings of 6 million pounds (or a 54 percent labor arbitragesavings). However, in the second year, when offshoringactivities had their own dedicated budget, “new” costs hadto be accounted for, such as travel to India by both seniorexecutives and staff assigned to various projects offshore,management of relationships with providers, and theestablishment of a coordination office in India. In the caseof one Midwestern manufacturing company, the majorsource of coordination failure was the “sink-or-swim”approach to the assignment of boundary spanners (e.g.,project coordinators). After several coordinators provedineffective in their new positions, the company created aselection and training program for new boundary spanners.

A comparison of the responses of high-experience companiesand low-experience companies reveals that low-experiencecompanies involved in manufacturing and professional/technical services express much greater concern about therisk of “loss of managerial control” than their high-experiencedcounterparts in those sectors (Chart 6).c Loss of managerialcontrol is an indicator of the extent to which companies havedeveloped and implemented the requisite organizationalcapabilities for coordinating and managing their globalsourcing, while also implementing new intellectual propertysafeguards associated with sourcing technological andinnovation work.

Does Experience Matter?

Chart 6

Loss of managerial control:high experience vs. low experience

Finance and

insurance

Manufacturing Professional

and technical

services

Software0000

6667

333

0000

6667

333

0000

53% 55

High experience Low experience

37

58

36

60

2925

Source: Duke University/The Conference Board Offshoring

Research Network 2009 Survey.

Note: Percentages represent combined responses for “important”

and “very important.”

a For another example of this “inefficiency trap,” see Ton Heijman, Arie Y. Lewin,Stephan Manning, NidthidaPerm-Ajchariyawong, and Jeff W. Russell, OffshoringReaches the C-Suite, The Conference Board, Research Report 1445, 2009, p. 26.

b Duke ORN Financial Services and Manufacturing Roundtables are hosted byDuke ORN and its member companies to provide an open opportunity formembers to network and discuss special topics of shared interest.

c “High-experience” companies are defined here as those having a scale andscope of 4 or higher on a scale used to rate all survey participants. A sampleof the scale can be seen in Chart 22 on page 20.

Data Security and Internal ResistanceViewed as Increasingly Important RisksAs companies’ expectations for offshoring change, so do their

perceptions of the risks they face. While “service quality”

retains its top position as the most important offshoring risk

from the 2007/2008 survey, respondents to the 2009 survey

give high ratings to “data security’ and “lack of acceptance

from internal clients” (Chart 7). The rating of the latter

risk is noteworthy because internal resistance was not

even in the top five risk results in the 2007/2008 survey.

In some instances, the lack of internal support has caught

offshoring executives off guard. One follow-up interviewee

said, “We were blindsided by tenacious resistance from

our accounting shared services group.”

What are the causes of this internal opposition to offshoring?

Follow-up interviews with executives reveal that the

perception of risks involving service quality and data

security reflected in the top two risks often fuel resistance

to sending a task offshore, especially to external service

providers. One interviewee contacted after the survey said,

“Internal groups use data security incidents and a recent

quality of service media account as reasons for questioning

offshoring initiatives.” Another interviewee said, “Our CFO

has asked for supporting documents on data security with

our current service provider.”

An additional source of internal resistance can be traced

to captive shared services operations onshore. The use of

captive shared services is often considered an intermediate

step toward offshoring or outsourcing of entire processes.

However, several CFOs indicated in follow-up interviews

with the Offshoring Research Network that the major

resistance to offshoring shared services centers to a

third-party service provider can come directly from the

internal shared services organization. One CFO said,

“[The] creation of [an] internal shared services group,

in retrospect, became the major obstacle to achieving

the next level of cost savings and process optimization.

The resistance to offshoring [by] the shared services

organization was fierce.” Despite these concerns, some

of the interviewees felt that internal anxieties could be

overcome if the provider is seen as competent to handle

the issues. One follow-up interviewee went so far as

to say, “It is all about selecting the right provider.”

Chart 7

Importance of offshoring risks

2007/2008

2009

Sources: Duke University/The Conference Board Offshoring

Research Network 2007/2008 and 2009 Surveys.

0.00 11.25 22.50 33.75 45.00 56.25 67.50 78.75 90

Incompatibility between

IT systems

Industrial relations/

trade unions at home

Increasing difficulty in finding

qualified personnel offshore

Wage inflation

Loss of synergy

across firm activities

High employee turnover

Lack of intellectual

property protection

Lack of acceptance

from customers

Political backlash at home

Political instability

Legal/contractual risks

Cultural differences

Loss of internal capabilities/

process knowledge

Lack of buy-in of offshoring

in corporate culture

Loss of managerial control

Operational efficiency

Lack of acceptance

from internal clients

Data security

Service quality65%

51%

5943

5137

4844

44

43

4334

4336

4032

3627

21

18

1814

4034

3635

3941

2727

2532

21

29

116

—12




A look at risks and drivers by industryIf the results for the questions about offshoring risks are

divided by the six specific industry types, only respondents

from finance and insurance companies consider “data

security” a significant threat (Chart 8). Given the importance

of keeping financial records secure and customer information

confidential, this is not a particularly surprising result. As for

the other industries, data security is an important concern

for less than half of the companies, and less than one-third of

software company respondents consider it a significant threat.


Chart 8

Offshoring risks by industry

0.00 13.75 27.50 41.25 55.00 68.75 82.50 96.25 110.000.00 13.75 27.50 41.25 55.00 68.75 82.50 96.25 110.00






qualified personnel offshore

Loss of synergy

across firm activities

Wage inflation



property protection




Lack of acceptance

from customers


process knowledge



Lack of acceptance



Data security

Service quality

0.00 13.75 27.50 41.25 55.00 68.75 82.50 96.25 110.000.00 13.75 27.50 41.25 55.00 68.75 82.50 96.20.00 13.75 27.5

42

70%

72

49

51

45

42

44

44

37

39

38

42

34

31

18

27

24

7

56%

47

47

46

44

42

38

43

50

42

24

22

37

24

30

22

26

25

54%

43

52

42

44

47

48

40

47

43

43

38

34

36

33

26

20

9

53%

36

42

42

42

33

38

43

32

29

25

25

25

32

28

13

16

8

35%

33

34

30

34

17

31

33

28

20

35

25

13

22

32

7

12

8

46%

31

36

34

33

42

29

26

26

30

28

16

25

18

26

14

10

1

Finance andinsurance High tech Manufacturing


services

Retail andconsumer

goods Software

Sources: Duke University/Archstone Consulting Offshoring Research Network 2005 U.S. Survey, Duke University/Booz Allen Hamilton

Offshoring Research Network 2006 Survey, Duke University/The Conference Board Offshoring Research Network 2007/2008 Survey,

and Duke University/The Conference Board Offshoring Research Network 2009 Survey.

Note: Percentages represent combined responses for “important” and “very important.”

In the industry segmentation of the drivers of offshoring,

“labor cost savings” is the number one driver for every

industry except retail and consumer goods, where the

category has the second-highest score. Instead of costs,

respondents from the retail industry consider “increase

organizational flexibility” their number one driver, and

this category is ranked second or third in most of the other

industry categories. The only exception is in the high-tech

sector, which considers offshoring as “part of a larger

global strategy” a more important concern.

As for the other categories, the comparison reveals

two industry-specific concerns of note:

Access to new markets This is primarily a concern for

manufacturing and retail/consumer goods companies.

Improved service levels Over half of the respondents

from the high-tech sector consider this an important

driver, while less than half of the respondents in the

other categories see this as a major consideration.

