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Offshoring or the unexpected virtues of ignorance.

Discussion in 'Sports and News' started by JayFarrar, Aug 2, 2015.

  1. JayFarrar

    JayFarrar Well-Known Member

    A year old but a terrific and lengthy read on offshoring and its impact.

    Losing Sparta | VQR Online

    To sum up: companies that offshore actually lose money and damage their brand but companies still do it because other companies do it.

    The old if all your friends jump off a bridge, you'll jump off a bridge strategy that they teach at all the best business schools.

    But, shareholder value!!!!
  2. doctorquant

    doctorquant Well-Known Member

    The academic term for that dynamic is mimetic isomorphism (DiMaggio & Powell, 1983). But given your deep understanding of what's taught in business schools, I'm CERTAIN you already knew that.
  3. JohnHammond

    JohnHammond Well-Known Member

    Do Porter and Rivkin have data besides interviews? We need some quantitative data here. I'm also curious regarding the interviews. More than 1,700 is a lot to conduct, even if you have a team of grad assistants or wide-eyed undergrads doing most of the work.
  4. justgladtobehere

    justgladtobehere Well-Known Member

    The issue of whether offshoring actually loses money is barely discussed, yet alone proven.

    "“Corporations often do things to impress their shareholders,” Bronfenbrenner said. “Everybody is offshoring and outsourcing, even though it isn’t necessarily a good financial decision. It may actually cost more, but to investors it looks like sound management. It’s just keeping up with the Joneses, where the Joneses are every other manufacturing company in the world.”

    A 2012 study by Michael E. Porter and Jan W. Rivkin of Harvard Business School, based on interviews with 1,767 executives involved in location decisions over the previous year, confirms Bronfenbrenner’s view. Porter and Rivkin found that “rigorous processes for location choices” are “far from universal” and that such decision-making processes “have lagged behind those for virtually all other major investment decisions.” They found that companies often underestimate the hidden costs of offshoring, overlook the advantages of a US location and “fall prey to biases that work against the U.S.”

    Combined, this research hints at a radical idea: that offshoring has simply become a reflex. And if that’s true, all the lean manufacturing and just-in-time production and automation and retraining and two-tier pay scales in the world won’t be enough to save American production jobs."
    The writer then goes on to mention that labor costs were cut in half, but logistics costs grew by a factor of ten. No mention if the actual changes in costs were a net positive or negative. To top it off, the writer states there is no proof that the outsourcing made Phillips any money because income from the division was down over the period the plant was shut. Just wildly throwing numbers around. It's almost like she has no understanding of finance or she does and knows she is misusing the numbers.
    Last edited: Aug 2, 2015
  5. doctorquant

    doctorquant Well-Known Member

    Absolutely nothing wrong with qualitative data in social sciences research, and I wouldn't be surprised at all if the central tendency is that location/sourcing decisions are less than rigorous. Doesn't mean they're inherently biased, however.
  6. The Big Ragu

    The Big Ragu Moderator Staff Member

    It's a broad generalization to say that "companies that offshore actually lose money and damage their brand but companies still do it because other companies do it." Everyone wants to speak in absolutes and make everything into an ideological thing -- making it a rule of some sort. It's just not like that. Outsourcing to benefit from cheaper labor can make great sense. It very often does. For example, there is no way Apple could produce iPhones in the U.S. and be as profitable as it is.

    That said, outsourcing can also be a mistake. It really just depends.

    I remember when this piece came out and the discussions around it. The fact is, regardless of whether the example of Phillips is indicative of a broad trend, or whether the assumptions the writer made are correct (because Phillips wouldn't give straight answers), there is undoubtedly at least a degree of what was being suggested. Labor is just one cost in manufacturing a product. It isn't necessarily the greatest cost -- depending on the product. It can be as little as 10 percent of your wholesale cost. In which case, higher shipping and coordination costs due to the outsourcing are likely to more than offset the labor savings.

    Which means there are undoubtedly companies that offshore, even though it isn't best for their profitbaility. Again, though, no, that doesn't mean that outsourcing never makes sense. In fact, it likely makes sense more often than not.

    What it does mean is that the Wall Street sell side analysts often push for outsourcing (pushing a simpleminded story) and company executives know that the announcement can pop the stock -- even though they also know it doesn't actually make financial sense. In those cases, it becomes more about the investor presentation and the stock price. Which is why I am certain it happens. Those are poorly run companies.

    Again, though, that doesn't mean that outsourcing to find cheaper labor doesn't make sense for ANYONE. If that is your conclusion, you are taking what are likely exceptions and trying to use them to prove a rule.
  7. doctorquant

    doctorquant Well-Known Member

    That's not what I learned when I was getting my MBA. The whole program was just a series of "If X then Y ..." propositions. :confused:
  8. Starman

    Starman Well-Known Member

    Lisa Norris, the nominal subject of the story, the plucky working-class girl who goes into business as a consultant advising companies on "leaner manufacturing practices" and (Har har) "union avoidance," mysteriously disappears from the story about 2/3 of the way through.
    Hummina hummina hummina.
  9. YankeeFan

    YankeeFan Well-Known Member

    A 2012 study by Michael E. Porter and Jan W. Rivkin of Harvard Business School, based on interviews with 1,767 executives involved in location decisions over the previous year, confirms Bronfenbrenner’s view.

    Wouldn't it take longer than a year for a lot of the benefits to show up on the bottom line?
  10. JohnHammond

    JohnHammond Well-Known Member

    Turns out it is quant after all. :) The 1,737 number is a sub-sample of a survey of more than 10,000 Harvard Business School alumni.

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