If you are sourcing from China because it is part of your LCCS (Low-Cost Country Sourcing) Strategy, you will need to find a new low cost country to source from. Just like India is no longer a low cost country for call centers and outsourced support, it won’t be long before China is no longer a low cost country for manufacturing. As clearly pointed out in this recent McKinsey Quarterly article on What China’s five-year plan means for business, the plan targets:
- a 13% increase in minimum wages each year,
- an annual increase in household income of 7% each year,
- new policies for pricing energy, raw materials, and water … that will increase costs further … and
- tighter environmental regulations … that will increase costs even further.
In other words, your labor costs will be 84% higher within five years. And your raw material and environmental disposals cost will likely see a comparative price increase. Low Cost Country? Not anymore!
A recent article in The Economist on the trouble with outsourcing noted that the latest TPI quarterly index of outsourcing suggested that the total value of contracts for the second quarter of 2011 fell by 18% compared with the second quarter of 2010. Dismal figures in the United States dragged down the average, and this can be, at least, partly explained by the economy, but is this the whole story?
According to the article, TPI suspects that part of this is due to the fact that much of what can sensibly outsourced has already been outsourced. While it’s a good theory, I disagree. Maybe most of the companies with a willingness to jump on the outsourcing bandwagon have already done so and outsourced everything they can, but there are still a lot of companies who haven’t jumped on the outsourcing bandwagon. But more importantly, with the recent rise in Global Services Organizations, it’s possible to outsource pretty much everything that a company does.
Another reason could be, as the article notes, that some of the worst business disasters in recent times have been caused, or aggravated by outsourcing. This makes sense, but it’s just as easy to screw a product or service up in-house if the right processes, checks, and balances are not in place. But it is true that, when outsourcing goes wrong, it is the devil to put right.
SI agrees with the editor and believes that companies are rethinking outsourcing. Not only are they replacing huge long-term deals with smaller, less rigid ones that are more easily managed, and terminated if things go wrong, but also considering other viable options such as setting up their own Global Services centers, if they are large enough, or taking advantage of low costs at home when the backyard is empty and incentives plentiful. There are still situations where outsourcing makes sense, but not as many, and they are not as cut and dry as they used to be. Companies have to do an analysis, and to make sure they are not the next name on the disaster list, have to be careful about the decision they make. It’s a new age of outsourcing, and it should prove to be a smarter one.