Offshore Operations: Local firms balance risks and benefits

Ottawa Business Journal

Despite the risks of war, natural disasters, and the like, local companies are daring to invest more and more in offshore operations in developing countries to compete globally.

Macadamian Software, an R&D outsourcing firm, runs one-third of its operations in politically volatile India as well as in Romania. It plans to increase offshore operations to two-thirds of its business in five years.

“You have no choice,” said Matthew Hately, Macadamian’s vice-president of marketing. “It’s extremely hard for Canadians to be cost-competitive without investing offshore.”

OCM Manufacturing opened a purchasing office in Shenzhen, China three years ago, despite all the risks involved in operating in a country notorious for corruption, red tape, and potential natural disasters.

“Companies do what they have to do to stay in business,” said OCM Manufacturing president Michel Jullian. “If your competitors are ‘offshoring’ their business, you have to do that to compete effectively with them.”

He says OCM Manufacturing chose China due to its strong manufacturing base.

“There is tremendous manufacturing infrastructure in China for everything. Anything of high-labour content is effective in China,” he said. For instance, the company buys cabling, circuit boards or metal cabinets for its clients.

An Asia Pacific Foundation of Canada survey in 2005 showed that 71 per cent of Canadian companies polled said they planned to boost their Asian holdings substantially or moderately during the year to supply markets all over the world.

The benefits seem to outweigh the risks. But in the event of crises, companies must be ready with contingency plans.

Fidus, an engineering design firm, opened a small offshore operation just outside Beirut, Lebanon, a year-and-a-half ago, believing the country would remain peaceful after its last civil war ended in 1990. Now, the company finds its Lebanese operation in the midst of the Israeli-Hezbollah conflict. Fortunately, the operation has been largely unscathed due to its location in a self-sustaining and insulated business hosting facility just outside Beirut.

The country’s labour pool was a big attraction for Fidus. The firm has little competition in Lebanon, as opposed to what it would be up against in China or India, said director of communications Denise Allen. The company hopes this will translate into long-term employment. The company now employs 10 Lebanese design engineers there, whose salaries are much lower than a typical Canadian salary, but competitive in Lebanon.

Furthermore, Fidus’s chief executive, Lebanese-Canadian Michael Wakim, has a large network of Lebanese expatriates who are potential customers.

Business remains uninterrupted so far, for this company whose clientele are in North America. “We are not moving goods in and out of the country, just information,” said Ms. Allen. Ottawa’s 50 design engineers keep close tabs on their Lebanese counterparts through Skype and e-mail.

However, costs have been incurred – $10,000 so far, according to Ms. Allen. “Because of what’s happened recently, we will be delaying any large scale expansion into Lebanon.”

Should the war escalate, Fidus would consider options from shutting down its Lebanese operations to transferring locations.

For OCM, only 10 per cent of its business is invested in China, while the rest is in Ottawa.

“Ten per cent helps me manage risk and reap the advantages of China … As my business grows, that part will grow as well,” added Mr. Jullian.

“Off shoring is not a simple equation,” he added. “You try to run your business so you can manage risks. If one of your suppliers defaults, you have to be able to recover, find alternate suppliers and do it quickly. I have back-up suppliers in Asia and North America. Don’t put all your eggs in one basket.”

That’s what Bombardier Transportation has done with production facilities spread throughout 21 countries. It had to evacuate 35 foreign nationals from its Jerusalem operations due to the Israel-Lebanon hostilities, said spokesperson David Slack. Local employees, however, remain. “We’re committed to facilitating customer obligations on the long-term basis. We’ll see how this pans out,” he said.

Offsetting risk for Macadamian Software meant in part setting up two offshore locations – in India and Romania.

“You need a better blend of cost, skill and speed to be competitive worldwide. In Ottawa, there are 10,000 to 20,000 development engineers. Worldwide, one to two million. We need access to that talent,” said Mr. Hately.

“We’re also looking for other talent in the EU, so if something happens in Romania, we have a backup plan from the Czech Republic or something.”

The company also has backup systems and 50 engineers in its Ottawa lab.

For those looking to establish offshore operations, Mr. Hately advises companies to pay attention to disaster recovery plans, contingency plans in case business slows down, getting back online with minimal interruption, and supporting customers if an office goes offline.

Mr. Jullian advises, “Before you get into any operation, you have to carefully analyze the pros and cons, what you’re getting out of it, and above all, what control you have over your offshore plant. Decide on the type and amount of business you give to that plant …

“Too many people assume going offshore is just like home. There are many problems in a remote location, so if you set up the same way (as home), you’re going to fail.”

By Germaine de Peralta

Special to the Ottawa Business Journal

Contact Information:

Shaun Markey