Companies still playing catch-up in global game

Offshoring is, without doubt, one of the fastest growing trends in the business world.

Companies like the Royal Bank of Scotland, Europes third biggest banking group, recently announced plans to increase their headcount in India to 1200, and the UK's biggest insurer, Norwich Union, proudly trumpeted their intention to move 7,800 jobs overseas by the end of 2007. Even the British government has been tempted by its lure, with proposals currently under review to move some positions at the Department for Work and Pensions to service centres overseas.

The growth in the outsourcing of services and the subsequent increase in the number of companies launching comprehensive global sourcing strategies, has seen countries such as India and China take the lead, and with many companies already taking advantage of the relatively low-cost of both goods and labour in Asia and the Pacific, the trend so no sign of slowing.

"I've seen a marked increase in the number of CEO's asking what benefits global sourcing can help their company realise," Kris Timmermans, Senior Executive at Accenture, says. "Even the large oil and gas companies, who are making huge profits, believe that they should benefit from the same cost base. And with many of them expecting a downturn in business in the face of greater competition from overseas, it's hardly surprising."

So integral have global sourcing and offshoring become in an increasingly small corporate world, that many companies are now setting themselves LCC (low cost country) targets. And although an increasing majority of companies have been offshoring services such as HR and IT for a number of years, Timmermans believes that the next few years will see a huge growth in the number of companies sourcing materials and goods from Asia and South America and Eastern Europe.

"I remain surprised that so many companies still have such a high local supply-base," Timmermans says. "I do though think that there is now a clear trend of companies trying to double their LCC spend in the next few years."

This prediction is backed up by comments from a number of leading figures who took part in an ELP round-table discussion on the subject in May 2006. Christina De Luca, the CPO for Refining and Marketing at BP, described the decision to source from low cost countries as a "no brainer". And when Osama El Kadi, the CPO at Centrica, was asked why it was so important, he replied "..if you don't you're going to be out of business."

Simple enough, but apart from the tangible cost benefits, what other advantages to companies gain from working with countries such as China and India? "When comparing the two countries we see a massive range of resources available," Timmermans says. "Although there is a real difference in the quality of resources available in India and the quality of resources in China. In terms of skill-sets, India is still way ahead of the game."

Timmermans' comments mirror those of Ben Trowbridge, the CEO of Global Advisory Firm Alsbridge, who late last year stated that: "China will still lag other markets, mainly India, as a destination for English-language-driven business process outsourcing (BPO) or shared service centers due to language, low national birthrate, intellectual property and other legal issues."

However, it's not just the Asia-Pacific powerhouses who are enjoying the benefits of an increasingly global marketplace. When it comes to offshoring, countries are increasingly looking to countries from the former Soviet Bloc. "Eastern Europe has technical expertise in a number of areas, including packaging and certain parts of the automotive industry," Timmermans says. "However, I always tend to be surprised by Eastern European limitations, and this is the reason they still trail well behind the likes of India and China."

Limited they may be, but it has been reported that dozens of Chinese and Taiwanese companies have invested huge sums in countries such as the Czech Republic. For example, Taiwan's Foxconn Technology Co., who manufacture PCs and components for the likes of Hewlett-Packard and Cisco, currently have an $80m plant employing 5000 people in the city of Pardubice, 60 miles east of Prague.

And with these regions offering companies the opportunity to benefit from a manufacturing base where wages are a fraction of those found in Western Europe it seems set to continue. Particularly when you take into account the fact that some Governments in Central Europe are offering manufacturers such as Foxconn 10-year tax holidays.

There are, though, some major stumbling blocks facing companies casting covetous glances overseas. "A major problem is one of culture, one of internal resistance," Timmermans says. "The main issue is not that the supplier base is not ready, but that companies are reluctant to let go of suppliers they have used for many years and feel comfortable with."

It's not just a leap of faith that is required, however, from a logistics viewpoint the infrastructure in Asia and the emerging South American market all create their own unique difficulties.

"Countries are struggling to build the capacity at the speed we see our clients moving," Timmermans explains. "The poor quality of roads in many countries means that transporting essential goods is also an issue, but one of the biggest problems facing us today is a lack of habour capacity, particularly in South America. This is causing huge bottlenecks in the supply chain and this is likely to continue for years to come."