SDA Professor of Strategic and Entrepreneurial Management
Offshoring and subsequent “coming back home again” reshoring choices by multinationals are once again raising doubts about the quality of long-term strategic decisions in both larger and smaller firms. A decision to outsource and relocate production in China and then, following the state incentives, to transfer it back to the US or Europe might be interpreted as a sign of excellent organizational flexibility, if we don’t take into account all the implicit and explicit costs related to the implementation of such important alterations to the firm’s operations and, not the least, the impact such decisions have on a firm’s reputation, research and development capabilities, perceived quality of its products and services.
From offshoring to reshoring
In 2000s many businesses were lured by the possibilities offered by offshoring. All the continents could have been used as locations for any of the value-chain activities, from assembly to customer service, from research to accounting, from product development to financial analysis. Many blue- (but also white-) collar jobs in developed countries, in both manufacturing and services, were lost to the “new” international manufacturing and service hubs in Asia, Latin America, Eastern Europe and Africa. In manufacturing, the highest impact of offshoring was on textile, apparel, computer and electronic equipment industries. The social impact of offshoring is difficult to underestimate. In the USA it led to “Reshoring Initiative”, aimed at bringing back millions of jobs lost to offshoring. President Trump is being called by some bloggers “Reshorer-in-Chief” and is discussing with American corporations “large tax cuts” to convince them to reshore the production activities back to the US. We also remember David Cameron’s declaring UK “re-shore” nation at Davos Forum in 2014.
Research confirmed that both skilled and unskilled, in both manufacturing and services jobs are subject to “offshorability”. In fact, in 2006 Prof. Alan Binder estimated that in the USA the total amount of “offshorable” jobs was between 42 and 56 million, including 14 million in manufacturing and 28-42 million in services. For Prof.Binder, the jobs “offshorability” largely depends on the importance of face-to-face, personal communication and on the necessity to be present in a certain location to perform the job.
Here we may perceive the pending impact of Industry 4.0 on the further increases in the “offshorability” of many jobs as technologies substitute the need of face-to-face interaction to establish personal relationships with clients or colleagues, to assist others, to perform or to work directly with public. The fourth industrial revolution connected people, people with things, things with things, things with machines, people with machines, and machines with machines. On another hand, Industry 4.0 is expected to improve the industrial efficiency by almost 20% by 2020, potentially erasing the job market statistics which started benefiting from timid results of governmental incentives by developed nations aimed at bringing back offshored jobs back home.
Decision-making in offshoring
However, the heart of the matter is rooted much deeper. Regardless the source of future changes to the business models operated by multinationals – be it Industry 4.0, offshoring or reshoring initiatives – the decision-making criteria are still mainly financial, therefore mainly short-term.
Take, for instance, key “classical” arguments against offshoring: increasing wages in emerging markets, shipping delays (and, therefore, potential fines) also due to insufficient ports capacities in both developed and developing countries. “Reshore now” initiative, among its core arguments against offshoring invites to calculate the “total cost of ownership”, which takes into consideration not only the cost of overseas production in directly owned factories or prices by offshore suppliers, but also the total cost of transportation, import duties, cost of trips needed to contact suppliers and supervise the quality of production, changes in packaging needed for shipping and to comply with different international standards, financial costs of advanced payments that are typical for emerging markets and of investments in the increased stock of finished goods and components, quality rework often needed for offshored production, cost of local prototyping to be shipped to the offshore facility, currency variations and so on.
Coming back home again: employing a long term view
Yet financial criteria are not sufficient to make sound strategic decisions in international business. 24 years ago Norton and Kaplan spoke about the necessity to include “intangible” assets in the performance measurement and in the strategic objectives and maps. Similarly to the four aspects of the traditional balanced scorecard, financial, customer, internal business processes and learning and growth measures, strategic decisions by the multinationals should be analysed and quantified along the following five sets of indicators:
- Financial indicators (profitability - related to business, fiscal pressure and cost of capital);
- Long-term growth possibilities (to denote long-term growth perspectives that might have lower 3-5 year profitability compared to the existing operations);
- Long-term competitiveness (quality as perceived by customers, access to new technologies, acquisition of new knowledge about customers, access to talents, innovation potential improvement due to the increased diversity);
- Complexity (increase or decrease in the organizational layers, procedures, information gaps, length of operational decision-making, individual frustration about the bureaucracy);
- Diversification of risks and exposure to new risks (e.g., economic cycles, fluctuations in currency, prices of commodities, transportation costs, environment, safety & health of employees and customers, geopolitical uncertainty);
- Reputation with customers, suppliers and employees.
The explicit inclusion of non-financial criteria to the decision-making process related to the international business will allow to refocus the strategy of a large or “pocket” multinational and to avoid short-term opportunity driven knee jerk reactions that are difficult to reverse.