Manufacturing Industry
Offshoring in the
manufacturing industry
2010/February
In this issue
Rapid growth of innovation
offshoring in manufacturing 02
Most manufacturers adopt
function-level strategy but
fewer integrate offshoring
into their corporate strategy 07
Despite a market shift,
manufacturing companies
remain conservative in their
captive service delivery models 10
Innovation has always been considered a core
competence that should be developed and maintained
within an organization. However, over the past decade
the growth of global innovation sourcing—driven mainly
by the globalization of both technology markets and
knowledge workers—has begun to challenge this
conventional wisdom. Offshoring goes far beyond the
migration of relatively routine tasks like administrative
work, IT infrastructure, or call center staffing and
now includes product development and design, and
research and development. Although the concept of
offshoring is not new for manufacturing companies, its
previous application usually involved labor arbitrage in
low-level, routine manufacturing jobs.
02
Rapid growth of innovation
offshoring in manufacturing
Findings from the 2009 Offshoring Research Network (ORN) survey reveal
that manufacturing companies are now among the major practitioners
of innovation offshoring, including engineering services, research and
development, and product design. Chart 1 summarizes the percentage
of manufacturing companies that are offshoring a particular function,
and clearly demonstrates that, compared to other functions, innovation
services are growing the fastest, surpassing other major offshore
activities such as information technology and contact center. This trend
within manufacturing is particularly noteworthy given its absence from
other industries more typically associated with information technology
offshoring. Take finance and insurance industry as example. Chart
2 illustrates the slow growth of innovation offshoring in finance and
insurance industry in which only 18 percent of companies are currently
offshoring their innovation activities.
40%
35%
Chart 1: Cumulative percentage
of manufacturing
companies offshoring
particular function
over time
30%
Source: Duke University/Archstone Consulting Offshoring
Research Network 2005 US survey and Duke University/
Booz Allen Hamilton Offshoring Research Network 2006 US
survey and Duke University/The Conference Board Offshoring
Research Network 2007/8 US survey and Duke University The
conference Board Offshoring Research Network 2009 survey
20%
25%
Innov
Proc
IT
M&S
CC
F&A
Soft
Other
HR
15%
10%
5%
0%
Through
1990
PrivewaterhouseCoopers
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Offshoring in the manufacturing industry 2010/February
03
40%
35%
30%
CC
25%
F&A
HR
IT
Innov
Know
Soft
20%
Chart 2: Cumulative percentage
of finance and insurance
companies offshoring
particular function
over time
Source: Duke University/Archstone Consulting Offshoring
Research Network 2005 US survey and Duke University/
Booz Allen Hamilton Offshoring Research Network 2006 US
survey and Duke University/The Conference Board Offshoring
Research Network 2007/8 US survey and Duke University/The
conference Board Offshoring Research Network 2009 survey
15%
10%
5%
0%
1992 1993 1994 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
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Offshoring in the manufacturing industry 2010/February
04
Overall distribution of offshoring by manufacturing companies (Chart 3)
shows that more than 60 percent of manufacturing companies engage
in innovation offshoring, where their main destinations (see Chart 4)
include India (33 percent), China (27 percent) and Western Europe (17
percent). This finding is consistent with service providers’ expectations
(2009 ORN service provider survey). In response to the question about
their expectations of growing destinations for a particular function, over
30 percent of service providers named India and China as high-growth
destinations for innovation offshoring (see Chart 5). More than a third of
participating manufacturers reveal that information technology, finance and
accounting, and procurement are among their top offshoring operations.
Innovation
Chart 3: Distribution of functional
implementations by
manufacturing companies
Source: Duke University/The Conference Board Offshoring
Research Network 2009 survey
63%
Information Technology
39%
Finance & Accounting
33%
Procurement
29%
Contact Centers
20%
Marketing & Sales
19%
Software Development
13%
Human Resources
Other
Legal Services
Analytical/
Knowledge Services
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11%
5%
4%
1%
Offshoring in the manufacturing industry 2010/February
05
Software
56%
Procurement
13%
24%
22%
6%
22%
6%
19%
14%
8%
4%
5%
8%
2%
2%
Chart 4: Distribution of offshore
destinations chosen
by manufacturing
companies for particular
function
Source: Duke University/The Conference Board Offshoring
Research Network 2009 survey
Marketing
& Sales
10%
44%
Innovation
33%
17%
13%
27%
8%
6%
7%
4%
2%
3%
Information
Technology
55%
Finance
& Accounting
Contact Center
13%
32%
18%
India
Western Europe
China
Other Asia
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13%
20%
29%
8%
7%
5%
13%
8%
18%
5% 5% 5%
32%
7%
11%
4%
7%
Eastern Europe (incl. Russia)
Latin America & Mexico
US & Canada
Middle East
Offshoring in the manufacturing industry 2010/February
06
One finding that stands out from the survey is offshore destination choices
of manufacturing companies. While India generally remains the most
attractive offshoring destination, participating manufacturing companies
articulated a strong preference for using European providers for finance
and accounting, marketing and sales, and contact center offshoring.
