Globalisation requires companies to compete globally, and offer better products and services that are appealing to customers. In several industries, global outsourcing today enables the business value chain, providing a mechanism for corporations to achieve their globalization objectives while keeping their costs manageable.
Y2K served as the growth engine for the offshore outsourcing industry. Demand was largely driven by a need to access flexible capacity at a lower cost. The trend has been significant over the last decade as offshore providers introduced new services, improved quality, provisioned flexible capacity and continued to offer labor arbitrage benefits.
Today, several factors are indicating a growing interest in domestic outsourcing. Domestic outsourcing means having work done in the same country by a different company. Within the USA, for example, development and operational centers in states like Montana, Alabama, Detroit, Wisconsin, Louisiana, and Maine are emerging and seeing increasing investments. Offshore providers are also recognizing domestic outsourcing as an opportunity and are investing in centers staffed by US citizens. The “offshore” pitch is changing to the “right shore” pitch as clients look to balance cost with better quality of delivery.
Several factors are contributing towards this trend.
Industry and economic factors
- Rapid environment changes are prompting demand for agile, adaptable products that solve business problems and have faster time-to-market. Taking a rigorous process-centric view and translating development requirements and architectures to remote teams may significantly slow things down. In several situations, these expectations are best perceived to be met by domestic destinations with well-integrated, highly collaborative, and business-centric teams working on similar goals.
- Innovation becoming mainstream. Offshoring continues to offer strong execution skills. However, generating viable innovation has been slow. In several situations, the “connect” required to innovate may be best when services are being delivered in closer proximity.
- Government incentives and support. Several state and local governments are now offering incentives like reduced tax rates, lower capital requirements, and improved entity structures to encourage corporations to make domestic investments.
- Immigration policies are tougher today that they were ever and are favoring increased usage of the domestic outsourcing model.
- The cash deployment factor. The last four years of recession and an uncertain economic environment focussed corporations towards conserving capital by making investments in improving productivity and generating operational efficiencies. These investments are now reaching the point of diminishing returns. Companies today are flushed with cash and their focus is starting to shift towards increasing their top line. As the economy improves and hiring starts to grow, there is an increased probability that corporations will invest cash to generate more returns. The demand generated as a result of these investments may provide a boost to domestic establishments as several situations may favor domestic over offshore destinations with the current economic environment.
- Matured sourcing. More and more buyers are demanding matured sourcing capabilities to free up their bandwidth and manage providers by results. As a result how providers deliver services is becoming less of a client concern unless there are risk factors involved. Providers are therefore asking for location flexibility that provides them with a balance of cost, quality, and timeliness. As a result, the trend towards “right-shoring” to sustain high-quality delivery will continue to increase as providers establish domestic outsourcing capabilities.
- Labour arbitrage benefits are going away. The labor arbitrage benefits associated with offshore locations are starting to disappear when you factor in wage increases, productivity loss, resource turnover, travel costs and other factors. Today, the dollar weakness is helping sustain wage differentials but that cannot be always expected.
- Typical issues with offshoring. Issues like language barriers and time and cultural differences can be some of the reasons to leverage domestic locations for certain types of work. Several customer-facing functions (e.g. call centers) may be best suited for domestic outsourcing for these reasons.
- Perceptions about job losses associated with offshoring. Ironically, media coverage of the loss of US jobs only surfaces when it relates to relates to offshoring. It does not come up for “domestic outsourcing”, even though in many situations it has an equal potential for job losses and displacements within the same country.
- Offshoring risks. The risk tolerance for companies is different when they execute domestically. The risk controls required to manage reputation risks, data security challenges, intellectual property protection, consumer data protection etc for offshore require significant investments. Several risks like cultural respect for IP and the legal responsiveness of destination countries are unique to offshoring.