Newswise — Companies considering offshoring need to examine the full impact of their decision-- both at home and abroad— to determine whether they are adding or destroying economic, social, and environmental value, according to a report released today by The Conference Board. The New Corporate Reality: External and Market Considerations is the second report in the series Thinking Offshoring Through: A Framework for Decision Makers.
Public backlash to offshoring—chiefly the reaction to job losses at home— has kept many business leaders from taking operations abroad. But layoffs are not the only hurdle facing offshoring companies. Offshoring can also cost the loss of a local tax base and damage to their brand. The negatives don't only affect a company's home workforce; rapid growth in offshore destinations often strains local infrastructure and creates damaging cultural stresses.
Whatever the size and scope of an offshoring venture, companies must weigh reactions by both consumers and the general public in addition to the market's response. Decision makers must systematically weigh the potential consequences for all stakeholders and assess whether the benefits outweigh the costs. The report discusses a whole battery of steps executives can take to mitigate offshoring's negative affects and educate stakeholders about the benefits of their decision.
"Even for companies that believe they exist solely to create value for shareholders, the social or sustainability implications of offshoring warrant considerable consideration, since, on a practical level, companies' reputations---their brand, desirability as employer, and, therefore , their financial success—are at stake," says Ton Heijmen, Senior Advisor to The Conference Board on Offshoring and Outsourcing.
THE SOCIAL COSTS OF OFFSHORING In the home country, it is not only employees who are hurt through layoffs; suppliers lose business, communities lose tax revenues, and the local economy loses the multiplier effects of direct spending. These impacts are heightened in areas lacking a deep economic base, where one company's decision to expand or shut down operations can reverberate throughout an entire community.
In the destination country , the positive effects of an infusion of income and economic activity can be offset by the stresses placed on resources and infrastructure, as well as the cultural changes experienced by workers. These include enduring disruptive nighttime shifts, being required to conceal their accents to hide their nationality, and reconciling the pressures of the new workplace and foreign influences with customs and traditional family values.
"In today's global economy, and in an era of heightened attention to corporate malfeasance, corporate behavior is under the microscope," says Janice Koch, author of the report. "The web of interdependencies among companies, suppliers, and partners; the market size of global companies; and the rapid changes that accompany globalization mean that the repercussions of decisions such as where to locate operations can be vast."
The report features an ethical decision making model based on a hypothetical offshoring initiative, designed to help executives weigh the company's moral obligation versus practical considerations " all in the context of stakeholder impacts. It also examines measures successfully implemented by companies that have offshored to mitigate economic and social impacts at home and in the offshore destination country.
OFFSHORING AND THE ENVIRONMENT
"Because many offshore destinations have only a rudimentary infrastructure and little or no environmental regulation, a sudden increase in business activity related to offshoring can often have a dramatic impact, says Heijmen.
In China, rapid economic development, largely a result of manufacturing offshoring, has led to severe air, water, and waste pollution. While manufacturing operations produce more direct pollution, the offshoring of services has already strained infrastructure in many popular offshoring locations. Roads, airports, and utilities lack capacity, and traffic congestion has created serious air and noise pollution problems.
Companies that establish their own offshoring operations are best positioned to ensure environmentally responsible operations. But, even those that offshore via third-party providers can exert positive influence, especially when communities and suppliers are competing for their business— for example, by stipulating certain performance standards and auditing the operation to ensure that they are upheld.
Because of the sensitivities, executives should directly confront offshoring issues with stakeholders. Passions on offshoring often cloud the positives---the jobs gained (insourcing), the money spent domestically by offshoring providers, the creation of potential new markets---and some less-understood realities , such as that job losses at home are overwhelmingly the result of heightened productivity or industry contraction rather than a consequence of offshoring. Educating the workforce, public and the press about the company's decision—including its strategies for mitigating negative impacts—is critical.
The full research report examines offshoring in all its ramifications and offers a comprehensive, 360-degree decision making framework to help decision makers weigh the financial, organizational, economic, social, and political issues involved—so they can avoid the often costly mistakes that can undermine an offshoring initiative. Source: The New Corporate Reality: External and Market Considerations, Research Report #1366, The Conference Board
About The Conference Board Non-partisan and not-for-profit, The Conference Board is one of the world's leading business membership and research organizations. The Conference Board produces The Consumer Confidence Index and the Leading Economic Indicators for the U.S. and other major nations. These barometers can have a major impact on the financial markets. The Conference Board also produces a wide range of authoritative reports on corporate governance and ethics, human resources and diversity, executive compensation and corporate citizenship. Our conference and council programs bring together more than 10,000 senior executives each year to share insights and learn from each other. Visit The Conference Board's award-winning website at http://www.conference-board.org.
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