US Weaknesses Will Continue to Drive Offshoring, New Study Says

A controversial new study on America’s global competitiveness entitled “Prosperity at Risk” suggests there will be no reversal of offshore outsourcing trends – at least for now. Harvard University surveyed 10,000 of its recent and seasoned graduates to get a better sense of how America stands up to the competition. Results are mixed, but the main takeaway is that executives continue to think globally when it comes to locating professional services, manufacturing and R&D. And while lower wages remain a major driver to go offshore, broader systemic problems with the US economic and political system were reported as damaging America’s long-term competitiveness.

America’s “jobless recovery” continues to bring the outsourcing industry into question as more and more companies decide to go offshore. This is the underlying tone of Harvard’s revealing survey results on American competitiveness. The study suggests that the US continues to fall behind on foundational factors like the availability of skilled labor, logistics infrastructure, taxation, K-12 education, and most notably, on the effectiveness of its political system. In contrast, the quality of the university system, context for entrepreneurship and sophistication of firm management were among the categories where a greater number of respondents saw the US pulling ahead.

A deeper interpretation of these results suggests that the US continues to retain its historic role as a global hub for innovation, new company formation and as a home base for global enterprises. However, concerns about the country’s underlying political and economic support are generating serious questions over how long the US will remain on top of the global corporate food chain.

Emerging Economies Pulling Ahead

Harvard’s competitiveness guru Michael Porter defines the term as “the extent to which firms operating in the US are able to compete successfully in the global economy while supporting high and rising living standards for Americans.” With the European debt crisis it comes as no surprise that the overall business environment in the US performed well compared to other advanced economies. But what’s more telling is how survey respondents felt about the overall business climate in the US compared to emerging economies. The “United States is competing with virtually the entire world to host business activities,” explained Porter in his report. Going forward, as infrastructure and talent pools strengthen in the developing world, the competition will likely intensify.

Back-Office Support High on Decision Makers’ Lists

Survey results underscored the rapid growth that we’ve seen in offshore back-office support services over the last five years. Overall sentiment for “onshoring” or “reshoring” of manufacturing and customer-service support functions seems to sway more favorably toward the US, but the majority of respondents still see offshoring as a more probable option. Likewise, 42 percent of decisions to potentially move activities outside the US involved R&D and engineering services. These results clear any doubt that only lower-skilled activities are at risk of being offshored.

Costs Drive Decisions, Other Factors Sway Them

Cost of labor was found to be the single leading reason for moving existing activities out of the US. Rapid local market growth and the desire to be closer to customers also suggest two trends. Firstly, offshore operations including back-office support double as platforms to expand business growth into developing markets. Secondly, it suggests a trend that global enterprises are decentralizing business functions and are adopting local product and service delivery models. Lower tax rates and attractive relocation incentives also show that developing markets are hungry for business and have gone to great lengths to court global investors.

Co-location and IP Security Still Favor the US

Survey results suggest that decision-makers continue to battle with political corruption and threats to intellectual property in developing economies. And while better access to skilled labor was high on the list of reasons to remain in the US, the importance of staying close to customers and other company operations show that geography matters when it comes to execution of services and delivery of product to market.