Strategic CIO // IT Strategy
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4/7/2009
05:15 PM
Bob Evans
Bob Evans
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Global CIO: Let's Put The Offshoring Bogeyman In Proper Perspective

We need to avoid getting caught up in the emotional flashpoints of offshoring and outsourcing without putting the extent of those practices into perspective.

Quick -- name the iconic American company whose CEO said this at the $28 billion-a-year company's recent annual meeting:

"Our quest for the best talent takes us to every corner of the world, allowing X to recruit, develop, and benefit from a diverse and inclusive workforce that works well together. Never before has this been more important considering the present competitive landscape. Fortunately, X finds itself in an advantaged position to attract, and to benefit from, some of the best talent in the world."

IBM? Amazon? Hewlett-Packard? Microsoft?

No, that would be John Deere, the 170-year-old manufacturer -- make that global manufacturer -- of agricultural, forestry, and construction equipment. As of late last year, John Deere had 31,700 employees in the United States and 25,000 outside, with $18 billion in revenue generated within the United States and about $10.2 billion outside it.

I point this out because too many of us in this country are failing to recognize the extent and reach of the global economy, and how deeply we as Americans are fully and irreversibly enmeshed as lusty and vigorous exporters of goods and services in every country on the face of the Earth. Instead, we get caught up in emotional flashpoints such as offshoring and outsourcing without putting the extent of those practices into perspective, and allow those uninformed prejudices to lead to bad business decisions.

And that's a perspective we in the IT business need to grasp with clarity and confidence if we're to be able to help frame business strategies going forward instead of being caught off-guard by them. Otherwise, we run the risk, as Sean Connery once said, of showing up with a knife at a gunfight: We just won't have the right tools to survive, let alone compete.

FACT: Total spending on IT outsourcing -- for both onshore and offshore work -- by U.S. companies and government organizations was $75 billion in 2008, according to researchers at Forrester. To try to roughly isolate the offshore component from the private sector, let's reduce that by 10% to account for government work, and by another 10% to account for onshore work. That leaves us with $60 billion for offshore work contracted by U.S. businesses in 2008.

FACT: Another classic American company, Eli Lilly, had fourth-quarter revenue of $5.21 billion, with $2.94 billion coming from the United States (56.4%) and $2.27 billion coming from other countries (46.3%). On an annual basis, that would be more than $9 billion in Eli Lilly 2008 revenue from outside the United States.

FACT: Another U.S.-based global brand, Nike, reported quarterly sales of $4.44 billion, with only about a third of that -- $1.6 billion -- coming from the United States. Multiply the remainder by four to get an approximate run rate for the year and that's about $11 billion in 2008 Nike revenue from outside the United States.

FACT: Boeing's 2008 revenue was $60.9 billion, with $23.8 billion -- or 38% -- coming from outside the United States.

FACT: The exports from just those four companies -- $54 billion -- almost matches the entire total of offshoring done last year by all American companies. Think about that next time someone tells you offshoring is destroying the U.S. economy.

My point is that while some politicians and labor kingpins have been screeching about the economic suicide of American companies purchasing IT services from countries outside the United States, the numbers just don't add up: $60 billion in offshore outsourcing contracts signed by U.S. companies in 2008 versus $54 billion in non-U.S. revenue during the same year from just four randomly selected American corporations operating in vastly different markets!

So tell me again: Why is it OK for these outstanding Fortune 500 American companies to act in their best interests by building out their businesses around the globe and generating 35% or 45% or more than 60% of their revenue from outside the United States, but it is not OK for Fortune 500 companies to choose suppliers from outside the country?

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To underscore the flawed nature of the looming protectionist sentiment regarding outsourcing, let's take a closer look at John Deere's operations and strategy to understand how fully and completely its business is enmeshed in the global economy. In this context, it's important to note that a core part of the company's stated mission is to help "human flourishing around the globe," which deeply shapes Deere's objectives:

• On Deere's customer base being global: "The world’s population continues to grow, adding literally thousands of new mouths to feed by the hour. Combined with improved living standards, this has led to greater worldwide demand for food and for energy, including biofuels such as ethanol. Global consumption of wheat, corn and soybeans has increased by approximately 20 percent in this decade alone. Related trends, pointing to increased demand for shelter and infrastructure, support a healthy outlook for our other businesses."

• On Deere's growth opportunities being global: "Profitably extending the John Deere brand to a wider worldwide customer base remains a top growth priority, as well as an area of considerable achievement. Last year, Deere sales outside the United States and Canada surpassed $10 billion for the first time. Sales in the emerging markets of Brazil, Russia, India, and China continued their strong growth and are now more than three times the level of 2006. While some of these countries have been hurt by the recent global economic slowdown, they should continue to be an attractive source of John Deere sales and market-share growth."

• On Deere's strategy requiring global: "In addition, by expanding our global footprint and entering new businesses, we are establishing a more resilient, broader-based business lineup."

• On Deere's need for global opportunities: "Earnings reached record levels for a fifth straight year. We continued to bring advanced new products to our customers and introduced the power and value of the John Deere brand to a growing global audience. For the first time, over half of our agricultural equipment sales came from outside the United States and Canada. Growth in developing areas such as Brazil, Russia and Central Europe was especially impressive."

• On Deere's two-way global partnerships: "John Deere and Hitachi have a joint venture for the manufacture of hydraulic excavators and track log loaders in the United States and Canada. John Deere also distributes Hitachi brands of construction and mining equipment in North, Central and South America. John Deere also has supply agreements with Hitachi under which a range of construction, earthmoving, material handling and forestry products manufactured by John Deere in the United States, Finland and New Zealand are distributed by Hitachi in certain Asian markets."

• "John Deere also signed an agreement to form a joint venture with Ashok Leyland Limited in India (Ashok Leyland John Deere Construction Equipment Company Private Limited) for the manufacture of backhoes and four-wheel drive loaders."

• On Deere's hunger for global talent, expressed in the words of CEO Robert W. Lane to open this column: "Our quest for the best talent takes us to every corner of the world, allowing Deere to recruit, develop and benefit from a diverse and inclusive workforce that works well together. Never before has this been more important considering the present competitive landscape. Fortunately, Deere finds itself in an advantaged position to attract, and to benefit from, some of the best talent in the world."

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