Forty-four percent of manufacturing companies offshore their marketing
and sales operations to western European providers, with only 10
percent to going to Indian providers. Similarly, Western (22 percent) and
Eastern (32 percent) Europe are also the favorite locations for finance and
accounting offshoring by manufacturing companies.
2%
Call Center
Chart 5: Percent of providers
naming regions as
growing destinations
for particular services
Source: Duke University Offshoring Research Network 2009
Service Provider survey
9%
7%
Finance
& Accounting
34%
Procurement
33%
Marketing
& Sales
Human
Resources
19%
9%
3%
30%
Innovation
16%
27%
19%
20%
12%
11%
7%
19%
12%
13%
15%
11%
12%
15%
15%
88%
Knowledge
Services
Software
Development
9%
23%
Legal
Services
Information
Technology
19%
7%
27%
28%
19%
13%
56%
22%
6%
13%
17%
1%
31%
27%
29%
10%
13%
15%
25%
16%
23%
11%
20%
31%
13%
19%
4%
1%
5%
4%
2%
India
US & Canada
Western Europe
China
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Eastern Europe
Latin America
Other Asia & Australia
Other
Offshoring in the manufacturing industry 2010/February
07
Most manufacturers adopt function-level strategy but
fewer integrate offshoring into their corporate strategy
Cost overruns and declining efficiencies (mostly due to wage inflation and
uncoordinated growth of offshoring activities across the company) often
trigger a reconsideration of the organizations’ offshoring activities, which
in many cases results the implementation of corporate-wide strategies
for guiding offshoring decisions. According to the 2009 ORN survey,
the top two reasons for contract termination specified by participating
service providers are clients’ unrealistic expectations and the lack of a
clear outsourcing strategy (see Chart 6). In the context of offshoring and
outsourcing, the adoption of a corporate-wide offshoring strategy likely
represents a transitional stage in the evolutionary process of developing
more elaborated offshoring and outsourcing capabilities.
Client’s expectations are unrealistic
Chart 6: Percent of service
providers indicating
factors as one of the six
most important reasons
for contract termination
Source: Duke University Offshoring Research Network 2009
Service Provider survey
44%
Client has no clear
outsourcing strategy
41%
38%
Service no longer needed
Client underestimates
scope of project
37%
Service quality is not achieved
34%
Client lacks skills/resources to
implement and manage relationship
Management-level
turnover on client side
25%
Change in target operating model
23%
Lack of buy-in by client’s
middle management
23%
Poor planning in work transfer
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30%
21%
Conflicts due to unanticipated
work (change orders)
20%
Cost savings are not achieved
20%
Offshoring in the manufacturing industry 2010/February
08
Reflecting this overall trend, the 2009 ORN survey shows a dramatic
increase in the number of organizations adopting a company-wide
strategy for guiding their offshoring decisions at the business unit and
function levels. Compared with the overall sample in which 57 percent
of companies have implemented a company-wide strategy guiding their
offshoring implementations, only 47 percent of manufacturing industry
participants report doing so (see Chart 7).
57%
Corporate-wide
47%
45%
Procurement
Chart 7: Percent of companies
adopting corporatewide and function-level
strategy
Source: Duke University/The Conference Board Offshoring
Research Network 2009 survey
85%
55%
Marketing & Sales
70%
54%
Contact Center
70%
53%
Information
Technology
67%
58%
Software
64%
53%
Finance &
Accounting
57%
51%
52%
Innovation
34%
Human Resources
40%
Overall
Manufacturing companies
PrivewaterhouseCoopers
Offshoring in the manufacturing industry 2010/February
09
As companies gain offshoring experience, they increasingly adopt a
company-wide strategy for guiding offshoring decisions at the business
unit and function levels. However, it is notable that more than half of the
manufacturing companies in the sample report that although an offshoring
strategy has been implemented at a function level it has yet to reach
the C-suite. This reality might reflect the decentralized nature of most
diversified industrial manufacturing companies. In fact, the manufacturing
companies sample includes at least two case studies of companies that
began offshoring various processes and functions having first adopted a
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corporate-wide offshoring strategy. In one case, the offshoring strategy was
implemented from the top, down and in the second, from the bottom, up.