Chart 9

Offshoring drivers by industry

Enhance capacity

for innovation

Increase organi-

zational flexibility

Exploit location-

specific advantages

Domestic shortage of

qualified personnel

Part of a larger

global strategy

Increasing speed

to market

Access to

new markets

Accepted industry

practice

Competitive

pressure

Improved

service levels

Access to qual-

ified personnel

Growth strategy

Other cost savings

Labor cost savings

Business process

redesign

42

57%

92

74

56

67

43

56

44

16

42

55

31

39

70

48

48%

84

68

69

65

61

54

35

24

36

70

28

45

53

35

56%

78

70

69

61

44

64

36

41

50

68

21

44

77

48

43%

82

66

64

55

40

60

44

25

43

58

32

37

70

44

71%

78

74

74

53

40

56

35

33

58

67

29

40

85

80

31%

86

56

62

63

28

50

30

22

50

46

44

36

64

50

Finance andinsurance High tech Manufacturing


services

Retail andconsumer

goods Software

Sources: Duke University/Archstone Consulting Offshoring Research Network 2005 U.S. Survey, Duke University/Booz Allen Hamilton



Note: Percentages represent combined responses for “important” and “very important.”


New Influences at Work inOffshore Location DecisionsWhile the right provider is definitely important, companies

also want to find the right location. When asked which

factors they considered “important” or “very important”

in considering offshore destinations, 49 percent of the

respondents in the 2009 survey indicate the “location

of the best service provider.” In the 2007/2008 survey,

only 36 percent of the respondents viewed this category

as important (Chart 10). As for the top location considera-

tions, 2009 survey respondents choose the same factors—

“low cost of labor” and “talent pool available”—that

respondents did in the 2007/2008 survey.


Chart 10

Offshoring location factors by survey year

2007/2008

2009

Sources: Duke University/The Conference Board Offshoring Research Network

2007/2008 Survey and Duke University/The Conference Board Offshoring


75%

68%

65

63

64

62

55

45

52

55

49

36

46

33

34

32

33

35

31

23

25

29

21

35

21

22

19

16

16

33

14

17

0.0 12.5 25.0 37.5 50.0 62.5 75.0 87.5 1

Collocating with existing

manufacturing plant offshore

Supporting existing

customers locally

Government incentives

Avoiding “hot spots”

Access to local market


BP facility offshore

Geographical proximity

Cultural proximity

Political stability

in host country

Quality of infrastructure

Location of the

best service provider

Low costs

(besides labor costs)

Matches language

requirements

High level of expertise

Talent pool available

Low cost of labor



Chart 11

Service provider perspective:reasons why clients outsource

70

87%

73

74

Accessing new markets

for products and services

Accepted industry practice


qualified personnel

Enhance capacity

for innovation

Part of a larger

global strategy

Exploit location-

specific advantages

Increasing speed to market

Increase organi-


Need to improve

service levels

Growth strategy

Competitive pressure

Enhancing efficiency through

business process redesign

Access to qualified

personnel offshore

Other cost savings

Labor cost savings

65

62

60

59

57

55

54

51

47

42

41


2007/2008 Survey and Duke University/The Conference Board Offshoring Research

Network 2009 Survey.



Chart 12

Service provider perspective: important risksassociated with service offering

38

53%

45

45

Cultural conflicts with clients

Other

Transparency of charges

Need to make client-

specific investments

Penalties specified in contract

Proprietary information

held back by clients

Threat of new competitor

from another country


Wage inflation

Client inability to

manage relationship

Competitors poaching clients

Availability of personnel

with management skills

Achieving expected cost savings

Increased difficulty in

finding qualified personnel

Currency fluctuation on dollar

denominated contracts

Satisfying quality expectations

Retaining talent

Pressure on margin

37

33

31

29

27

27

26

26

20

19

18

13

13

11


2007/2008 Survey and Duke University/The Conference Board Offshoring Research




According to the results of the 2009 ORN Service Providersurvey, “cost savings” — both for labor and other expenses —and “access to qualified personnel” are, from the serviceprovider perspective, the top motivators of clients’ decisionsto offshore (Chart 11).

As for the risks in their own operating environment, 53 percentlist “pressure on margin,” making it the highest ranked challenge(Chart 12). In what is surely a reflection of the tough economicconditions of 2008 and 2009, the second and third mostimportant challenges are “retaining talent” and “satisfyingquality expectations.”

The View from the Other Side: Results from the Service Provider Survey

Source: Arie Y. Lewin, Nidthida Perm-Ajchariyawong, Derek Sappenfield, and Charles Aird, Is the Global Outsourcing Industry in for a No-Holds-Barred Competition?PricewaterhouseCoopers, 2009.


The Trickle-Down Effectof Offshoring StrategyMany companies, as noted previously, initiate their off-

shoring efforts with highly standardized, well-documented,

labor-intensive functions that yield spectacular savings

and create overly optimistic anticipations for future savings.

Companies that seek to achieve significant savings over

the long term should adopt a corporate-wide offshoring

strategy to guide their decisions at the business unit and

functional levels. The adoption of such a strategy not only

legitimizes offshoring initiatives, but also provides guidance

for the development of an offshoring operational plan

or a provider-selection model, reinforces the importance

of on-site visits to offshore locations, helps draft the

core elements of a master service agreement, assists in

obtaining crucial internal buy-in, and plays a role in

the establishment and staffing of corporate offshoring

resource centers. In addition, if these organizational

capabilities are already in place, an individual process

owner can focus primarily on transferring the process and

specifying appropriate metrics without the daunting tasks

of negotiating a contract, agreeing on labor and telephony

rates, and the many other details that need to be negotiated

in the absence of a strategy.

In Offshoring Reaches the C-Suite, the report based on

the ORN 2007/2008 survey, 53 percent of the respondents

said they had adopted a corporate-wide strategy for guiding

offshoring and outsourcing decisions at the business unit and

functional levels, up from 22 percent in the 2005 survey.5

In the 2009 survey, 59 percent of the respondents indicate

they have such a strategy. Moreover, 54 percent of companies

with such a strategy in the 2009 survey say the service quality

of their operations either “exceeded” or “far exceeded” their

expectations, while only 35 percent of those without a

strategy report the same level of satisfaction (Chart 13).

Also, based on the offshoring outcomes reported by ORN

participants, companies with an offshoring strategy report

average achieved cost savings of 34 percent, compared

with 26 percent average achieved cost savings for com-

panies without an offshoring strategy.

The Globalization of InnovationServices ContinuesIn the early days of offshoring, much of the growth came

from the huge volume of administrative transactions.

(For the purposes of the offshoring survey, “administrative

services” refer to back-office activities—finance and

accounting, human resources, procurement—that have

often been viewed as peripheral to core competencies.)

As a result, these functions have often been sourced from

specialized service providers who can perform the task

more efficiently and at a lower cost. During the past few

years, however, companies have started to seek global

sourcing for their innovation services (product design,

research and development, and engineering services).6

In the 2009 survey, 32 percent of the surveyed companies

indicate they offshore at least one administrative activity

(Chart 14). This is a surprising development because these

services were once viewed as critical competencies that

had to be kept in-house (see Chart 26 on page 23).


