Manufacturing Industry
Offshoring in the
manufacturing industry
In this issue
Rapid growth of innovation
offshoring in manufacturing 02
Most manufacturers adopt
function-level strategy but
fewer integrate offshoring
into their corporate strategy 07
Despite a market shift,
manufacturing companies
remain conservative in their
captive service delivery models 10
2010/February
Innovation has always been considered a core
competence that should be developed and maintained
within an organization. However, over the past decade
the growth of global innovation sourcingdriven mainly
by the globalization of both technology markets and
knowledge workershas begun to challenge this
conventional wisdom. Offshoring goes far beyond the
migration of relatively routine tasks like administrative
work, IT infrastructure, or call center staffing and
now includes product development and design, and
research and development. Although the concept of
offshoring is not new for manufacturing companies, its
previous application usually involved labor arbitrage in
low-level, routine manufacturing jobs.
Rapid growth of innovation
offshoring in manufacturing 02

Findings from the 2009 Offshoring Research Network (ORN) survey reveal
that manufacturing companies are now among the major practitioners
of innovation offshoring, including engineering services, research and
development, and product design. Chart 1 summarizes the percentage
of manufacturing companies that are offshoring a particular function,
and clearly demonstrates that, compared to other functions, innovation
services are growing the fastest, surpassing other major offshore
activities such as information technology and contact center. This trend
within manufacturing is particularly noteworthy given its absence from
other industries more typically associated with information technology
offshoring. Take finance and insurance industry as example. Chart
2 illustrates the slow growth of innovation offshoring in finance and
insurance industry in which only 18 percent of companies are currently
offshoring their innovation activities.

40%

35%
Chart 1: Cumulative percentage
of manufacturing
companies offshoring 30%
Innov M&S Soft
particular function Proc CC Other
over time IT F&A HR
25%
Source: Duke University/Archstone Consulting Offshoring
Research Network 2005 US survey and Duke University/
Booz Allen Hamilton Offshoring Research Network 2006 US
survey and Duke University/The Conference Board Offshoring 20%
Research Network 2007/8 US survey and Duke University The
conference Board Offshoring Research Network 2009 survey

15%

10%

5%

0%

Through 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
1990

PrivewaterhouseCoopers Offshoring in the manufacturing industry 2010/February

 03

40%

35%

30% CC Innov
F&A Know
HR Soft
25% IT

20%
Chart 2: Cumulative percentage
of finance and insurance
15%
companies offshoring
particular function
over time 10%
Source: Duke University/Archstone Consulting Offshoring
Research Network 2005 US survey and Duke University/
Booz Allen Hamilton Offshoring Research Network 2006 US
survey and Duke University/The Conference Board Offshoring 5%
Research Network 2007/8 US survey and Duke University/The
conference Board Offshoring Research Network 2009 survey

0%
1992 1993 1994 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

PrivewaterhouseCoopers Offshoring in the manufacturing industry 2010/February

 04

Overall distribution of offshoring by manufacturing companies (Chart 3)
shows that more than 60 percent of manufacturing companies engage
in innovation offshoring, where their main destinations (see Chart 4)
include India (33 percent), China (27 percent) and Western Europe (17
percent). This finding is consistent with service providers expectations
(2009 ORN service provider survey). In response to the question about
their expectations of growing destinations for a particular function, over
30 percent of service providers named India and China as high-growth
destinations for innovation offshoring (see Chart 5). More than a third of
participating manufacturers reveal that information technology, finance and
accounting, and procurement are among their top offshoring operations.

Innovation 63%
Chart 3: Distribution of functional
implementations by Information Technology 39%
manufacturing companies
Finance & Accounting 33%
Source: Duke University/The Conference Board Offshoring
Research Network 2009 survey

Procurement 29%

Contact Centers 20%

Marketing & Sales 19%

Software Development 13%

Human Resources 11%

Other 5%

Legal Services 4%

Analytical/
1%
Knowledge Services

PrivewaterhouseCoopers Offshoring in the manufacturing industry 2010/February

 05

Software 56% 13% 6% 6% 19%

Procurement 24% 22% 22% 14% 8% 4% 2%

2%
Marketing
Chart 4: Distribution of offshore 10% 44% 13% 13% 8% 5% 8%
& Sales
destinations chosen
by manufacturing
companies for particular Innovation 33% 17% 27% 6% 7% 4% 2%
function 3%
Source: Duke University/The Conference Board Offshoring
Research Network 2009 survey Information
Technology 55% 13% 5% 13% 5% 5% 5%

