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An outsourcing model enables many original equipment manufacturers (OEMs), primarily those that are small or mid-size, to become more competitive. However, this business model carries risks that, unmitigated, can have a significant impact on a company’s financial performance and long term success. Managing outsourcing is not trivial, cannot be rushed, and must be pursued with a strategy in mind. In the end, outsourcing can be successful if you have the right strategy, processes, people, and tools to maintain control of your business.

Despite the significant benefits that come with outsourcing, there are also risks and challenges for OEMs to consider. Placing manufacturing activities in the hands of a manufacturing partner makes it increasingly important to manage tasks through documented business processes, contractual agreements, and software tools. Without building new processes and infrastructure to support this supply chain approach the benefits of outsourcing will be offset by newly introduced costs and risks.

When outsourcing to China, be sure that your American staff is educated on the cultural sensitivities that will undoubtedly influence the mindshare you receive at your manufacturing partner. Your ability to effectively socialize and establish personal relationships in Asia will be as important as the dollars that you spend. As you build your offshore partnership, keep in mind the time zone and communication challenges that are inherent in this new relationship. You may not have the option to pick up the phone to explain a product change or to drive across town to pick up the initial prototypes. It is essential to put in place the appropriate tools to collaborate effectively across time and language barriers, and the disciplined processes to ensure that hand-offs and changes are clearly communicated. This will become essential in the NPI phase of new products, and, once a product is in production, for managing the myriad of changes that are inevitable in fast-moving product development environments.

China has made major strides in laying the groundwork for a diverse and successful outsourcing industry in recent years. Central and local authorities have demonstrated a quiet determination to promote information technology (IT) and other business services industries across the country. They have also launched initiatives to develop education, training, and other supporting infrastructure.

As a result, China is quickly building a strong outsourcing industry, and emerging outsourcing players already have strong credentials. Like India, whose emergence as an outsourcing location was export-driven, China has a strong export platform on which to build an outsourcing industry. But China also has the strength in its domestic market to create a deep services base and has already established strong ties in the Japanese and South Korean markets.

As the outsourcing industry has become increasingly sophisticated, suppliers have also progressed to specialize in niche areas, such as legal services, animation and gaming, e-learning, online tutoring, offshore engineering, high-tech and telecom engineering, and pharmaceutical research and development (R&D). Analysts expect outsourcing and offshoring in these sectors to skyrocket in the coming years. For example, offshore engineering was expected to grow from $10-$15 billion in 2006 to $150-$225 billion by 2020.