Chart 13

Achieved service quality for companieswith and without a corporate strategy

With strategy

Without strategy

Sources: Duke University/The Conference Board Offshoring Research

Network 2007/2008 Survey and Duke University/The Conference Board


8%11%

2743

58

41

7

4

0

1

0 14 28 42 56 70

Far below

expectations

Below

expectations

Meets expectations

Exceeds

expectations

Far exceeds

expectations

5 Ton Heijman, Arie Y. Lewin, Stephan Manning, NidthidaPerm-Ajchariyawong,and Jeff W. Russell, Offshoring Reaches the C-Suite, The Conference Board,Research Report 1445, 2009, p. 6.

6 Production design services include prototype design, systems design, andapplication development. Research and development services includeresearch on new materials and processes, code development, and researchand development of new technologies. Engineering services include designautomation, tool design, simulating, drafting and modeling, engineeringanalysis (e.g., finite element analysis), embedded systems development,reengineering, and technical publications.

Chart 14

Company participation in offshoring functions

Source: Duke University/The Conference Board Offshoring Research


40

54%

32

35

0 14 28 42 56 70

Legal services

Other functions

Marketing & sales

Knowledge &

analytical services

Innovation services

Contact center

Software development

IT infrastructure

Administrative services

30

7

11

52

16

While a desire for basic cost savings similar to those

received when administrative services were offshored

may have spurred the rapid growth of innovation services

offshoring, results from both the 2009 client provider

surveys reveal different motivations. When making a

decision to offshore administrative services, companies

are clearly looking for “cost savings” and “business process

redesign” (Chart 15). The offshoring of innovation services,

however, is driven more by concerns about the need

to “enhance capacity for innovation” and increase

“organizational flexibility” and “speed to market.”

The continuous development of new products and services

in a short time frame is critical to companies whose products

or services heavily rely on technology and innovation. In

terms of offshoring concerns, both sets of respondents select

“data security,” “service quality,” and “lack of acceptance

from internal clients” as their top three risks (Chart 16).

Offshorers of innovation services, however, are much more

concerned about “legal/contractual risks” and a “lack of

intellectual property protection” in offshore destinations.

0 15 30 45 60 75 90 105


qualified personnel

Accepted industry practice

Business process redesign

Improved service levels

Access to new markets

Competitive pressure

Part of a larger

global strategy

Exploit location-

specific advantages

Labor cost savings

Other cost savings

Access to qualified personnel

Growth strategy

Increasing speed to market

Increase organi-


Enhance capacity

for innovation

Chart 15

Drivers associated with the offshoring of innovation and administrative services

Innovation


31%83%

5978

1574

5274

5570

6369

87

67

3362

5852

3552

950

6533



46

23

3810

3738

0 15 30 45 60 75 90 105




Wage inflation



qualified personnel ofshore



Lack of acceptance

from customers

Loss of synergy across

firm activities


property protection






process knowledge


Lack of acceptance


Service quality

Data security

Chart 16

Risks associated with the offshoring of innovation and administrative services

Innovation


61%67%

7859

5759

2758

5158

4256

49

56

2956

2450

3448

3044

4041



42

41

3320

2815

2026

1913

1511


The race for innovation talentChart 17 shows that factors related to the availability of

skill and talent are of great importance when companies

consider where to offshore their innovation services.

Finding a location with a “high level of expertise” is a

greater determinant for companies seeking to offshore

innovation services (87 percent) than it is for those who

offshore administrative services (64 percent). An even

wider gap is present in the responses for the influence

of the “location of the best service provider” (69 percent

for the innovation offshorers versus 32 percent for the

administrative service offshorers).

The emphasis on talent of those offshoring innovation

services may be a reflection of the growing shortage of

science and engineering workers in the United States.

From 1995 to 2003, for example, the United States

experienced a slow but steady decline in the number of

U.S. nationals earning master’s degrees in engineering.7

The lack of workers with higher degrees was exacerbated

in 2003 when the U.S. Congress reduced the quota for the

H1B visa, which is for workers engaged in “specialty

occupations” that require expertise and/or an advanced

degree, from 195,000 to 65,000 (Chart 18).


0 15 30 45 60 75 90 105

Cultural proximity


Low costs


Avoiding “hot spots”

Political stability

in host country

Low cost of labor


BP facility offshore

Supporting existing

customers locally

Matches language

requirements






Location of the best

service provider



Chart 17

Factors underlying location choicesfor the offshoring of innovation andadministrative services

Innovation


64%87%

6275

3269

5160

4150

947

1444

57

44

11

44

3540



7839

3830

3822

3149

1930

1338

Chart 18

Shortage of science and engineering talent inthe United States and change in H1B visa policy

Source: Arie Y. Lewin, Silvia Massini, and Carine Peeters, “Why Are

Companies Offshoring Innovation? The Emerging Global Race for Talent?”

Journal of International Business Studies, Vol. 40, 2009, pp. 901–925.

0

50,000

100,000

150,000

200,000

6

8

10

$12

1990 1992 1994 1996 1998 2000 2002 2004 2006

H1B capScience andengineering

graduates

GDP [right scale, in $ trillions]

Data on master’s and PhD degrees in sciences and engineering comes

from the U.S. National Science Foundation. Data for H1B visa quotas are

from the U.S. Citizenship and Immigration Services.

7 See Science and Engineering Indicators 2010, National Science Board and theU.S. National Science Foundation, 2010 (www.nsf.gov/statistics/seind/start.htm).

If the results of the various ORN surveys are divided into

the period prior to 2003 and the period after 2003, there

is a significant difference in the responses of innovation

offshorers about the importance of the “domestic shortage

of qualified personnel” and the need to “gain access to

qualified personnel offshore” (Chart 19).

The rapid emergence of specialist service providers across

the world, especially in countries with an excess of skilled

and educated workers, has allowed companies to globally

source science and engineering workers to support their

domestic operations (Exhibit 1). Additionally, structural

changes in the labor market for science and engineering

professionals are influencing the decisions of individuals

to select careers in these fields. Empirical studies have

identified several trends that have long-term implications

for U.S. nationals entering science and engineering careers.

For example, many technical professionals have been

separating from organized employment for quite some time,

and by 2004, very few companies had workers involved

in encryption, data mining, network security, animation,

and gaming on their payrolls.8 This exodus of science and

technical workers is related to the larger trend of companies

increasingly using a “contingent workforce” rather than full-

time employees.9 In addition to changing the makeup of their

employee population, many companies are also diversifying

the geographic location of where their engineering and

scientific work is performed. These changes are being made

to access new markets (e.g., China and India) or to engage

the best talent from around the world for R&D and thereby

speed up the product development process. These trends

are growing at a time when unemployment rates in several

engineering subfields reached historical highs due to the

recession, although there are already signs of recovery.10

Chart 19

Availability of talent and skilled personnelhas become a critical issue for innovationwork among U.S. companies

Sources: Duke University/Archstone Consulting Offshoring Research

Network 2005 U.S. Survey, Duke University/Booz Allen Hamilton

Offshoring Research Network 2006 Survey, Duke University/

The Conference Board Offshoring Research Network 2007/2008

Survey, and Duke University/The Conference Board Offshoring


Domestic shortage ofqualified personnel

Access to qualifiedpersonnel offshore

41%

30

73 69

31

44

88

62

50

6

78

47

Before 2003 After 2003

Overall

Innovation offshorers



Administrative offshorers



Note: “Before 2003” refers to the rationales survey participants provided

for offshoring implementations that were launched prior to 2003.

“After 2003” refers to rationales offered for offshoring implementations

that occurred after 2003.

Sources: Duke University Offshoring Research Network 2007/2008 Service Provider Survey

and Duke University Offshoring Research Network 2009 Service Provider Survey.

