Offshore Outsourcing Is Both Inevitable and a Source of U.S. Manufacturing Strength

Jan. 6, 2005
Just the mention of the word "outsourcing" these days immediately sparks debate. But regardless of recent controversy, the move among manufacturers to outsource an increasing number of business processes is a reality.

Joe Costello
Chairman and CEO
Cincinnati, Ohio

A recent survey reported in a leading trade magazine noted that 66% of U.S. manufacturers have now begun to outsource product design.

In addition, IDC reports that U.S. manufacturers will increase outsourcing of business processes by 10.7% over the next year, with engineering among the top three, along with logistics and finance. Manufacturing executives should, at the very least, evaluate outsourcing as an option given the ever increasing pressure to reduce time to market, boost innovation and deliver products at a lower cost. When companies are restricted from using a resource that lets them compete at a global level, they will lose to the competition. And that loss impacts the U.S. market and economy as a whole.

Based on my company's quarter of a century of experience in providing product design and development services to small and midsized manufacturing and design firms, it has become clear that offshore outsourcing, rather than a major competitive threat, is instead a major source of competitive strength for one of the largest segments of the U.S. economy. In fact, focusing the discussion of outsourcing primarily on large corporations misses the point. While offshore outsourcing may bolster the bottom lines of the largest corporations, it is becoming a strategic necessity for many of the 229,000 companies in the midmarket in America. For every Fortune 1000 company, there are 229 midsized ones generating a total of $6 trillion in revenue annually. Their competitive well being — and, consequently, that of the U.S. economy as a whole — increasingly will depend on an expansion of outsourcing.

Our experience shows that outsourcing aligns with, and can help to drive, the growth strategy of midmarket manufacturers. Strategic outsourcing lets in-house engineers focus on innovative new designs, while more routine design/engineering work is outsourced. This substantially improves the recruitment, retention, and motivation of in-house engineering talent by eliminating less challenging activities such as the reuse of existing designs or the migration of legacy 2D drawings to 3D parts and assemblies.

One of the main challenges manufacturing executives face is answering the when, why, and what of outsourcing. A recent Forrester Research report found that during the past three recession years, manufacturers focused single-mindedly on cost cutting to stay afloat. But with the economy slowly turning up, these firms need to generate innovative products and services to expand their top lines. The report went on to say in-house R&D and existing suppliers don't always have the broad disciplines required to create multifaceted products.

As product demand grows, two scenarios will force a focus on cost and the evaluation of outsourcing. One scenario has the market leader struggling to meet increased demand. The second has new entrants and aggressive competitors creating product "knock-offs" and leveraging outsourced engineering and manufacturing to lower costs. In either case, outsourcing reduces cost, freeing capital for investment in new infrastructure that lets manufacturers stay a step ahead of the "commoditized" competition.

In today's competitive environment, mid-market companies must use every available asset to deliver innovative products efficiently and at low cost. No matter what your opinion on outsourcing, it has been going on for decades and shows no signs of stopping. Outsourcing is neither good nor bad — it is inevitable — and should be embraced as a source of strength and renewal for the U.S. manufacturing base.

think3 is a provider of integrated product development services.

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