Sourcing Domestic or Sourcing Foreign: Where is the Smart Money Going?

By Clayton Browne

There’s more to reshoring than meets the eye. We’ve heard a lot about the trend toward bringing jobs back to the U.S. in the last year or two, and the numbers are no mirage. U.S. businesses and government agencies are offshoring less work today than they were two, three or four years ago, and the trend seems to be building momentum. However, there is a caveat. U.S. businesses are still outsourcing just as much if not more work as they were a few years ago, they are just sourcing a growing amount locally instead of offshore.

According to Kevin Parikh, CEO of Avasant, a number of social and economic factors have dovetailed to cause the current reshoring phenomenon, and he suggests that the current reshoring trend is not a long-term structural change in the marketplace, but a natural correction to the offshoring stampede of recent years. “Reshoring is really a fallacy. The current onshoring trend is more of a

pendulum swinging back from too much offshoring over the last few years. Offshoring will continue, but be tempered by strategic onshoring, offering a more balanced outsourcing delivery model.”

Eric Hochstein, managing director of Highstone Associates, points out that the decade plus rush to offshore beginning back in the 1990s focused largely on labor costs and not total cost of ownership. “They didn’t think much about the hidden costs of offshoring in the early days. The thought was how could you go wrong if you are paying talent a tenth of the costs back home.”

Hochstein goes on to argue that the hidden costs of offshoring, including shipping and transportation, high training/retraining costs, loss of flexibility and intellectual property considerations, are now being realistically calculated in outsourcing decisions. Not surprisingly, a lot of businesses are finding the TCO of offshoring is a lot higher than they thought.

The Reshoring Trend

Manufacturing reshoring has been in an uptrend for a few years now, and even Apple joined the crowd, recently announcing they would begin manufacturing operations in the U.S. again. A 2013 report from Boston Consulting Group  presented data showing that 12% of surveyed companies had reshored some manufacturing operations since 2010, and another 38% were considering it.

Reshoring is not just limited to manufacturing. Many areas of the services industry are also seeing jobs come back home. GM announced a few months ago that they were transferring 3000 offshore IT services positions back home from overseas, and had plans to hire up to another 7000 in Austin, Texas, Warren, Michigan and elsewhere stateside over the next few years.

State and local governments are also increasingly outsourcing various business and IT functions because of budgetary constraints. Parikh points out that major outsourcing providers have recently struck deals with the State of Virginia, City of San Diego and Orange County.  Furthermore, all of these deals involve hundreds of million dollars of annual spend and contractually mandate the use of local or statewide resources.  Very few recent local government outsourcing deals have involved any offshoring.

Nearshoring: Happy Medium?

Nearshoring can give businesses the best  of both worlds, so it is not surprising that it is one of the hottest trends for 2013. You can still find high-quality IT and programming talent in many places in Mexico, Costa Rica, Chile, Argentina, Poland, Romania and Slovakia for significantly less than U.S. or Western European labor costs, and enjoy the benefits of sharing the same time zone and the possibility of closer collaboration. By the same token, nearshoring also makes the daily interaction and operational flexibility required for agile software development or other modern real-time-feedback systems possible.

The significant advantages of nearshoring vs offshoring means that the steady trend we have seen towards bringing work closer to home over the last few years is likely to continue. “Government projects and projects involving sensitive information will remain onshore, but otherwise almost any kind of work can be nearshored,” Hochstein says.

Impact Sourcing

“Impact sourcing” is a new term describing outsourcing of basic business process services to low-income rural areas, such as emerging countries in Africa, Latin America, Asia and even some poverty-stricken areas of the U.S. The concept of impact sourcing was spearheaded by research investments funded by the Rockefeller Foundation’s PRIDE Initiative.  Based on this initiative, Avasant and Accenture were identified to define how low-income communities, government and the private sector can create global job opportunity. “Impact sourcing has the effect of raising the spirits and dreams of individuals that have never had an opportunity to be part of the Global Economy,” said Parikh.

The idea is to create a win-win situation that creates jobs and improves the economic circumstances of the people in these areas. The locals get training and jobs that pay at above-market rates, and some studies have shown that impact sourcing can perform many BP tasks at costs up to 40% below those of BPO providers in major cities in India, China and the Philippines.

Impact sourcing projects generally involve breaking larger business processes into basic micro-tasks that can be assigned to trained individuals on a local basis. Examples of tasks undertaken as part of impact sourcing projects include revising and managing digital content, data mining and transcription.