Exhibit 1

Distribution of service providers by HQ region

LatinAmerica

6%

WesternEurope

19%

EasternEurope

10%

Africa2%

India16%

China7%

Other Asia andAustralia

10%

NorthAmerica

30%

8 For more detail, see James A. Evans, Gideon Kunda, and Stephen R. Barley,“Beach Time, Bridge Time, and Billable Hours: The Temporal Structure of TechnicalContracting,” Administrative Science Quarterly, Vol. 49, No. 1, 2004, pp. 1–38.

9 For more detail, see Steven R. Barley and Gideon Kunda, “Contracting: A NewForm of Professional Practice,” Academy of Management Perspectives, Vol. 20,No. 1, 2006, pp. 45–66; and Howard Muson, “Treating Contingent Workers asa Strategic Resource,” The Conference Board, Executive Action 333, 2010.


10 Sources: Staffing industry analysts and U.S. Bureau of Labor Statistics; BartonReppert, “Employment Data Gives Cause for Optimism about EngineeringRebound,” IEEE-USA Today's Engineer Online, May 2010 (www.todaysengineer.org/2010/May/employment.asp).

In addition to the emergence of the contingent workforce,

companies now have access to new technologies that can

help them locate talent and expertise from around the world.

InnoCentive, to cite one example, is an open innovation

marketplace that connects companies, academic institutions,

and public sector institutions with a global network of

experts in a variety of domains. “Seeker” companies post

their research or engineering challenges on the InnoCentive

website. Each challenge carries a modest financial reward

for the individual or group who solves the puzzle first.

Companies that have used this platform have discovered that

the country of origin of the solvers spans the world, with the

many solutions coming from India, China, and Russia.11

Prior studies provide strong evidence that the ability to

invest in the improvement and expansion of the talent pool

is a critical component of the success of Asian countries

in attracting innovation offshoring.12 In China, both the

Ministry of Education and the Ministry of Commerce have

developed policies with the objective “of training 1.2 million

people in five years and creating one million new employ-

ment opportunities for college graduates.”13 Chart 20

compares the number of graduates with bachelor degrees

in engineering and computer science in the United States,

India, and China. While the results for China may appear

impressive, the focus on additional educational programs

for potential employees in the outsourcing services sector

may be a reflection of the unemployability of recent grad-

uates from Chinese universities and technical institutes.14

A 2006 survey of division representatives from U.S.-based

companies involved in engineering offshoring found that

46 percent of respondents said there was a “limited supply”

of well-qualified engineering candidates in China. When

asked to choose among reasons that Chinese engineers

failed to meet their needs, a “lack of communication skills”

received the highest rating.15 Nevertheless, the number

of individuals being trained and the ability of the Chinese

government to invest in science and engineering programs

have the potential to help make China an important location

for innovation work.


Chart 20

Comparison of average number ofengineering and computer sciencebachelor graduates over time

1996 – 2000

India

United States

China

2000 – 2004

2004 – 2008

69,900

108,450

201,130

123,600

128,719

316,397

196,100

127,379

607,802

Sources: China Data: Ministry of Education of The People’s Republic

of China; United States: National Center for Education Statistics;

India Data: All India Council for Technical Education (AICTE).

11 Dwayne Spradlin, “The InnoCentive Top 10 Solver Countries,” Perspectives onInnovation (blog), March 2, 2009 (blog.innocentive.com/2009/03/02/the-innocentive-top-10-solver-countries).

12 See, for example, Dieter Ernst, Innovation Offshoring: Asia’s Emerging Role inGlobal Innovation Networks, East-West Center, Special Report 10, 2006.

13 See China Outsourcing Market Research 2009, Accenture and the ChinaCouncil of International Investment Promotion, 2010, p. 58. The report isavailable online (www.accenture.com/NR/rdonlyres/5039C2E8-1E5B-4916-A018-1D79E2B22623/0/252Accenture_China_Outsourcing_Market_Research.pdf).

14 China Outsourcing Market Research 2009, p. 59.

15 See Vivek Wadhwa, Ben Rissing, and Gary Gereffi, “Industry Trends inEngineering Offshoring,” Working Paper, 2006, p. 11 (papers.ssrn.com/sol3/ papers.cfm?abstract_id=1015839).

At the same time, many developing countries are encourag-

ing expatriate citizens with science and engineering degrees

to return home. Some of these countries have created

national policies and incentives, such as tax benefits and

guaranteed employment, to encourage these citizens to

repatriate. (See Exhibit 2 for examples of programs to

encourage the repatriation or social contributions of

skilled talent.)

A number of ORN case studies reveal that multinational

companies have also become involved in projects to

encourage the education of scientists and engineers in the

developing countries where they have offshore operations.

Six Fortune 500 companies have joined with Indian com-

panies to form “value-added innovation partnerships,”

which are R&D projects that are sponsored by U.S. or

European companies but executed in India. Other companies

are establishing their own academies to train graduates

below a certain educational level in the special skills the

companies need. For example, a multinational company

may enter into a joint venture with local engineering poly-

technic schools to develop engineering tracks for certain

technical specialties (e.g., electro-technical engineering,

material science, tire innovation). Those who pass certifi-

cation tests at the end of the training period are offered jobs.

The ORN has documented such arrangements in Brazil,

China, and Hungary.

Weighing the pros and cons of Chinaand IndiaChart 21 on page 20 offers a comparison of the location

motivations of those who offshore innovation services to

India and those who offshore them to China. The majority

of companies that offshore their innovation services to

India indicate that their decision is driven primarily by

the “talent pool available” and the “low cost of labor.”

Companies that source innovation services from China

place a greater importance on gaining “access to [the]

local market” than companies that source the same

services from India.

Several U.S. manufacturing companies are finding new

uses for factories in China that were initially established

to produce components to ship back to United States.

In one ORN case study, a large Midwestern diversified

manufacturer collocated an engineering group to a factory

in China to perform “low-level” work (e.g., specification

changes, three-dimensional designs), thereby freeing

engineers in the United States for higher-level work.

However, the Chinese engineers turned out to be very

experienced and were even able to design a product

specifically for the Chinese market. This experience helped

the company realize the importance of allowing new ideas

to emerge from engineering groups around the world.

Sources: Or Kashti, “Cabinet approves NIS 1.3b plan to reverse Israeli brain drain,” Haaretz, March 14, 2010 (www.haaretz.com/news/cabinet-approves-nis-1-3b-plan-to-

reverse-israeli-brain-drain-1.264731); The Development Marketplace for African Diaspora in Europe website (www.dmade.org); Tenth Malaysia Plan website (www.epu.gov.my/

html/themes/epu/html/RMKE10/rmke10_english.html); Myungsoo Park, “From Brain Drain to Brain Gain: Korea Diaspora Network,” APEC Science and Technology Network,

February 25, 2010 (astn.stepi.re.kr/art/2010/LectureNotes/From%20Brain%20Drain%20to%20Brain%20Circulation%28Korea%20Diaspora%20Network%29.pdf).

Exhibit 2

Examples of programs to encourage the contributions of expatriate talent

Mexico3x1 Program for migrants

provides matching funds

to support social projects

in Mexico AfricaGlobal networks of scholars (e.g.,

the Development Marketplace for

African Diaspora in Europe) mobilize

African scientists living abroad

to help their home countries

IsraelGovernment invests

1.3 billion shekels

to attract scientists

back home

MalaysiaAs part of the Tenth Malaysia

economic plan, the government

is reaching out to the Malaysian

diaspora for ideas and capital

South KoreaStarting in the 1960s,

programs have been created

to reverse the “brain drain”

of Korean scientists


In a similar manner, another ORN case study company

discovered the importance of having the right to direct

provider employees independent of provider management.