Finance
& Accounting 32% 20% 8% 8% 32%

Contact Center 18% 29% 7% 18% 7% 11% 4% 7%

India Eastern Europe (incl. Russia)

Western Europe Latin America & Mexico
China US & Canada
Other Asia Middle East

PrivewaterhouseCoopers Offshoring in the manufacturing industry 2010/February

 06

One finding that stands out from the survey is offshore destination choices
of manufacturing companies. While India generally remains the most
attractive offshoring destination, participating manufacturing companies
articulated a strong preference for using European providers for finance
and accounting, marketing and sales, and contact center offshoring.
Forty-four percent of manufacturing companies offshore their marketing
and sales operations to western European providers, with only 10
percent to going to Indian providers. Similarly, Western (22 percent) and
Eastern (32 percent) Europe are also the favorite locations for finance and
accounting offshoring by manufacturing companies.

2%

Call Center 9% 7% 19% 9% 19% 28% 7%

Finance
34% 3% 19% 9% 16% 19%
& Accounting

Procurement 33% 7% 27% 20% 13%

Chart 5: Percent of providers
naming regions as Marketing 27% 23% 12% 12% 15% 12%
growing destinations & Sales
for particular services Human
30% 11% 19% 11% 15% 15%
Source: Duke University Offshoring Research Network 2009 Resources
Service Provider survey
Legal
88% 13% 13%
Services
Knowledge
56% 22% 6% 17%
Services
1%
Information
Technology 31% 10% 25% 16% 11% 4%
1%
Software
27% 13% 23% 20% 13% 5%
Development

Innovation 29% 15% 31% 19% 4%

2%
India Eastern Europe
US & Canada Latin America
Western Europe Other Asia & Australia
China Other

PrivewaterhouseCoopers Offshoring in the manufacturing industry 2010/February

Most manufacturers adopt function-level strategy but
fewer integrate offshoring into their corporate strategy 07

Cost overruns and declining efficiencies (mostly due to wage inflation and
uncoordinated growth of offshoring activities across the company) often
trigger a reconsideration of the organizations offshoring activities, which
in many cases results the implementation of corporate-wide strategies
for guiding offshoring decisions. According to the 2009 ORN survey,
the top two reasons for contract termination specified by participating
service providers are clients unrealistic expectations and the lack of a
clear outsourcing strategy (see Chart 6). In the context of offshoring and
outsourcing, the adoption of a corporate-wide offshoring strategy likely
represents a transitional stage in the evolutionary process of developing
more elaborated offshoring and outsourcing capabilities.

Clients expectations are unrealistic 44%

Chart 6: Percent of service Client has no clear
providers indicating 41%
outsourcing strategy
factors as one of the six
Service no longer needed 38%
most important reasons
for contract termination Client underestimates
37%
scope of project
Source: Duke University Offshoring Research Network 2009
Service Provider survey
Service quality is not achieved 34%

Client lacks skills/resources to

30%
implement and manage relationship
Management-level
25%
turnover on client side
Change in target operating model 23%

Lack of buy-in by clients

23%
middle management
Poor planning in work transfer 21%

Conflicts due to unanticipated

20%
work (change orders)
Cost savings are not achieved 20%

PrivewaterhouseCoopers Offshoring in the manufacturing industry 2010/February

 08

Reflecting this overall trend, the 2009 ORN survey shows a dramatic of companies have implemented a company-wide strategy guiding their
increase in the number of organizations adopting a company-wide offshoring implementations, only 47 percent of manufacturing industry
strategy for guiding their offshoring decisions at the business unit and participants report doing so (see Chart 7).
function levels. Compared with the overall sample in which 57 percent

57%
Corporate-wide
47%

45%
Procurement
85%
Chart 7: Percent of companies 55%
adopting corporate- Marketing & Sales
70%
wide and function-level
strategy 54%
Contact Center
70%
Source: Duke University/The Conference Board Offshoring
Research Network 2009 survey
Information 53%
Technology 67%

