The Boeing MAX 737 & Offshoring: My Take

According to a recent Bloomberg article, Boeing outsourced some of the failed MAX 737 software work to $9-dollar-an-hour offshore resources. Is this a problem? Maybe yes, maybe no. But here's what is DEFINITELY a problem: an organization thinking that it makes good business sense to offshore work purely based on per-hour labor cost differences.

The only way to truly study labor cost differences is to know with fairly high degrees of precision what the process time (touch time) is to perform ALL of the work related to the tasks in question. This includes all of the wasted effort in going back and forth with teams that weren't well trained, don't have the necessary skills, or both. This includes all oversight time, done virtually, that's needed from the originating organization. This includes all of the travel time and expense going back and forth to resolve problems. When you factor in 100% of actual expenses, the $9-dollar-an-hour person may become a $20-dollar-an-hour person. And that's before you factor in the potential for customer loyalty loss due to poor quality. Many organizations who offshore work never do a full analysis before deciding what's best for their pocket book. They jump based purely on per-hour labor costs.

Does this mean an organization should never offshore? No. The reasons to offshore that may make good business include:

1. Getting closer to the customer or supply chain - An organization may find that the delay time between a customer order and getting product to a global customer is hurting market share, raising cost (as often occurs with expedited shipping), or both. And it's more difficult to understand the nuances of customers from 8,000 miles away. On the supply chain side, it may be more cost effective to produce product closer to a source of raw material that's harder to get, expensive, and/or heavy.
2. To fulfill a commitment - An organization may also use job creation as a lever to gain a geopolitical advantage that's critical to their strategy.
3. To mitigate capacity constraints - Offshoring can be a quick way to mitigate sudden capacity constraints that might take longer to resolve internally or require a significant upfront investment. That said, many organizations haven't fully mined the capacity they can create by reducing waste in their processes.

But, as I suggested in #1 above, looking purely at labor cost do to perform the work once and ignoring the high cost of rework, oversight, and transportation is irresponsible.

Did Boeing behave irresponsibly? The facts are still emerging, but it's certainly seeming so. And, while many believe (including me) that the airline industry's safety record is due in large part to its history of not holding pilots criminally liable for errors, Boeing may have crossed the line. As someone who flies nearly every week, that line is intolerable. Is the root cause of this situation due to $9-dollar-an-hour software engineers? I doubt it. But the spotlight that's now shining brightly on Boeing (as it has with Wells Fargo, WorldCom, Enron, and many others) provides another opportunity for all of us to consider fundamental aspects of how businesses should operate. Let's not squander it.