The enticement to companies of a worker who earns $2 an hour in India as against ten times that amount for a worker in the United States is obvious. For years, such wage differentials have attracted leading manufacturing companies to low-wage nations. More recently, businesses of all kinds have also exported back-office functions such as data entry, payroll processing, and call centers. Business-process offshoring is all the rage, and the hundreds of companies that have taken this route often cut their costs by as much as half.
Yet as impressive as these achievements may appear, new research by the McKinsey Global Institute (MGI) finds that companies are leaving billions of dollars in savings behind when they offshore back-office functions and service jobs.1 Such companies are merely replicating what they do at home, where labor is expensive and capital is relatively cheap, in countries in which the reverse is true. What is needed? Nothing less than a total transformation of business processes to harness the new environment’s potential. And by undertaking such a transformation, many companies will find that the resulting lower cost structure releases massive new revenue opportunities even more valuable than the savings.
Halfway to global
The first...