58%
Software
64%

Finance & 53%

Accounting 57%

51%
Innovation
52%

34%
Human Resources
40%

Overall
Manufacturing companies

PrivewaterhouseCoopers Offshoring in the manufacturing industry 2010/February


As companies gain offshoring experience, they increasingly adopt a
company-wide strategy for guiding offshoring decisions at the business
unit and function levels. However, it is notable that more than half of the
manufacturing companies in the sample report that although an offshoring
strategy has been implemented at a function level it has yet to reach
the C-suite. This reality might reflect the decentralized nature of most
diversified industrial manufacturing companies. In fact, the manufacturing
companies sample includes at least two case studies of companies that
began offshoring various processes and functions having first adopted a
PrivewaterhouseCoopers
09
corporate-wide offshoring strategy. In one case, the offshoring strategy was
implemented from the top, down and in the second, from the bottom, up.
During follow-up interviews, manufacturing companies that have yet
to adopt company-wide offshoring strategies indicated that they are
considering doing so. In moving to a company-wide strategy, companies
hope to guide and standardize offshoring decisions across business units
and functions such as IT infrastructure (to achieve economies of scale
via third-party providers), accounting and finance, and global sourcing of
innovation-related work.
Offshoring in the manufacturing industry 2010/February
Despite a market shift, manufacturing companies remain
conservative in their captive service delivery models 010

The 2009 ORN survey indicates that a majority of manufacturing
companies continue to favor captive delivery models offshore compared
with companies in other industries, which are increasingly relocating
as well as shifting existing captive operations to third party-providers.
47 percent of new offshoring implementations launched between 2007
and 2009 by manufacturing companies involve captive delivery models
2%
offshore compared with 54 percent in 2004 to 2006 (see Chart 8). These
results suggest that although companies are now keen to diversify their
operations and place more emphasis on using external service providers,
the manufacturing industry remains relatively conservative when it comes
to service delivery models for offshoring.
1%

100%
6% Other
8% Local Provider
12% 18% Joint Venture
90%
5% International Provider
2%
Chart 8: Percent of offshoring 24% Domestic Provider
80% Captive
implementation using
a particular delivery 16%
model in Manufacturing 70% 29%
2%
industry 32% 12%
Source: Duke University/Archstone Consulting Offshoring 60%
Research Network 2005 US survey and Duke University/
Booz Allen Hamilton Offshoring Research Network 2006 US 3%
survey and Duke University/The Conference Board Offshoring 12%
Research Network 2007/8 US survey and Duke University/The 50%
conference Board Offshoring Research Network 2009 survey

40%

66%
30%
54%
50% 47%
20%

10%

0%
Pre-2001 20012003 20042006 20072009

PrivewaterhouseCoopers Offshoring in the manufacturing industry 2010/February

 011

As previously noted, many manufacturing companies remain conservative
with their offshoring operations, however, an unexpected, though
perhaps inevitable development is the growth of offshoring including
third-party outsourcing of innovation-related projects (see Chart 9). This
trend is consistent with the accelerating growth of the global sourcing
of innovation efforts reflecting the availability of qualified talent in newly
industrialized and emerging economies. It may also reflect that companies
are recognizing the need for innovation work to enable access into large
new markets in Asia. But it may also reflect of the decline the career
choice of science and engineering by younger American students.
However, managing innovation applications offshore in captive operations
or in value-adding outsourcing partnerships requires the development of
organizational capabilitiesincluding coordination, leadership, sharing,
and dissemination of information and knowledge, protection of intellectual
property and, most importantly, integration of external knowledge back
into an organization.

Chart 9: ORNs definition of

innovation services Function Examples of tasks

Engineering Services Design automation

Tool Design
Simulating
Drafting & modeling
Engineering analysis (e.g., finite element analysis)
Embedded systems development
Re-engineering
Technical publications
Research and Development Research on new materials and processes
Code development
Research and development of new technologies
Product Design Prototype design
Systems design
Application development

PrivewaterhouseCoopers Offshoring in the manufacturing industry 2010/February

www.pwc.com

To have a deeper conversation about any of the issues in this paper,

please contact:

Charles Aird
PricewaterhouseCoopers
Phone: (704) 344-7651
Email: charles.l.aird@us.pwc.com

Derek Sappenfield
PricewaterhouseCoopers
Phone: (240) 481-5345
Email: derek.sappenfield@us.pwc.com

Bob Scheier
PricewaterhouseCoopers
(267) 330-2736
robert.h.scheier@us.pwc.com

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