You only have to send a trouble shooter out to an offshore plant a few times, and the cost advantage will be lost (but it won't show up in the cost of product - due to accountants). The worst case scenario, and I have seen it, is to open a container and find that the goods inside are faulty, and to discover that there are another three containers en-route with the same set of faults. The cost of product had gone up...not down.
Sounds about right. Not been involved in off-shoring manufacturing but I have been involved in off-shoring 'back office' services to contractors. <borrows soapbox>
The initial proposal all too often simply takes the cost per clerical head here and compares it with the cost per clerical head over there. What it doesn't include is the management left here who monitor the contract/performance and the management there who correspond with them. Layers of management which either didn't exist before or needed a lot fewer staff. Because the project cannot possibly come in way over budget, the extra costs are absorbed as general management overhead.
What out sourcing also completely misses is that the opportunity to reduce the costs in future is significantly reduced. The process is often over defined, such that the actual labour needed increases. Any changes to process have to be negotiated at great length and expense. The contractor has no incentive to reduce that because they are paid for what they do, they will never suggest that they can reduce their input. There is a tendency to cast the process in stone and the senior management tendency is to work around the deficiencies rather than rethink and refine the entire process every few years.
It gets even worse when you have contractors talking to contractors; the number of relationships to manage increases exponentially and in practice everything is referred back, massively inflating the cost in time and flexibility. The contractual labyrinth becomes a nightmare to manage and no-one even thinks of improving it because the whole edifice could collapse if anything changed.
Meanwhile after working the processes and parcelling them out to various contractors for a few years your own 'experts' in the process itself have gone, all you have left is the monitors. They become the only people you can ask, the management both here and over there who have usually found a well paid niche and have a vested interest in leaving everything exactly as it is. If glaring problems do emerge, generalist management tend to agree to any (costly) enhancements the contractors say are needed because they don't have the detailed knowledge of the process that was established or the requirements that existed before off-shoring.
There is a real problem still on the horizon. Much of the private sector have been working through the consequences for a while. They have discovered that the cost savings and service levels do not magically improve, rather it builds in the inefficiencies and makes change far more difficult. The government meanwhile, being a few steps behind, have discovered out sourcing as if it's a new idea. All the consultants who previously advocated it as such a brilliant idea have moved into lobbying for it in the public sector in areas such as health and education. The real crime is that with consultancies and directorships in prospect, there's very little incentive for those who make the decisions in the public sector to do otherwise.</soapbox>
