Rural Sourcing: Lots of Buzz But it Will Have No Impact on Global Delivery

By Linda Rosencrance

Although rural sourcing has been around for a number of years, it seems to have gained momentum in the U.S. in the past couple years. Rural sourcing is the practice of outsourcing work to suppliers that have located their delivery centers in rural areas where costs are lower. Because the suppliers’ costs are lower, they can pass those savings on to their customers.

The only difference between rural sourcing and home sourcing, or onshoring, is the location. It’s just a matter of where the delivery center is located.

In theory, any company could put a delivery center in a rural location and claim it’s a rural outsourcer. But typically suppliers that offer rural outsourcing are small, start-up entrepreneurs that have developed organically in rural communities, according to Mary Lacity, Professor of Information Systems, College of Business, University of Missouri.

“It’s organic growth—they developed in these communities,” she said. “I don’t see a relocation strategy. Most of the companies are small, start-up entrepreneurial companies and in the last year and a half, they’re seen big demand. They don’t even have to sell [themselves] because companies are coming to them.”

But not only do customers who outsource to suppliers in rural areas get lower costs than they’d get from suppliers situated in urban or foreign locations, they also get higher quality work. That’s because the employees typically have no other opportunities for work if they want to stay in their rural communities. So they tend to take pride in what they do and want to do good work.

“Companies are saying they need to bring things back onshore because of customer satisfaction and as they’re coming back they’re looking for ways to keep costs low and retain employees,” said Lacity.

The lack of a scalable rural workforce may be one reason very large companies looking to save money are developing delivery centers in Tier II cities in the Midwest, rather than more rural locations. It’s a half-way strategy that allows suppliers to get slightly lower costs but not a low as rural sourcing.

A Way Back Home

Monty Hamilton, CEO of Atlanta, Georgia-based Rural Sourcing Inc., an IT domestic sourcing provider, agrees.

“There is a growing segment of work that was outsourced out of the county beginning to move back into the US,” said Hamilton. “It’s not going to be something that moves the needle on a $50 billion or $60 billion IT outsourcing overall market, but we’re seeing clients calling us looking to bring it back here. And there’s a growing segment of call center that’s coming back to the U.S.”

Although there are no hard numbers for the size of the rural sourcing market in the U.S., analysts estimate it a less than $100 million a year.

And while the financial impacts to a supplier may be hard to measure in some cases, if people are happy and loyal their employers it impacts the ability of businesses to provide good customer service and to retain customers.

“In a rural location an employer would be considered a premier employer—they would be an employer of choice and they’d have lower employee turnover and lower absenteeism rates,” said Paul Lucy, Director, Economic Development & Finance Division, North Dakota Department of Commerce. “That’s a large criticism about dealing with the Indian suppliers—that their turnover rates are very high so that’s a benefit to the customer.”

There are also other benefits to suppliers that decide to locate in a rural area. For one thing, they pay their employees less because the cost of living is less than in larger markets in North America and that allows them to charge their customers less. In addition, wage rates in offshore locations like India are also increasing, making them less attractive to customers than rural locations.

And their operating costs—everything from facility costs to utilities to healthcare costs for employees—are lower. Some rural communities even renovate buildings and get them ready for an employer. And some even offer free leases for a number of years, ultimately requiring the companies to only pay property taxes.

“Finding facilities is no problem. Everyone wants to sell their abandoned manufacturing plant,” Lacity said. “You enable it with IT—these cities all have T1 lines and broadband. The technology is the easy part; the physical facilities are the easy part.”

Workforce Development Woes

The limitation to suppliers is that it’s hard to develop, attract and retain enough head count in these rural communities, so they’re challenged by their ability to develop a workforce.

But Lucy said local and state governments as well as regional development centers work with the suppliers to offer such things as financial assistance to help them develop employee training programs. And the state often works with colleges and universities to put programs in place to provide short-term and long-term workforce development. In addition, rural development councils will go into rural communities and offer general training on using a computer and a phone system to get a workforce ready for a new employer.

The lack of a workforce may be one reason very large companies looking to save money are developing delivery centers in Tier II cities in the Midwest, rather than more rural locations. It’s a half-way strategy that allows suppliers to get slightly lower costs but not a low as rural sourcing. But the benefit is that they also have a bigger workforce to pull from.

“Companies like IBM have announced that they put 800 IT people in Columbia, Missouri,” Lacity said. “That will be much larger than a rural outsourcer but it will much smaller than a Chicago or St. Louis or New York. We’re seeing movement everywhere. Also the large Indian companies are starting to develop delivery centers inside America and hiring American workers in the Midwest. But while it’s easier to recruit in areas with larger populations, it’s harder to retain employees because they have more opportunities to change [employers].”

Hamilton said because scale is a problem compared with an offshore location like Bangalore his company looked to locate in cities with populations of around 200,000. Rural Sourcing has development centers in Jonesboro, Arkansas and Durham, North Carolina.

“So not a major metropolitan areas but areas that have the infrastructure, other industry and enough people that can support a 100-200 person IT shop,” Hamilton said. “When you’re talking about BPO work or call center kinds of activities, companies  want 500 or 1,000 people to support them, but not so much in the IT space. A strong team of 25, or 50 or 100 is a very viable solution for those companies. Rural sourcing may not be right for every situation, but for many it is.”

While scale is the biggest drawback, the only other drawback Hamilton sees is the perception of the talent level of the workforce.

“Companies will say, ‘So what kind of talent can you get in Arkansas,’” said Hamilton. “But there is talent in those states. We sometimes undervalue and marginalize our own talent in the U.S .when we really shouldn’t.

So the consensus among experts is that while there’s room for rural outsourcing to grow, it’s not going to topple India’s hold on outsourcing and it’s never going to be done on a the scale that will allow it to threaten the global delivery players.