For decades, US-based businesses have gone overseas to locate operations in emerging countries with low-wage labor. Subsequently, many companies have found that wage margins between our country and foreign markets have declined. Recently, well-known companies such as Dell, Delta, US Airways and United have brought operations back to the States.
Initially, multi-national companies determined that the offshoring of certain functions, especially in call centers, back-office operations, and business processing outsourcing, made sense. This was tied to an economic reality: the potential wage savings between the United States and many international markets was as high as 70%! However, as more companies seek to compete on a global scale, these markets are becoming increasingly saturated.
Is Onshoring a Real Trend?
Listed below are examples of the many companies that have chosen either to return operations home or focus on consolidations within the USA in smaller Tier II or III communities:
- In 2011, Delta stopped outsourcing to a South African firm.
- Also in 2011, US Airways closed its call center operations in Manila.
- Hewlett Packard consolidated business functions to Arkansas in 2009.
- IBM opened a technology center in Dubuque, Iowa in 2010.
The Hard and Hidden Benefits of Onshoring Wages
While countries like China and India, with wages still below those in the USA, have experienced sharp rises in labor rates, wages here have barely kept up with inflation. Unemployment and underemployment continues to put downward pressure on wages. This further reduces the wage advantage, with many skilled people willing to work for lower wages.
Homeshoring. Homeshoring (remote employees working at home in the USA) can be 15% to 20% less expensive than offshoring, according to some studies, creating a scalable workforce and reducing operating expenses, including real estate. Many large global US companies are now making a push to further increase the percentage of their remote homeshored workforce.
Smaller Cities. Tier I US cities have frequently been used for wage comparisons to offshore locations. However, today, an increasing number of entry and mid-level jobs can be located in less expensive Tier II and Tier III cities. Examples include IBM planning to hire 1,400 in Dubuque, Iowa, and up to 800 in Columbia, Missouri, and HP planning to hire up to 1,300 in Conway, Arkansas. Locating in Tier II or Tier III US cities can provide meaningful labor, operational, and real estate savings in lieu of offshoring. Also, incentive packages in some US communities outperform incentive packages in other countries.
Additional Costs. Beyond labor, other costs that can be higher in offshore locations include additional training of new employees who are unfamiliar with US business practices and customer expectations, and, those hired as a result of increasing turnover levels. Further, "Americana" training and accent-neutralization programs are required in places like India.
Instability. In many offshore environments, the risk of political and social unrest is ever present, with fears regarding illegal markets, crime, employee security, IT theft, and intellectual property.
Language. Language issues have historically been a challenge in outsourcing to places like India, but to a lesser extent in the Philippines.
Customer Satisfaction. Resulting in part from language and cultural issues, agents often take significantly longer to resolve problems, and customer satisfaction scores decline due to their frustration.
Corporate Reputation. Increasingly, companies are being challenged for supporting countries with poor human rights records and lax labor standards.
How Can Companies Decide Which Way to Go?
Given the stakes and the complexities involved in the onshoring versus offshoring debate, companies should:
- Evaluate corporate needs and understand the magnitude of potential labor savings. Ask yourself, do we really have an optimal workforce footprint? Are there better labor pools out there for our specific job descriptions?
- Learn from other companies that have gone through this process to hear first-hand about the value, savings and how to avoid expensive mistakes. While circumstances are never exactly the same, best practices will emerge.
- Perform periodic comprehensive comparisons of existing and prospective labor pools to identify optimal labor and operational savings that will help improve shareholder value.
- Compare Tier II and Tier III cities as part of your ongoing strategic workforce footprint optimization.
- Identify incentives and grants that are available for your specific project.
For more information on this topic, contact Tim Myllykangas ([email protected]) or Mitch Jacoby ([email protected])
in the Workplace & Location Planning (W&LP) group at Cresa in Boston.