JoAnn Hackos, PhD
CIDM Director

In the 2004 (Number 4) McKinsey Quarterly, Ronald Ritter and Robert Sternfels, in their article “When Offshore Manufacturing Doesn’t Make Sense”,* provide examples in which offshore manufacturing is the wrong choice, despite the lower wages available in third-world economies. They demonstrate that many management decisions to move manufacturing offshore are based on gross overestimates of the cost savings and ignorance of the potential problems.

One apparel manufacturer in Los Angeles, paying hourly rates well above minimum wage, found that they could manufacture less expensively in California when they accounted for the logistics costs, including the costs of inventory, obsolescence, shipping, and currency exchange rates. In manufacturing examples for apparel, plastics, and high tech electronics, the authors found significant differences between the initial savings estimates and the actual savings. Apparel savings declined from 50 percent estimated to 30 percent actual, plastics declined from 21 percent estimated to 13 percent actual, and electronics declined from 2.6 percent estimated to 1.8 percent actual (based on actual manufacturers).

Keeping manufacturing at home led to shorter lead times, greater responsiveness to market changes, short supply chains, and much lower inventory requirements. In each case, speed and responsiveness became competitive advantages.

Based on our 2003 CIDM survey of offshoring, we found comparable data in information development. In every case, the advantage promised by lower salaries was grossly overestimated. Once the cost of logistics is accounted for, promised savings of 80 percent typically translate into 20 percent. Logistics costs in information development include

  • Editing for non-standard English
  • Higher translation costs for non-standard English
  • Project management of remote locations
  • Equipment costs, especially equipment to be documented
  • Lack of training or experience in technical communication

Ritter and Sternfels make specific analyses for manufacturers to conduct when they are considering offshoring. Similar analyses should be applied to organizations considering offshoring their information development.

First, consider the sources of your competitive advantage. Is information that helps customers understand your product and use it effectively an advantage over your competitors? To produce competitive information in support of a product’s use requires a keen understanding of what customers want to do and how they conceive of your product helping them reach their goals. Does your information-development organization offer this competitive advantage? If you do not know your customers’ needs intimately, can you claim to offer a true competitive advantage over low-cost competition?

Second, consider your company’s tolerance for risk. If you are developing information that ensures the safe operation of equipment, you should assess the risk of getting this information wrong or making it more difficult to understand. I know from personal experience that companies have been successfully sued by individuals who can prove that information did not adequately warn them of dangers in operating equipment. As an expert witness in several product liability cases, I have demonstrated that the information was so badly written that the user was put at risk.

Third, consider the opportunities you have to increase the productivity at home and diminish the relative importance of labor costs. Find out how much labor costs represent as a percentage of the cost of your company’s products. If they are higher than 40 or 50 percent, your company may already be looking for ways to reduce them. If you can reduce the labor costs of your operation and still produce the same goods and services (your information, of course), you can build an operation that is close to the customer, secures proprietary technology information, and can maintain a good level of quality. Seek out lean development methodologies (more on this in later articles) that help increase productivity, such as single sourcing, format-free content developed in XML or SGML, and tools that automate portions of your development life cycle.

Fourth, look for ways to design products that minimize the need for information and training. Become involved in usability studies to improve product interfaces. Look for ways to reduce the amount of information you provide by seriously pursuing minimalism.

If you are able to develop some or all of these ideas, you will be able to increase productivity and reduce costs. However, you still may find your organization an offshoring target, particularly in companies where labor costs are a substantial or even the primary cost of operations. That still doesn’t mean that every effort you make is in vain. By building a strong operation that includes in-depth customer knowledge, you will develop a competitive edge that will be difficult to emulate.

* A version of their article appeared in The Wall Street Journal on October 19, 2004