Offshoring Poses Crucial Human Resource Challenges at Home, Overseas

Released: 7-Dec-2005 2:30 PM EST
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Newswise — Potentially massive savings in wage and benefit costs continue to drive the global offshoring movement, but companies are facing a wide range of people management issues both overseas and at home, according to a major study released today by The Conference Board, the global research and business membership organization.

Aligning The Organization: Management and Human Resource Concerns is the third report in the series Thinking Offshoring Through: A Framework for Decision Makers.

But offshoring continues to pose risks as well as opportunities. "Does cheaper also mean riskier?" the new study asks. "As labor demand rises in offshoring markets, offshorers and potential offshorers would be right to wonder how long the arbitrage opportunity will last. Will labor supply continue to meet growing demand?"

Already, increases in demand for IT skills are driving up pay levels, especially in such centers as Bangalore and New Delhi in India.

The study emphasizes that companies must look beyond wages to consider benefits, training and other costs before they outsource and also consider transportation, cultural and other expenses related to offshoring.

At home, companies are learning they can quell some of the disruption springing from offshoring by designing plans to aid employees who lose their jobs to offshoring, overcoming resistance from disgruntled workers and maintaining both morale and a positive image among remaining employees.

"All of these groups must be considered if a company wants to protect its image as an employer of choice," says Ton Heijmen, Senior Advisor to The Conference Board on Offshoring and Outsourcing. "Meeting these and other challenges calls for innovative approaches and developing specific leadership qualities."

DOING YOUR ORGANIZATIONAL HOMEWORK BEFORE OFFSHORING

Due diligence for offshoring companies should include a basic familiarity with local employment law, particularly the requirements and obligations surrounding termination. Companies should also know the standard contractual terms that apply, as well as the costs of hiring and firing and the procedures prospective vendors follow to screen potential employees, including background checks and references.

Project management skills and other management qualifications are essential for leaders of offshoring projects. Executives should possess interpersonal, networking, persuasion, and technical skills. They should manage relationships through empathy, which is useful in a cross-cultural context and in serving a broad range of stakeholders, and by relying on social skills, which are most effective in creating and building and leading teams.

Offshoring executives should also be good integrators, a skill that requires expertise in conflict management and inspiring group and individual cooperation. Offshoring directors can foster collaboration among the various elements of an offshoring operation, help reduce distrust, diminish the importance of differences in status, and minimize negative stereotyping.

"One of the most important requirements for executives involved with offshoring is the ability to foster and maintain a spirit of trust," says Jan Koch, the principal researcher and author of this series of research reports.

The study points to a number of actions that companies can take to build cooperation and sustain trust, including:

* Involve managers at all levels in important decisions.
* Foster openness and create a sense of fairness.
* Promote a culture in which people believe in their colleagues' and leaders' competence.
* Promote cross-cultural health, awareness, and cooperation.

"While manufacturing has a long history of being managed from afar as a discrete process, business processes and other services that touch many integral parts of a company's operations involve a higher degree of coordination and integration with different parts of the organization," says Heijmen. "In addition to operational issues, executives should consider the special processes they'll need to institute to manage people and projects, drive behavior, and resolve conflicts half a world and many time zones away—regardless of the offshoring structure they choose."

THE POWERFUL LURE OF CHEAPER LABOR
Companies continue to be attracted to hiring employees abroad at wage and salary multiples sharply lower than at home. Payroll clerks in the U.S. earn $15 an hour but only $2 in India. While call center employees in America have an average annual salary of $28,000, it is $2,000 in India. The average programmer in San Jose, California, earns $78,000, but the salary for the same job in India is $11,000. A financial researcher/analyst, a post that commands a salary of $33 to $55 an hour in the United States, can live a very comfortable lifestyle on $6 to $15 per hour in India.

Employers don't have to worry about overtime pay in India because employees are paid a flat monthly wage. So stark are the wage disparities that offshoring critics in the U.S. warn that the mere threat of moving administrative jobs overseas can depress wages and any potential increases in income at home.

Offshoring is clearly much more than an American phenomenon. European companies are flocking to Poland, Bulgaria, Romania, and other countries where software engineering wages can be as low as $6,500 a year. Such migration may lead to a new era in Europe—resulting in weaker unions, more flexible labor rules, and greater competition.

"It will likely also result in rising social tensions as a consequence of job losses and longer working hours," Heijmen says.

In addition to having a substantial population of low-skilled workers, China produces three times as many engineers with Bachelor of Science degrees each year as the U.S. Russia, China, and India together produce about three times the number of engineering and natural science graduates as the U.S.

Despite the increase in the number of highly-skilled workers in China, India, and other countries, serious educational constraints—high illiteracy rates, the lack of language proficiency, inadequate higher education, etc.—could easily dampen growth and reduce the attractiveness of certain offshore locations.

The Conference Board study points to another trend. The number of U.S. citizens pursuing science and engineering degrees has fallen, while the number of jobs requiring such training is growing. Also, well-educated foreign workers have had a hard time entering the country because of a reduction in the number of work visas issued in the past few years.

Source: Aligning the Organization: Management and Human Resource Concerns
Report #1370-05-RR, The Conference Board

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