Nearshore Americas

U.S. Sourcing Firms Bid to Reverse Offshoring Trend

As the US economy tries to shake off the effects of last year’s recession, companies are looking for ways to make their outsourcing operations more streamlined and cost-effective, without sacrificing productivity.

It doesn’t help that wages in India and other offshore destinations have been steadily rising, and a weak US dollar is making it expensive to import services from overseas. Enter the onshore.  With some customers jumping on board immediately, and others cautiously waiting to see where this goes, analysts are divided over the scalability and long-term feasibility of onshoring. Nearshore Americas speaks with three startup providers in the US who think it’s not only feasible but more profitable than many of your current offshore operations. Here’s a look at the onshore industry, its benefits and challenges.

The concept of onshoring (inshoring, re-shoring, insourcing), has been around for some time, but has only taken off as a trend in the last two years. After a decade of globalizing services, factors like pricing pressure, complicated logistics, quality issues and language barriers are sadly part of the equation. Offshore outsourcing is still very lucrative, but clients are now also asking for service alternatives closer to home as a way to maintain control. And companies are responding.

Indian players Infosys, Wipro, HCL and Tata Consultancy Services have all been aggressively growing their North American capabilities, as has Mexico’s IT giant Softtek, which earlier identified the US market as its only real target for expansion. As for American firms, the latest have been GE and Caterpillar who both announced that they may be moving parts of their operations back home in coming years.

“One thing that Indian and Latin American outsourcers never figured out is how to serve smaller companies. Their business model just doesn’t work for those clients. Whereas the onshore industry is relevant for SMBs since it dials down the level of complexity” – Dana Stiffler, AMR Research

Fast Growing Market

The onshore trend is not so much about multinationals as it is about smaller domestic providers grabbing a niche in this new market.  We sat down with three up and coming providers – Rural Sourcing Inc., Systems in Motion, and Rural America Onshore Sourcing – to understand their business model. While differing slightly in implementation, their ‘rural sourcing’ strategy is simple: Set up in suburban and rural towns, where salaries and operating expenses are much lower than metropolitan areas, but skilled workers are just as available. The high broadband penetration in these areas under the National Broadband Plan allows many of these employees to work from home, creating a ‘virtual workforce’ that drives costs down even further. That may be the single biggest advantage the US has over other countries.

Even though these are relatively new businesses, they’re already reporting tremendous demand. “The volume of people reaching out to us is increasing every month”, says Christopher Derrington, CEO of Rural America. “This year we booked more sales by the end of March than we did all of last year. We’ll soon be recruiting in 27 states and may be expanding into Canada”. Rural America has been in business for 18 months, and has a total of 400 employees.

The Onshore Advantage

Proximity – When it comes to staying involved in your outsourcing operation, the onshore industry can’t be beaten. With your provider in the same country with the same culture and language, effective communication increases while cost of travel decreases. Clients can interact directly with the developers and not just with account managers. “Because of our geographic proximity, we work collaboratively with our clients, directly with their technical teams”, says Monty Hamilton, CEO of Rural Sourcing Inc. “Since they can take ownership of the application development process, they’re comfortable giving us complex projects which they may not have sent overseas”.

Onshore customers also aren’t bothered by many of the complications of offshoring – wage and price inflation, corruption, unstable political environments, high attrition rates, access to skilled bilingual workers, etc. There is a greater sense of security since the work is governed by US law. Data or software protection and intellectual property concerns are less of a hassle.

Dana Stiffler, Research Director for Global Business and Outsourcing at AMR Research, says that proximity is especially important for small to medium size firms that operate only in the US, since they can’t outsource on a large scale. “One thing that Indian and Latin American outsourcers never figured out is how to serve smaller companies. Their business model just doesn’t work for those clients. Whereas the onshore industry is relevant for SMBs since it dials down the level of complexity”.


Operating expenses – We know that in terms of labor costs, no one can touch India. But Debashish Sinha, CMO of Systems in Motion, maintains that the onshore industry can be cost-competitive. “You can’t think solely in terms of wage rates, but total cost on an outcome basis”, he says. “Productivity of an offshore resource can be 25-50% less than a US-based resource. So while our wage rate may be higher, when you consider efficiency and hidden costs, we’re actually very competitive”. His point is helped by the appreciation of the Indian rupee this quarter (3.5% against the dollar). Even if India’s price advantage has decreased however, it’s still pretty significant.

For US states that have been hit hard by employment losses, the job creation potential of an outsourcing company is a relief. So providers often receive government incentives to attract them to certain states or cities. The state of Michigan awarded Systems in Motion a $7.4 million credit to build their delivery center in Ann Arbor. Similarly Tata Consultancy Services took advantage of large tax breaks from Ohio to build their delivery center in Cincinnati. TCS declined to comment.


Access to talent – The US unemployment rate is hovering at around 10% currently, which has made a lot of highly skilled workers available to onshore providers. “Our average worker has about 7-8 years of experience”, says Derrington of Rural America. “Many lost jobs during the recession, but have done decades of IT or application development work”. Monty Hamilton from Rural Sourcing Inc. prefers instead to tap into fresh talent from US universities. “We set up in Jonesboro, Arkansas. Arkansas State University and other colleges nearby produce graduates that are great software developers”. Either way, no one is complaining about lack of skilled workers.

Challenges Onshore Players


One of the recurring criticisms of the onshore industry however is the lack of scalability. A recent report by the Information Technology Association of America (ITAA) talks about the scarcity of IT workers in the US due to baby boomers retiring and fewer numbers of IT graduates. According to its survey, 77% of IT companies are concerned about a shortage of skilled workers. The onshore industry may not be feeling the pinch yet as it’s still in its infancy. Debashish Sinha of Systems in Motion admits that there is some truth to that. His company currently has only 85 employees, but is aiming to grow that to around 250.

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Derrington argues that using the virtual business model through VoIP and Sharepoint, scaling up is not a problem. His goal is to have rural IT workers across the country delivering higher-end services to meet the needs of any size company. And if you’re looking at simple voice based outsourcing, scalability prospects are good. Datamonitor projections show the number of US home-based call agents growing at an annual rate of 20% between 2009 and 2012, from about 50,000 to more than 80,000.


The attitude of the outsourcing world is another challenge for onshore companies. “Organizations need to give it a fair shot”, says Monty Hamilton of Rural Sourcing Inc. “There’s always this knee-jerk reaction that India is the place to go, with no consideration of the alternatives”. Sinha agrees – “Big investment was made in the globally distributed service model, and it seems that companies now must make it work in order to amortize that investment. It’s difficult to change that mentality, even when you show them something more profitable”.

Complementing Global Services

Onshoring must be understood in context. Its purpose is not really to break into new markets; it is to provide companies with a different sourcing alternative. As Dana Stiffler says, “Onshoring is not viewed as a substitute for offshoring, but as a complement. It is to add more value to an outsourcing operation and to fine-tune it”. And in fact, the model that many companies are considering is one in which the standardized work is done offshore, while the more complex operations are performed onshore when companies can be more involved. Onshore locations in the US could even become centers for specific functions like serving government agencies which, for security reasons are not able to source work overseas.

For now at least, the onshore industry is still small and relatively unnoticed. But as it continues to grow and define itself in coming years, we see it occupying an important place in the outsourcing market. Stiffler believes that this is a trend that’s here for the long run, and it’s a good thing for American businesses.

Kirk Laughlin

Kirk Laughlin is an award-winning editor and subject expert in information technology and offshore BPO/ contact center strategies.

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