This second company now routinely implements its own

management philosophy and processes inside their providers.

One manager at the company says, “Once I was able to

directly evaluate, motivate, and reward provider staffs,

quality of service and attrition rates improved dramatically.”

Companies in other sectors that break their innovation

activities down into ever-smaller and specific tasks and

distribute them among geographically dispersed providers

can face complex coordination issues and, not surprisingly,

declining efficiency. As shown in Chart 22, diseconomies of

scale and scope seem to be worse for innovation offshoring

than they are for administrative work. This may be due

to innovation offshoring requiring new managerial and

organizational capabilities that substitute top-down control

for self-organizing processes that are guided by shared mind

sets, specific outcomes and milestones, and the flexibility

to continually fine tune the project’s direction.16


Chart 21

India or China: criteria for selectinga location for innovation offshoring

India

China

Sources: Duke University/Archstone Consulting Offshoring Research Network

2005 U.S. Survey, Duke University/Booz Allen Hamilton Offshoring Research

Network 2006 Survey, Duke University/The Conference Board Offshoring Research

Network 2007/2008 Survey, and Duke University/The Conference Board Offshoring


67%

80%

86

79

67

79

73

59

19

52

21

36

32

27

38

26

11

26

40

23

61

20

25

20

26

19

32

19

30

17

37

17

0.0 12.5 25.0 37.5 50.0 62.5 75.0 87.5 10

Supporting existing

customers locally

Avoiding hot spots



Cultural proximity




Political stability

in host country

Collocating with

existing facility offshore


Location of the best

service provider

Matches language

requirements

Low costs



Low cost of labor




Network 2006 Survey, Duke University/The Conference Board Offshoring

Research Network 2007/2008 Survey, and Duke University/The Conference

Board Offshoring Research Network 2009 Survey.

0

10

20

30

40%

9 or

higher

87654321

Knowledge/innovation offshoring

Administrative

Ach

ieve

d c

ost

savi

ngs

Scale and scope

Chart 22

What is the source of managerial inefficiencyin innovation offshoring?

16 For a discussion of the organizational capabilities needed for effectivemanagement of offshoring operations, see Heijman, Lewin, Manning, Perm-Ajchariyawong, and Russell, Offshoring Reaches the C-Suite, pp. 24–26.

Despite the fact that offshoring has been a business reality

for decades, there is little agreement or data about the effects

of offshoring on domestic employment. When participants

in the ORN survey were asked to estimate the impact of

offshoring on their domestic employment, participants

indicated that over half of their offshoring efforts had not

made a change in the number of domestic jobs in most

functions (Chart 23). The two exceptions to this result—

administrative services and contact center operations—

are the most labor-intensive activities. The innovation

services category, on the other hand, has the highest

“no change” score (68 percent). This finding would seem

to reinforce the hypothesis that innovation offshoring

is not driven by labor arbitrage or cost cutting but by

a need to respond to a domestic shortage of talent.

Table 2 compares differences in the effects of offshoring

on domestic employment across industries through the

use of ratios of offshore employment relative to domestic

employment.17 The overall ratios are below 11 percent,

with the highest ratios in financial services (approximately

10 jobs offshored per 100 domestic jobs) and the software

industry (almost 8 jobs offshored per 100 domestic jobs).

If the results are broken down by the location of a company’s

headquarters, U.S. companies have a much higher ratio of

offshore to domestic employment in these industries than

European companies. The finding that the U.S. software

sector has the highest ratio—almost 13 offshoring jobs

per 100 domestic jobs—may be another reflection of the

scarcity of domestic science and engineering graduates

in United States.

Chart 23

Estimates of offshoring’s impact on domesticjobs by function (percentage of implementations

leading to indicated result)




Research Network 2007/2008 Survey, and Duke University/The Conference

Board Offshoring Research Network 2009 Survey.

0 100%

45 49 6

Administrative

47 39 13

Contact center

58 34 8

IT

55 14 31

Marketing and sales

68% 22% 10%

Innovation

63 23 14

Procurement

55 35 10

Software development

No change Decreased Increased

Note: Due to rounding, percentages may not add up to 100 percent.

Table 2

Ratio of offshoring employment to domestic employment(estimated from ORN sample)

United EuropeanOverall States Union

Finance & insurance 10.16% 11.64% 3.28%

High tech & telecom 2.17 2.23 2.01

Manufacturing 1.08 1.00 1.19

Professional & technical services 6.13 5.73 5.63

Retail & consumer goods 0.76 0.36 3.96

Software 7.55 12.93 1.76

Sources: Duke University/Archstone Consulting Offshoring Research Network2005 U.S. Survey, Duke University/Booz Allen Hamilton Offshoring ResearchNetwork 2006 Survey, Duke University/The Conference Board OffshoringResearch Network 2007/2008 Survey, and Duke University/The ConferenceBoard Offshoring Research Network 2009 Survey.

Domestic Employment and Global Sourcing

17 The offshore-to-domestic-employment ratio is the total number of offshoreemployees divided by the total number of domestic employees reported byrespondent companies by headquarter region (i.e., the United States andEurope). However, to account for the fact that the ORN database captures onlypart of overall population of companies engaged in offshoring, weight-adjustedfactors are applied to the original ratio to obtain the adjusted ratio of offshoreto domestic employment shown in Table 2.


While the impact of offshoring on domestic employment

may be due to a number of factors (e.g., the institutional,

social, and political environment), it may also be influenced

by the presence or absence of an offshoring strategy in

a respondent’s company. In the results for the question

on the overall impact of their offshoring on domestic

employment, the responses in the “no change” category

are similar for both respondents from companies with a

strategy (58 percent) and those from companies without

(56 percent). In the “decreased” category, however,

strategy companies say that 28 percent of their offshoring

implementations have reduced domestic employment,

compared to 44 percent of those without an offshoring

strategy (Chart 24). This may provide support for the

argument that a corporate offshoring strategy can help

companies focus on a broad range of strategic issues

beyond cost reduction and consider ways to minimize the

impact of offshoring on their domestic employees.


Table 3

Offshoring outcomes by industry

Chart 24

Effect of offshoring on domestic jobs by strategy(percentage of implementations leading to indicated result)

Sources: Duke University/Archstone Consulting Offshoring Research

Network 2005 U.S. Survey, Duke University/Booz Allen Hamilton

Offshoring Research Network 2006 Survey, Duke University/

The Conference Board Offshoring Research Network 2007/2008

Survey, and Duke University/The Conference Board Offshoring


58%

With strategy Without strategy

56

28

44

14

0

No change Decreased Increased

A comparison of responses to the offshoring outcome questionreveals that finance companies’ offshoring outcomes lag behindthe other five industries in some important areas (Table 3).In particular, finance and insurance respondents do not findthat their offshoring efforts led to “major product innovations”(0 percent), “better access to new markets” (3 percent), or “break-through process improvements” (12 percent). Forty-two percent

of respondents from manufacturing companies, on the otherhand, say that their offshoring efforts have led to improve-ments in each of these same three areas. At the other endof the outcome spectrum, only 25 percent of manufacturingrespondents find that offshoring has led to “better access toqualified personnel,” even though 61 percent of manufacturingrespondents say this is an important driver of offshoring.