During follow-up interviews, manufacturing companies that have yet
to adopt company-wide offshoring strategies indicated that they are
considering doing so. In moving to a company-wide strategy, companies
hope to guide and standardize offshoring decisions across business units
and functions such as IT infrastructure (to achieve economies of scale
via third-party providers), accounting and finance, and global sourcing of
innovation-related work.
Offshoring in the manufacturing industry 2010/February
010
Despite a market shift, manufacturing companies remain
conservative in their captive service delivery models
The 2009 ORN survey indicates that a majority of manufacturing
companies continue to favor captive delivery models offshore compared
with companies in other industries, which are increasingly relocating
as well as shifting existing captive operations to third party-providers.
47 percent of new offshoring implementations launched between 2007
and 2009 by manufacturing companies involve captive delivery models
2%
offshore compared with 54 percent in 2004 to 2006 (see Chart 8). These
results suggest that although companies are now keen to diversify their
operations and place more emphasis on using external service providers,
the manufacturing industry remains relatively conservative when it comes
to service delivery models for offshoring.
1%
100%
90%
Chart 8: Percent of offshoring
implementation using
a particular delivery
model in Manufacturing
industry
Source: Duke University/Archstone Consulting Offshoring
Research Network 2005 US survey and Duke University/
Booz Allen Hamilton Offshoring Research Network 2006 US
survey and Duke University/The Conference Board Offshoring
Research Network 2007/8 US survey and Duke University/The
conference Board Offshoring Research Network 2009 survey
8%
12%
18%
6%
5%
2%
24%
80%
Other
Local Provider
Joint Venture
International Provider
Domestic Provider
Captive
16%
29%
70%
2%
32%
12%
60%
3%
50%
12%
40%
30%
66%
50%
54%
47%
20%
10%
0%
Pre-2001
PrivewaterhouseCoopers
2001–2003
2004–2006
2007–2009
Offshoring in the manufacturing industry 2010/February
011
As previously noted, many manufacturing companies remain conservative
with their offshoring operations, however, an unexpected, though
perhaps inevitable development is the growth of offshoring including
third-party outsourcing of innovation-related projects (see Chart 9). This
trend is consistent with the accelerating growth of the global sourcing
of innovation efforts reflecting the availability of qualified talent in newly
industrialized and emerging economies. It may also reflect that companies
are recognizing the need for innovation work to enable access into large
Chart 9: ORN’s definition of
innovation services
new markets in Asia. But it may also reflect of the decline the career
choice of science and engineering by younger American students.
However, managing innovation applications offshore in captive operations
or in value-adding outsourcing partnerships requires the development of
organizational capabilities—including coordination, leadership, sharing,
and dissemination of information and knowledge, protection of intellectual
property and, most importantly, integration of external knowledge back
into an organization.
Function
Examples of tasks
Engineering Services
Design automation
Tool Design
Simulating
Drafting & modeling
Engineering analysis (e.g., finite element analysis)
Embedded systems development
Re-engineering
Technical publications
Research and Development
Research on new materials and processes
Code development
Research and development of new technologies
Product Design
Prototype design
Systems design
Application development
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Offshoring in the manufacturing industry 2010/February
www.pwc.com
To have a deeper conversation about any of the issues in this paper,
please contact:
Charles Aird
PricewaterhouseCoopers
Phone: (704) 344-7651
Email: charles.l.aird@us.pwc.com
Derek Sappenfield
PricewaterhouseCoopers
Phone: (240) 481-5345
Email: derek.sappenfield@us.pwc.com
Bob Scheier
PricewaterhouseCoopers
(267) 330-2736
robert.h.scheier@us.pwc.com
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firms of the network, each of which is a separate and independent legal entity. This document is for general information purposes
only, and should not be used as a substitute for consultation with professional advisors. DH-10-0266