Outsourcing billionaires: Making fortunes by meeting demand
Last Updated: Friday, June 6, 2008 | 8:52 AM ET Comments0Recommend4By Alyson Papalia Forbes
Outsourcing and offshoring are two similar concepts that are often lumped together. By definition, the former is to purchase or subcontract from an outside source; the latter, on the other hand, can be done both within and outside a company. These two practices, when combined, make up a phenomenon known as offshore outsourcing, a specialized field that has led seven of Forbes' billionaires directly to their fortunes.
These seven men hail from just two places: Taiwan and India. The Taiwanese billionaires — Terry Gou and Barry Lam — lead companies specializing in contract manufacturing, namely in the production of electronics.
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Hon Hai, the maker of Apple's iPod, among other everyday gadgets, is one of the world's largest contract electronics manufacturers. CEO Terry Gou has made billions off the company, which he founded in 1974. Founder and CEO of Quanta Computer Barry Lam has pioneered the design and manufacturing of notebook computers.
By contrast, India's offshore outsourcers have made their billions through software services. Wipro, Infosys Technologies and HCL Technologies all have C-level executives who have worked their way to 10-plus digits through companies that provide global software and IT services.
Why have companies around the world chosen these Taiwanese and Indian companies to handle aspects of their business?
"The economics behind offshoring are really compelling, and customers usually do it for three reasons — they want specialized firms, [they want] to cut costs, and [they want] access to talent or specialized skills," said Robert Kennedy, a professor at the University of Michigan Business School.
'The economics behind offshoring are really compelling, and customers usually do it for three reasons — they want specialized firms, [they want] to cut costs, and [they want] access to talent or specialized skills.'
— Professor Robert KennedyThe executive director of the William Davidson Institute, a nonprofit research and educational institute dedicated to the changes affecting companies in transition and in emerging market economies, Kennedy points out that it's often contract manufacturing businesses that offshore. These businesses have a need for specialized companies like Quanta or Hon Hai, and companies looking for software services are generally more focused on reducing costs and finding fresh talent.
For a company like Quanta to produce the majority of notebook computers is, simply put, more efficient. "The advantage is that Quanta can do all of the research and development themselves," Kennedy says. Quanta can build one factory and produce scores of laptops, and Dell, HP and IBM don't have to waste funds constructing three separate facilities with smaller outputs.
When it comes to cost arbitrage, offshore software services come out on top.
"Software engineers in India make about a third as much as software engineers in the U.S. — and even less than that at entry level," Kennedy explains.
And sometimes, North America just doesn't cut it when it comes to specialized skills.
"We saw this a few years ago in software with Y2K. Many of the issues surrounding Y2K were that the software platforms were assembled in the '60s and the U.S. engineers didn't remember how to fix them," Kennedy says. Even if companies were willing to equip their staff with these skills, there aren't enough people to learn for that knowledge to make much of a difference.
Meeting a similar demand are companies like Wipro and Infosys, which also have large remote radiology services. If there is a shortage of radiologists in the U.S., X-rays are sent overseas, where an American-trained radiologist can evaluate them. Although they're paid around $50,000 US a year in India, compared with the $300,000 they'd make in the U.S., the money can go further there, allowing them to live a more luxurious lifestyle than they would have in the U.S.
There is such a rapid development of capital markets in other countries that even small discrepancies in salary and the cost of labor are significant. These billionaires have capitalized on the fact that developing countries are growing two to three times as quickly as countries like the U.S., essentially fueling an offshore outsourcing trend whose expansion appears to have few boundaries.