Increased productivity/efficiency 63% 54% 64% 75% 63% 63% 20%

Increase in firm’s overall competitiveness 54 52 60 75 63 68 50

Improved organizational flexibility 49 54 45 83 57 63 60

Better focus on core competencies 48 44 36 58 86 42 40

Improved service quality 47 42 44 58 43 42 40

Better access to qualified personnel 46 53 20 25 43 42 60

Firm growth 40 33 30 42 29 68 40

Better access to new markets 20 3 10 42 29 26 20

Breakthrough process improvements 20 12 10 42 43 26 20

Major product innovations 17 0 0 42 29 32 20

Retail and Retail andFinance and High consumer consumer

Outcome Overall insurance tech Manufacturing goods Software goods

Source: Duke University/Archstone Consulting Offshoring Research Network 2005 U.S. Survey, Duke University/Booz Allen Hamilton Offshoring Research Network2006 Survey, Duke University/The Conference Board Offshoring Research Network 2007/2008 Survey, and Duke University/The Conference Board OffshoringResearch Network 2009 Survey.

Rating Offshoring Outcomes by Industry

Looking Ahead: The ShiftingGeography of OffshoringOffshoring is expected to continue to grow for at least the

next two to three years. According to the 2009 survey results,

54 percent of the participating companies plan to expand

existing offshoring operations in the next 18–36 months

(Chart 25). However, 37 percent plan no change in their

offshoring operations. In the results for the 2007/2008

survey, only 27 percent of respondents said they planned

no change in their offshoring activities. This finding has a

parallel in the slowing trend that can be observed in the

cumulative percentages for a number of companies, which

show that the offshoring of many functions leveled off

after 2008 (Chart 26).

Sources: Duke University/The Conference Board Offshoring Research Network 2007/2008

Survey and Duke University/The Conference Board Offshoring Research Network 2009 Survey.

54%

Chart 25

Comparison of plans for expansion of offshoringactivities (18–36 months out): 2007/2008 and 2009

2009 2007/2008

50

37

27

8

Expanding No change

in plans

Relocating

to another

offshore

location

16

5

20

3

21

2

16

Relocating

back to

home

country

Transfer to

third-party

service

provider

Transfer to

a wholly-

owned

subsidiary

Note: Percentages may not add up to 100 percent because multiple answers were allowed.

Chart 26

Cumulative percentage of companies offshoring business service functions

Source: Duke University/Archstone Consulting Offshoring Research Network 2005 U.S. Survey, Duke University/Booz Allen Hamilton



0

10

20

30

40

50% IT

Innovation

Call center

Finance and accounting

Software

Procurement

Marketing and sales

Human resources

Knowledge services

Legal

Pre-1989 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008


Regional expectations: European companiesanticipate expansionU.S. and Canadian companies appear to be taking a

more cautious approach than European companies, since

North American companies are more likely to say they

have no changes planned (Chart 27). According to follow-up

interviews with executives, a lower level of transactions

in the U.S. economy during the past year may partially

explain this trend. One executive said, “Because growth

in transaction volume has leveled off, the pressure on

expanding outsourcing capacity has vanished.” Another

noted that “the urgency of shifting captive operations to

new providers has declined.”

Financial services companies are lookingto grow their operationsResponses from the manufacturing and software sectors

indicate that those industries are planning to slow their

operations (Chart 28). Conversely, 57 percent of financial

services companies, in spite of the economic downturn,

indicate that they plan to expand their offshore operations

in the next 18-36 months. Less than a third of these com-

panies say they anticipate no change to their current plans.


Transfer to

third-party

service

provider


49%

Chart 27

Comparison of plans for expansion of offshoring activities(18–36 months out): U.S./Canadian and European companies

United States and Canada Europe

68

39

24

10

Expanding No change

in plans

Relocating

to another

offshore

location

5 30

3 5 20

Relocating

back to

domestic

country

Transfer to

a wholly-

owned

subsidiary

Note: Percentages may not add up to 100 percent because multiple answers were allowed.

Transfer to

third-party

service

provider


Chart 28

Comparison of plans for expansion of offshoringactivities (18–36 months out) by industry

No change

in plans

Expanding Relocating

to another

offshore

location

Relocating

back to

domestic

country

30

67

57

Finance and insurance Manufacturing Software

57%

3339

48 9

50

412

40

Note: Professional/technical services and retail/consumer goods had small sample sizes

for this question. None of the high-tech companies provided observations for this question.

Percentages may not add up to 100 percent because multiple answers were allowed.

Service providers are able to anticipatemost needsA comparative analysis of the growth in offshoring demand

(from the client survey) and supply (from the service pro-

vider survey) shows that service providers are generally

in sync with the demands of their clients (Chart 29).

The top three categories for client expansion in 2009—

software development, IT, and innovation—are also the

top three functions in which service providers intend to

expand the scale of their existing services and/or initiate

new service offerings. However, service providers seem

to overestimate the demand for legal services. Nearly

30 percent of participating service providers say they

anticipate legal services will becomea fast-growing off-

shoring service, but only 5 percent of client companies are

planning to expand their current legal service offshoring

operations or initiate new legal service offshore imple-

mentation. (For more on this disconnect, see the box below.)




Research Network 2007/8 Survey, Duke University/The Conference Board

Offshoring Research Network 2009 Survey, Duke University Offshoring Research

Network 2007/2008 Service Provider Survey, and Duke University Offshoring

Research Network 2009 Service Provider Survey.

Chart 29

Expected growth in demand and supply

Percentage of suppliers

indicating plans to extend

scale or offer new services

Expected growth in

demand by providers

Innovation

Software

development

Procurement

Marketing

and sales

Legal services

Knowledge

services

IT

Human

resources

Finance and

accounting

Contact

centers

25%52

2153

2314

2023

2814

2524

2058

1020

2529

2031

32%

43

17

17

5

28

41

15

28

24

Percentage of companies

indicating plans to

expand scale or

offshore new services

According to an in-depth interview with an executive from aleading legal service provider, there are several factors thatexplain the recent slow growth of legal services offshoring.On the demand side, many law firms and corporations takea conservative stance toward the sensitivity of their legalactivities, which makes such services a less obviouscandidate for offshoring. A few American companies haveoutsourced or offshored legal services. GE has shifted itsoffshore legal work from GENPACT to Pangea 3 in India, whileDupont has outsourced database management and datamining assignments related to asbestos liability litigationto Office Tiger (a RR Donnelly subsidiary). However, whilethe number of service providers has increased since 2007,one supplier in India noted that only “a few have securedblue-chip U.S. clients.” This is a case, he continues, where“supply has not yet been able to drive demand with newlegal service offerings.”

The massive influx of service providers into the legalservices offshoring market has caused some companiesto reconsider the advantages of obtaining high-qualitylegal services at a lower cost. Despite a hard push fromproviders, many law firms and companies remain cautiousabout sending their legal activities offshore, especiallywhen the task involves intellectual property, which isconsidered an important risk. There are also barriers tomore specific patent and trademark application work. TheUnited State Patent and Trademark Office (USPTO) hasissued a memo to all attorneys registered with the agencystating that applications prepared by foreign associatesare not covered by U.S. rules of privilege.a This creates ahuge barrier for companies considering offshoring theirlegal work involving patents or trademarks.

What’s Holding Back Legal Services Offshoring?

a See generally James N. Willi, “Proposal for a Uniform Federal Common Law of Attorney-Client Privilege for Communications with U.S. and Foreign Patent Practitioners,”Texas Intellectual Property Law Journal, Volume 13, No. 2, 2005, pp. 279, 307–335; and Daiske Yoshida, “Note: The Applicability of the Attorney-Client Privilege toCommunications with Foreign Legal Professionals,” Fordham Law Review, Vol. 66, 1997, pp. 209, 227–238.


