Is Offshoring threatened by a return to Onshoring?

CHICAGO - JUNE 16:  A demonstrator protests ag...
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One of the potential side-effects of the global economic slowdown that could have far-reaching financial and political consequences is the question of whether offshore jobs should be brought back onshore.

After all, since the Offshoring model really started to take off in the 90s, a number of economies have become dependent on the revenues generated by their ability to provide such facilities for the historically more costly Western countries. For example, India’s business and technology services companies are estimated to have had revenues of some $58 Billion in 2008, up from just $4 Billion ten years earlier, with that sector’s export earnings (largely Offshoring) reaching an estimated $46 Billion in 2008 – offsetting some three quarters of the country’s oil imports.

The rationale for Offshoring was simple:

  • Consumers were ever-more price conscious, and companies were equally ever more cost conscious.
  • Developing economies had much lower labour rates and so could provide manufacturing and many services at significant lower cost, to the benefit of the consumer and the company.

The effects on local labour were not a serious consideration as it was widely believed that they would find alternate employment – perhaps even at a higher skills level which would earn them more money.

Of course, Offshoring was not without its challenges – issues over the quality/consistency of goods and services supplied, of cultural/language differences (especially in the services sector), of corporate governance (data and information leaks, etc.) and of differing expectations of both parties raised their heads. But these could be overcome while economies remained strong and consumers kept buying.

However, the persistence of the economic slowdown, coupled with the likelihood that unemployment in the Western democracies will remain high for the foreseeable future and the growing public debt are forcing a re-evaluation of the Offshoring model:

  • What impact will weaker Western currencies have on the production cost?
  • Will a move to new models of outsourcing – using a managed-services model with guarantees of performance/quality, as opposed to the classic “staff augmentation” model – enable total delivered cost to be lower Onshore?
  • For manufacturing, to what extent will lower transport costs of finished goods offset the higher manufacture cost of Onshore products?
  • What is the premium that can be attached to national pride (e.g. goods/services from that Onshore country)?

And then there are political considerations for the Onshore country: politicians that are seen to encourage job growth are more likely to be re-elected. What’s more, perhaps this could be done in a way that benefits that country’s fiscus, while being seen to be friendly to business and to the workforce as a whole. To what extent would tax breaks for companies bringing jobs back Onshore be offset by the additional income taxes it would gain from the newly employed, the decrease in unemployment benefits and the additional sales tax/VAT it would gain from the spending of these people?

Although a return to Onshoring may not be suitable for everything – large scale manufacturing of small, relatively low-cost items, for example – it seems to me that the benefits to a country, and to that country’s employers, of adopting a greater Onshoring model could be significant. And, if this trend took hold, the impact on Emerging markets that had come to rely on providing Offshoring could be even more significant. What do you think?

Update:
Great blog article by Derek Singleton: “5 Strategies for Growing as a Domestic Manufacturer

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7 responses to “Is Offshoring threatened by a return to Onshoring?

    • The costs of “back-shoring” are a consideration, but are considerably lower than maintaining an offshoring relationship that is damaging to the business.

      From an IT perspective, the CIO might experience fall-out if he/she was the instigator of the offshoring, as your post points out, but this consideration should not over-ride the needs of the business as a whole – although I accept that, unfortunately, such personal considerations often do…

  1. Hey Guy. I’m already seeing this start to happen in the US market. As you outlined, the drivers are wages increasing in locations such as India, unemployment here at home, the growing political opposition to ‘jobs going overseas’, a groundswell of opinion that ‘strange accents’ equates to low skills/knowledge (unfortunately created by some call centers mistaking education level for skill level), communication/bonding issues caused by accent and differences in cultures, competitive pressure caused by companies who use onshore support as a differentiator in their sales and marketing, etc.

    I just did a study and found that the hard cost delta between India and US based support representatives is now only about 20%. If you factor in intangibles such as customer satisfaction and repurchase rates/customer lifetime value, it’s almost a wash.

    It may well be that this isn’t enough to cause too many companies to pull their support back to the US, but I’m hearing from businesses that are currently in the process of expanding now suggesting they will not seek to offshore their support.

    I think this trend to onshore will continue as I’m seeing that many of the ‘low-value’ support requests such as status updates for orders, shipping info, rma details, faq, etc are being automated online. And then, online peer-assisted communities are expanding and becoming more relevant to answering more complex questions. This is trending towards having longer/more complex issues to resolve via direct customer representative which seems to favor the onshore model right now.

    • Thanks for your comments, Steve – it’s good to hear from somebody on the ground in the US that can confirm this. I think the trend will further be supported by the increasing nationalism I’m seeing all over the world.

  2. It will not happen Guy. Take Sweden for example, both Swedish and foreign companies are moving abroad since it’s simply to expensive. What do you think will happen with manufacturing of Volvo and Saab? Who is going to pay as much for a Saab as a Rolls Royce just because it’s made in Sweden. J. Swedish companies get better qualified IT consultants in India for half the price.

    Outsoursing is here to stay and the cheapest countries is and will be where manufacturing will take place. The alternative is a company that can not compete with its competitors since what they are offering is too expensive.

    Obviously this will keep on angering trade unions and the work force, but there is no avoiding it.

    • I can’t speak for Sweden specifically, Catarina, but there is already evidence of this happening in the US and in some parts of Europe. The question is to what extent this will happen, but as wages continue to rise in formerly low-cost countries and quality issues continue to arise this, together with high unemployment and consequent political and economic costs in many Western countries, might well cause a significant move back to Onshoring. As I say i the post, it probably won’t happen for very low-cost items, but for higher-value items and services, it poses a potential threat to economies in the East that have relied on this.

  3. Pingback: Mad Economics » Blog Archive » Is Offshoring threatened by a return to Onshoring?

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