Outsourcing Myopia

A real shift must occur—from shortsighted, narrow-minded, local job protection to true business use of global resources.

Countries cannot continue to thrive without high-tech economies, and America’s high-tech economy is eroding. The erosion began when manufacturing was outsourced. Today, many companies are little more than brand names, selling products that were developed somewhere else and manufactured in China.

A decade ago, outsourcing of manufactured products was presented as a positive, a significant opportunity for profitable growth. Indeed, the influential Boston Consulting Group warned that companies that did not outsource were missing a major opportunity for lower costs and greater shareholder returns. No one really considered how a country could maintain a technological lead when it did not manufacture. The mindset shifted. Manufacturing was the old economy and America’s future was in the new economy of knowledge-based jobs, innovation and marketing prowess.

But so far, the “new economy” has not yet arrived. The new knowledge-based jobs have not appeared. On the contrary, U.S. Bureau of Labor Statistics reports show a net loss of hundreds of thousands of jobs in major engineering job classifications. Today, many computer, electrical, electronics and software engineers who were well-paid at the end of the last century are unemployed and cannot find work. A country that doesn’t manufacture doesn’t need as many engineers, and much of the work that remains is being outsourced, or is done by visiting foreigners on work visas.

Talent moves

Outsourcing proponents keep claiming that design, innovation and marketing direction will remain the prerogative and under the control of corporate headquarters. But consider this: Product and market development is a “process,” fueled by the supply of talent. When the local supply dwindles and talent emerges elsewhere in the global environment, the center-of-gravity shifts.

After spending more than a decade squeezing costs out of manufacturing and the back office, the focus is now shifting to once sacred research and development operations. This is the biggest single remaining controllable expense; R&D productivity must increase, or it will be moved to where it is more effective.

Technology innovation calls for complex knowledge and sheer depth of talent. Demand is growing rapidly, while local supply in the United States and Europe is simply not keeping pace. And the notion of central control is becoming quaint.

Now many large companies are starting to outsource innovation. Some are even outsourcing basic research, while others are routinely generating business-process innovation and development of innovative products offshore. Contract manufacturers and independent design houses are achieving prominence in nearly every technical arena, from consumer products to automation systems and software.

If U.S. companies really want to ward off offshore competition, they must start by recognizing that outsourcing partners may quickly become competitors. Many sophisticated outsourcing suppliers are clearly aware that their subservience is transitional. They feel they can bring design, innovation and marketing prowess to bear on new global markets to generate new growth and success.

Fortunately, the myopia is starting to be corrected and a more strategic view of global sourcing is starting to emerge. The new buzzword is “transformational outsourcing.” Companies are discovering that offshore outsourcing is really about growth—making better use of innovation plus all of the other ingredients that make a successful global business. This approach creates new types of cooperative and complementary jobs in the United States, as well as globally.

The labor savings from global sourcing can still be substantial. But it is small compared to the enormous gains in efficiency, productivity, quality, revenues and profitability that a company can achieve by fully leveraging offshore talent.

A real shift must occur—from shortsighted, narrow-minded, local job protection to true business use of global resources, and from simply utilizing cheaper labor to stimulating innovative talents and partnering of complementary knowledge resources.

Jim Pinto is an industry analyst and commentator, writer, technology futurist and angel investor. You can e-mail him at:jim@jimpinto.com. Or review his prognostications and predictions on his Web site: www.jimpinto.com

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