Offshoring, according to ORN, refers to a process of

sourcing business functions or processes supporting

home-based and global operations from abroad, either

through wholly-owned (captive) organizational units or

external service providers (offshore outsourcing) that

are normally low cost. In general, offshoring means that

business functions supporting home-based and global

operations are sourced from a location outside the home

country. Often the terms offshoring and outsourcing are

confused. Offshoring refers to process of sourcing and

coordinating tasks and business functions across national

borders. Outsourcing, in contrast, denotes delivery of

products or services by an external provider (i.e., one

outside boundaries of the firm). Offshoring may include

both in-house (captive or international in-sourcing) and

outsourced activities. Outsourcing, in turn, may occur

both domestically (onshore) and abroad (offshore).

Further, offshoring concerns sourcing rather than sales

activities, and operations that support global or domestic

functions rather than local operations. For example, setting

up HR departments in foreign subsidiaries in support of

local operations (e.g., sales and distribution) is not what the

ORN means by offshoring. Only if HR services (e.g., payroll

services) are provided from offshore in support of global or

home-based HR functions does the term offshoring apply.

The ORN project on offshoring of technical and admini-

strative work was launched in 2004 at Duke University

Center for International Business Education and Research

(CIBER), The Fuqua School of Business. In 2004 and

2005, ORN focused on surveying the offshoring practices

of U.S.-based companies. In 2006, an online survey was

extended to research partners from EU universities to

recruit companies in their countries to participate in the

survey as well as conduct case studies. At core of the

ORN project is the contextual commonality of the survey

through the centralized online administration of survey

(in the native business language of a country where

necessary) each year. The cumulative ORN database is

unique in that it allows scholars to observe companies’

actions as they outsource and offshore any type of task or

business process. The ORN corporate (buy-side) survey

allows the network to track the evolution of global sourcing

practices involving seven main areas: functions offshored,

choice of offshore location and rationale for this choice, type

of service delivery model used (captive, third-party, hybrid),

strategic drivers of offshoring, perceived risks, performance

metrics, and future offshoring plans (18-36 months out).

Functions offshored include contact centers, finance and

accounting processes, HR, legal services, procurement,

other administrative back office services, and all innovation

work—R&D, product design, engineering services, and

software development. ORN studies do not cover offshore

outsourcing of manufacturing activities. Participating

firms are from all industries, ranging from financial

services, manufacturing, and software companies to

technical and professional services. They include large

(from the Forbes 2000), mid-sized, and small companies

(<500 employees).

A unique feature of the ORN survey is its focus on

surveying specific offshore project implementations rather

than the general experience of companies with offshoring.

In practice, this means every specific function that a com-

pany (sometimes involving multiple respondents from the

same company) has offshored in a particular location is

identified by the year it was launched and is treated as

a separate observation. This survey design results in a

very fine-grained database that enables an analysis of

offshoring dynamics across various administrative and

technical functions located in a wide range of countries or

regions of the world (e.g., Malaysia, Sri Lanka, Egypt,

Brazil, Nicaragua, Guatemala, Costa Rica, Tunis, Morocco,

Jordan, and Rumania, in addition to China and India),

across industries, and across types of delivery model

(captive, third-party, or hybrid). Finally, the ORN

database includes both companies that have already been

offshoring as well as companies that have considered

offshoring but have not yet initiated the offshoring of

any application.

Since 2007, the annual ORN survey of corporations

(buy side) is complemented by an annual ORN Service

Provider Survey to collect data on the supply of offshore

services. The provider survey tracks service providers

in the key dimensions of service offerings, offshore

destinations, contract and client relationships, and growth

strategies. A combination of data from both surveys provides

a richer and more insightful understanding of offshoring

practice, as it allows ORN to compare the expectations of

both client companies and service providers. With academic

rigor and objectivity, Duke CIBER reinforces its neutrality

and refrains from any commercial bias in conducting the

survey research, which further differentiates the ORN

project from consulting companies.


Research Methodology


The Offshoring Research Network (ORN) project on theoffshoring of technical and administrative work was launchedin 2004 at the Duke University Center for InternationalBusiness Education and Research (CIBER), The Fuqua Schoolof Business. Since its launch, ORN has become one of theworld’s most respected authorities on the research andanalysis of offshoring trends. Offshoring refers to theprocess of sourcing any business functions supportingdomestic and global operations abroad, in particular fromlower-cost emerging economies.18

In 2004 and 2005, ORN surveys focused on the offshoringpractices of U.S.-based companies. In 2006, the onlinesurvey was expanded to involve research partners fromEU universities that recruit companies in their countries toparticipate in the survey and examine empirical researchcases. At the core of the ORN project is the contextualcommonality of the survey and the centralized onlineadministration of the annual research. When necessary,surveys are translated into the native business languageof the respective country. For 2009, the survey wasrepositioned to allow companies to update their archivaldatabases at any time. This feature provides companies withan incentive to seek an up-to-date overview of their offshoreoperations with the future functionality to obtain a range ofbenchmarking calculations.

As of November 2010, the ORN database encompassed over2,000 companies (22 percent large, 35 percent mid-size,and 43 percent small) and over 4,300 discrete offshoringprojects, and the database continues to grow. ORN providessupport to the offshoring community by organizing researchdebriefings, holding webcasts, and presenting research atleading international conferences. ORN publishes research intop academic and practitioner publications as well as twoannual survey reports, which are among the most referencedpublications in the managerial and consulting arenas.Selected research publications and presentations can befound on the ORN website.19 ORN also provides customresearch to corporate members.

The cumulative ORN database is comprehensive and allowsscholars to observe companies’ actions as they outsourceand offshore all types of business processes or functions.

Users of the ORN core survey can track the evolutionof offshoring practices in nine main areas:

1. Overall offshoring status (currently offshoring,considering offshoring, not considering offshoring)

2. Adoption of corporate and functional strategies guidingoffshoring decisions

3. Functions offshored

4. Strategic drivers of offshoring

5. Perceived risks

6. Choice of offshore location and rationale for this choice

7. Type of service delivery model used(captive, third party, hybrid)

8. Performance metrics

9. Future offshoring plans (18-36 months out).

Functions offshored include contact centers, finance andaccounting processes, HR, legal services, other admini-strative back office services, and all innovation activities(e.g., R&D, product design, engineering services, andsoftware development).

The ORN survey is unique in its focus on specific offshoreprojects rather than a company’s general experience withoffshoring. In practice, this means a specific function acompany has offshored in a particular location (sometimesinvolving multiple respondents from the same company) isidentified by the year the project was launched and is treatedas a separate observation. This survey design results in acomprehensive and detailed database that allows for ananalysis of offshoring dynamics across various administrativeand technical functions located in a wide range of countriesor regions of the world, as well as across industries, sizes ofcompany, and types of delivery model (captive, third party, orhybrid). Finally, the ORN database includes both companiesthat already offshore as well as companies that have con-sidered offshoring but have not yet initiated it. The annualORN survey of corporations (buy side) is complemented by theannual ORN Service Provider Survey (which started in 2007),as well as by case studies, focused surveys, and workshops forparticipating companies that are intended to provide feedbackand contribute to the interpretation of findings.

These findings also have important policy implications. Theysuggest that national competitiveness increasingly dependson the ability of companies to reorganize themselves globallyand connect with specialized service providers and newscience & engineering clusters around the world.

