The Offshoring Balanced Scorecard
When I read a business magazine, it’s not only the articles themselves that draw my attention, but also the glossy eye-catching advertisements surrounding the words of wisdom. A scan of the ads reveals what’s hot in the business world – the products and services competing for executive mindshare in an increasingly complex global economy. Lately, I’ve noticed an increase in a unique offering on the pages of both scholarly and mass market publications – geographic locations: Cities, provinces, counties, states, and entire countries proudly announcing their readiness for business, inviting firms from across the globe to set up shop in their locale. Picturesque photos of the municipality are inevitably accompanied by promises of a highly motivated and skilled workforce, enlightened regulatory climate, and lower costs of doing business.
These ads are there for a reason. We live in a mobile world in which people and companies are increasingly nomadic, following the path, however meandering, they believe will lead to greater success and prosperity. If that means relocating a business from Indiana to India, from Toronto to Taipei, then so be it. The benefits of these moves appear obvious and abundant – lower wages, cheaper utility costs, better tax rates, a pool of skilled workers, the list goes on and on. But does the reality match the promise? In many cases, the answer is no. AMR Research discovered that 56% of companies moving production offshore experienced an increase in total landed costs, and a 2010 Ernst & Young survey of CEOs found that more than a third stated the overall costs of entering high-growth markets like Brazil, India, and China were higher than expected.
Writing in the Harvard Business Review, authors Porter and Rivkin argue that location choices often prove less desirable than expected because managers overlook the current and future hidden costs associated with a move to a foreign location.[i] To avoid disappointment, and a river of red ink, I would suggest organizations relocating to a new location create a Balanced Scorecard to gauge the move’s overall effectiveness. Let’s consider such a Scorecard beginning with the Employee Learning and Growth Perspective and working our way up.
Employee Learning and Growth Perspective:
Traditionally, three areas of ‘capital’ populate the EL & G perspective: Human, Information, and Organizational. Each of these will be accounted for in our offshoring Scorecard.
- Human Capital: Offshoring is often undertaken based on the promise of a skilled and motivated workforce, one that is able to competently shepherd the firm’s products and services through production to ultimate delivery to customers. To ensure that is in fact the case, companies should include measures such as:
- Strategic job coverage ratio (percentage of required skills possessed by the employee population)
- Training costs
- Percentage of employees with advanced degrees (or other educational achievements)
- Number of internal promotions – depicts the workforce’s ‘upward mobility’)
- Number of workers hired versus projected (a gauge of skills present – if more workers are required, perhaps the promised skills are not present)
- Information Capital: Here we typically attempt to measure how well technology is employed in the service of strategy execution. For offshoring endeavors a key measure will be the percentage of employees using technology, which determines whether employees are able to use enabling technologies effectively.
- Organizational Capital: Considered the very ‘soft stuff,’ of company operations, and frequently represented by culture as defined by ‘the way we do things around here.’ A key measure to include in this category will be Employee satisfaction or engagement. Managers should carefully examine the responses of domestic employees and expatriates. Both groups could possibly struggle in a potential culture clash of geographically based ideals.
Internal Process Perspective:
Depending on the unique value chain employed by the company (the specific activities they pursue to drive value for their customers), measures in this perspective could vary widely. However, outlined below are a number of key metrics that should be carefully monitored by any offshoring entity.
- Quality: Especially relevant in manufacturing environments, companies must ensure new locations maintain existing quality standards
- Raw material usage: Related to the above, this will serve as a gauge of worker productivity.
- Scrap rates: Again, related to quality and productivity.
- Freight costs: They may increase as a result of reaching now distant markets.
- Innovation: More a topic area than a specific metric. Firms must ensure innovation does not suffer if manufacturing is physically separated from research and development. Number of new products and services in the pipeline, and sales from new products and services may serve as representative indicators.
- Supplier relations: Firms often spend years cultivating a trusted relationship with key suppliers. Will they be able to create such a bond in a new environment?
- Inventory turns: An important indicator of operational efficiency, which is often a prime motivator for moving offshore.
- Intellectual Property rights: One executive whose firm had moved their production to a new country described how they had removed units of measure on the gauges in their factory, fearing a loss of production knowledge. Protecting IP rights in countries with weak production may prove expensive.
To compete effectively in today’s marketplace organizations must be masters of agility; swiftly responding to changing customer tastes and preferences, while at the same time meeting shareholder expectations. Offshore facilities can severely test a company’s ability to meet changing needs because of the lead times associated with distant locations. Consider a maker of fashion apparel. The items they’re shipping now may already be considered passé by the time they hit store shelves in far-flung locales, resulting in costly markdowns for the manufacturer. Here are some Customer-related metrics for your Offshore Scorecard:
- Cash to cash cycle: How rapidly you can transform raw materials into finished goods.
- Customer satisfaction
- Customer retention
- Share of wallet in key segments
- Likelihood to recommend
This perspective represents the ‘end in mind’ of your strategic story – the logic suggesting that successful execution in the other three perspectives will drive sustainable financial success. In addition to the standard arsenal of financial metrics, here are a few that are more germane to an offshoring organization:
- Wage costs: Lower wages are almost always a strong impetus for moving offshore. Therefore, it’s vital you measure your costs to ensure you’re achieving the anticipated advantage. Sadly, you may find that advantage dissipating rapidly due to global pressure on wages. For example, in Shanghai, the wages of a typical line production worker spiked 125% between 2006 and 2011. In India, middle management salaries rose 13% in 2011.
- Currency fluctuations: They can have a dramatic impact on profitability.
- Taxes: Another prime motivator for making a move.
Some may argue that creating a Balanced Scorecard after an organization has already moved Offshore is a case of ‘too little too late.’ Of course, extensive due diligence should be applied before embarking on a move as substantial as offshoring. However, by carefully analyzing strategic metrics, managers are able to proactively shape their offshore operations, learning where adjustments are necessary and determining what interventions are called for to ensure the investment yields its’ promised benefits.
[i] Michael E. Porter and Jan W. Rivkin, “Choosing the United States,” Harvard Business Review, March 2012, PP. 80-93