Outsourcing jargon is often based on the geographic relationship of the provider to the buyer. Typically, offshoring applies to providers in India and Asia’s Pacific Rim.
For buyers in the United States, nearshoring is specific to the hemispheric advantage offered by countries in Latin America and the Caribbean. While costs might be a bit higher than offshoring, it is often easier to communicate with providers, a key advantage for collaboration-intensive tasks like agile software development.
Onshoring is when organizations outsource to competitive regions within the U.S. And within that context there is reshoring, which is when offshoring is repatriated and work brought back to domestic shores.
The Onshore Buzz
“There has certainly been an uptick in talk of reshoring,” says Bill Luttrell, senior locations strategist for Werner Enterprises, a global logistics firm based in Omaha, Neb. “There are also economic development initiatives at the state and local levels that are starting to heavily promote their areas.”
The reasons for bringing outsourcing deals back to the United States are varied, but are heavily influenced by rising costs abroad – Indian hourly rates are growing at 20 percent annually – and an abundance of cheaper labor within the U.S., driven in part by still-high levels of unemployment. For manufacturing, energy costs are an issue, given that the transport of material goods thousands of miles eats up fuel.
From a services perspective, it is the removal of labor arbitrage that is most noticeable, as well as the nimbleness of providers and quality of service.
“Within services, the advantage is that it is so easy to move back,” says Luttrell. “When there is no factory, you can be more flexible. And with back office functions, we are seeing some of that come back because of quality issues.”
The unique circumstances facing the United States’ economy are also making onshoring more appealing. Big corporations have plenty of cash on their balance sheets. They have been spending big bucks on automation technology, which has kept unemployment high. Conversely, this maintains the low labor costs that make onshoring economical.
“As time goes by, the labor gap is closing,” says Luttrell. “With investments in machining, productivity has improved without bringing down unemployment. A lot of jobs have been replaced by machines.”
As well, there is pressure to deliver services to culturally specific and highly regulated industries, like healthcare, which can argue for keeping an outsourcing provider close to home.
This trend is a serious concern for many offshore providers. If they can’t compete solely on labor costs, then they must up their game from a services perspective, with a heavier emphasis on innovation and technological expertise in areas such as mobile applications and agile software development. They also have to deliver to a buyer market that has truly gone global.
“I was with the World Bank from 2000 to 2007, and one of the things we noticed was the immense success of globalization,” says Luttrell. “What that means is that you can source anything from the world’s three main regions: Asia-Pacific, Europe and the Middle East, and the Americas. Multi-national companies are now able to pick from any of these – including outsourcers in the United States.”
That would suggest a level playing field, but it also argues for a semi-permanent state of disruption, which may not serve all buyers.
Nearshore: NAFTA and More
Cost is always a driver when outsourcing, with lower-value functions such as basic call center support often sourced where labor is least expensive. For American companies, the hemispheric time zone advantage of an onshore or nearshore provider can be addressed by having a person in India working in the middle of the night. Now, however, that is beginning to change, with nearshore providers aggressively inserting themselves in the middle of the push to bring offshore deals back to the States.
“Personally, I think there will be a lot more nearshoring than reshoring,” says Luddell. “There are quality options in Mexico. This is in manufacturing, too. Many of the American maquila operations that moved to China are now coming back to nearshore in Mexico.”
The reasons for this shift go beyond advantageous time zones and cheap labor. They touch on the unique advantages of the North America Free Trade zone, which closely integrates Mexico’s economy with that of the United States and Canada.
But when looking at inflation, quality, churn, all-in labor costs, training and efficiency, from a services perspective there is also an argument to be made for onshore investment – particularly in rural areas in the United States. Consequently, many U.S. jurisdictions are aggressively courting businesses abroad.
“Individual states are starting to set up offices in markets where, typically, outsourcing jobs have gone, such as China,” says Luttrell. “They are arguing for advances in productivity, and aiming to attract both direct foreign investment and business from American companies that had previously left.”
Other examples of activity include the Reshoring Initiative, which offers free software to encourage U.S. companies to make the decision to set up shop state-side. Founder and President Harry Moser has said that “any company” that is “trying to evaluate the feasibility of reshoring is encouraged to use our free software or call us for free advice.”
Outsourcing is people-centric, and there are plenty of examples of American outsourcers leveraging the advantages of low-cost jurisdictions within the continental United States for everything from application development to infrastructure services. This is particularly true in Tier 3 cities in the States, which can be 30 percent cheaper than Tier 1 cities.
Examples include Wichita, Kan., where Advantage Outsourcing leverages low business costs and its proximity to operations for aerospace giants Cessna, Boeing, and Learjet. There is Ann Arbor, Mich., where Systems in Motion takes advantage of an excellent physical infrastructure, reasonable cost of living and a large pool of young, university-educated workers. In Jonesboro, Ark. (and elsewhere) the aptly named Rural Sourcing Incorporated offers application development, support and maintenance services. Tulsa, Okla., has Managed Outsource Solutions and Matrixforce Solutions. Even very small towns like Macon, Mo., which is home to Onshore Technology Services, are participating in the trend.
These examples suggest we might see more onshoring in the years to come, particularly if the offshore price advantage continues to erode. In that context, to stay in the game nearshore providers in Mexico and the Caribbean will be challenged to push their advantage as having not only cultural and geographic alignment, but also dynamic sourcing models and skilled employees.
Timothy Wilson is a Canadian journalist based in Guadalajara, Mexico. He covers business and technology, as well as cultural and political news. Aside from Global Delivery Report, he freelances for the Canadian Broadcasting Corporation and the Globe & Mail, among other outlets. His blog, “La politica es la politica” covers breaking stories from Mexico and Central America. Follow Tim on Twitter @TimothyEWilson.ne