About the Offshoring Research Network (ORN)

18 This definition is taken from Stephan Manning, Silvia Massini, and Arie Y.Lewin, “A Dynamic Perspective on Next-Generation Offshoring: The GlobalSourcing of Science and Engineering Talent” Academy of ManagementPerspectives, 22, no. 3, 2008, pp. 35–54.

19 For more information, visit our website (offshoring.fuqua.duke.edu/research.jsp).

Founded in 1992, Duke CIBER is one of thirty-one nationalcenters funded under Title VI, Part B, of the Higher EducationAct. The center strives to internationalize the content of coreand elective courses while developing innovative teachingmaterials for Duke’s Fuqua School of Business. It promotesand advances research on international business and U.S.competitiveness.

Duke ORN Research TeamArie Y. LewinProfessor of Strategy and International BusinessDirector CIBERLead Principal Investigator, International ORN ProjectDuke University CIBER, The Fuqua School of BusinessE-mail: faculty.fuqua.duke.edu/ciber/center/arie.html

Dr. Nidthida Perm-AjchariyawongORN Senior Research AssociateDuke University CIBER, The Fuqua School of Business

Dr. Xing ZhongORN Research AssociateDuke University CIBER, The Fuqua School of Business

Jeff W. RussellORN Director of Research OperationsDuke University CIBER, The Fuqua School of Business

The Conference BoardTon Heijmen Senior Advisor, Offshoring/Outsourcing

Randall Weiss Managing Director, Domestic andInternational Research and Products

Academic PartnersCopenhagen Business School (Denmark, coveringScandinavian countries)

IESE (Spain)

Macquarie University (Australia)

Manchester Business School (United Kingdom)

RSM Erasmus University (Netherlands)

ULB - Solvay Business School (Belgium)

Wissenschaftliche Hochschule fur Unternehmensführung(Germany)

University of Tokyo (Japan)

Kyung Hee University (Korea)

EMLYON Business School (France)

Polytechnic University of Milan (Italy)

The Conference Board is the lead collaborator for ORN U.S.Buy-side Survey (2007–2009). PriceWaterhouseCoopers is thelead sponsor of ORN Service Provider Survey (2008-) Past ORNSponsors include Booz Allen Hamilton (2006) and ArchstoneConsulting LLP (2004 and 2005).

AffiliatesInternational Association of Outsourcing Professionals

Information Technology Association of America (ITAA)

Cosponsoring CIBER AffiliatesFlorida International University Indiana University

Michigan State University

Temple University

University of Connecticut

University of Hawaii at Manoa

Indiana University

University of Kansas

University of Maryland

University of Memphis

University of North Carolina at Chapel Hill

Related Resources from The Conference Board

Research Reports

Offshoring Reaches the C-Suite, Research Report 1445, 2009

Assessing Offshoring Risks, Research Report 1431, 2009

Executive Action

Treating Contingent Workers as a Strategic Resource,Executive Action 333, 2010

The Conference Board Council Program

Membership in one of our councils gives you access to a selectcommunity of 2,400 executives from a broad array of industries,functions, and regions who know the value of this rich source ofinsights and new approaches. Enduring relationships are thecornerstone of the council experience. Enhanced by our global,enterprise-wide reach, these relationships span the world andextend value across your organization. Confidential peer dialoguecombines broader perspective, specific knowledge, and sharedexperience to save you precious time and public missteps.

Globalization Leadership Council

Strategic Sourcing Leadership Council


The Duke Center for International BusinessEducation and Research (CIBER) Lead Collaborators and Affiliates


© 2011 by The Conference Board, Inc. ISBN No. 0-8237-1001-7All rights reserved. Printed in the U.S.A. The Conference Board®

and the torch logo are registered trademarks of The Conference Board, Inc.

Arie Y. Lewin is professor of strategy and internationalbusiness at Duke University, Fuqua School of Business and isdirector of the Center for International Business Educationand Research (CIBER). He is a fellow of the Academy ofInternational Business, and the Organization Managementand Theory division of the Academy of Management awardedhim their first Trail Blazer award at their 2008 Annual Meeting.Lewin is visiting research professor at IESE (2005–2008) andRSM Erasmus University (1998–present), where he is alsoERIM Senior Fellow. He was editor in chief of the Journal ofInternational Business Studies (JIBS) from 2002 to 2007,founding editor in chief of Organization Science from 1989to1998, and convener of the acclaimed Organization ScienceWinter Conference (1994–2010). His research interestscenter on strategic renewal of organizations encompassingstudies of adaptation and selection as co-evolutionarysystems, the emergence of new organizational forms, andadaptive capabilities that distinguish between innovating andimitating organizations. He is the lead principal investigatorfor the multiyear international Offshoring Research Network(ORN) project, which focuses on how companies globalizetheir organizations, business functions, processes, andservices by tracking firm strategies, experiences, and futureplans related to global delivery of all business functions andadministrative and technical work. His current researchfocuses on the globalization of innovation.

Nidthida Perm-Ajchariyawong is senior research associateat the Center of International Education and Research(CIBER), Fuqua School of Business, Duke University. She hasa PhD in strategic management from the Australian GraduateSchool of Management and is currently engaged in theOffshoring Research Network (ORN) project. Nidthida’sresearch interests focus on strategic outsourcing andoffshoring, firm innovation, strategic inter-firm relationshipand managerial decision making.

Jeff W. Russell is currently the Director of ResearchOperations at the Duke Center for International BusinessEducation and Research (CIBER) at the Duke Fuqua Schoolof Business. Current projects include the globalization ofproduct development and services as well as cross culturalcommunication effectiveness and the training of boundaryspanners who lead and manage global relationships. Mr.Russell has written extensively for practitioner orientedpublications and has served on advisory boards for theInternational Association of Outsourcing Professionals andthe Software Information Industry Association.

Many individuals, executives, and companies have contributed tothe preparation of this report. We especially thank the companyrespondents of the 2009 Offshoring Research Network (ORN)survey and the ORN participants who attended the annualdebriefing session, and senior executive roundtables at Duke fortheir valuable feedback and input to get behind the numbers.Duke’s Fuqua School of Business alumni have provided a greatdeal of support to the Duke ORN over the last six years.

The authors sincerely thank the following for their valuable insightsinto the 2009 study: Dr. Stephan Manning, Michael Monaghan,Professor Thomas Huytzschenreuter, Professor Henk Volberda,Professor Joan E. Ricart, Professor Torben Pedersen, andPricewaterhouseCoopers. We also wish to acknowledgeBooz & Company and Archstone Consulting for their earlycontributions to this research.

We wish to thank and acknowledge the following The Fuqua Schoolof Business staff for their commitment and support during thecompletion of this year’s report: Ayse Durmaz and Joe Conder,for their efforts in creating the new survey architecture; andFrank Liao, Bryan Seelagy, and Stefanie McAdoo for their tirelesswork on survey administration and analysis. From The ConferenceBoard, we thank Wennie Lee and Timothy Dennison.

We would like to acknowledge the National Science Foundation(Award No. 0522359) for its early support of two case studiesand development of the underlying theoretical models.

Lastly, we would like to thank all of the ORN membership organi-zations who participated in the 2009 research survey: theInternational Association of Outsourcing Professionals (IAOP),The Information Technology Association of America (ITAA), andGlobal Services Magazine.

Publications Team

Publishing Director Chuck Mitchell

Editor Timothy Dennison

Designer Peter Drubin

Production Andrew Ashwell

About the Authors Acknowledgments

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