Offshoring – the strategy of locating a business function in another country to reduce operating costs – has been around for a long time. However, the past couple of decades have seen US and European companies embracing the strategy at a pace never seen before. Enabled by improving technology and communications infrastructures, companies have been seeking ways to move operations to lower cost markets, particularly countries such as China, India and the Philippines.

While the media and business world have spent a great deal of time discussing offshoring, a new term has come into use in recent years: 'reshoring'. Reshoring means bringing a business operation back to its home country after having located it abroad. It is a confirmed phenomenon, occurring in response to factors which will be explored in this article. However, reshoring has not replaced offshoring, as some headlines may suggest, and reshoring is unlikely to happen at the same speed as offshoring, at least in the business process outsourcing (BPO), IT and shared services sectors.


Who is reshoring and why?

While a variety of entities have attempted to characterise the extent of reshoring among manufacturing operations, there has been relatively little tracking of such movements in the corporate services sectors. Anecdotal information available through the media serves to identify the trend but has not gone so far as to quantify the trend. Furthermore, reshoring is an appealing topic in the US and Europe, which has likely led to more media coverage and political discourse than is actually warranted.

Additionally, mixed in the conversation are investment projects which five or 10 years ago would have automatically been slated for offshoring but are now being launched in domestic markets. These projects, while evidence of the reemergence of certain job types in the US and Europe, are not associated with a recall of something currently being done overseas, and should therefore not be counted as reshoring.

Nevertheless, in the US a wide range of companies, including IBM, Bank of America, General Motors, American Express, Accenture, Carbonite, AT&T and several airlines, have made the decision to bring IT, customer service or other functions back home, particularly from India.

A return journey

While manufacturing reshoring activity has been driven largely by cost considerations, BPO, IT and shared services reshoring decisions have tended to cite quality of service as the primary concern. Companies have felt the impact that distance can have on quality, speed to market and the ability to adapt to changing customer demands, finding specifically that:

  • Thick accents and a lack of local context have made it difficult for offshore customer service representatives to communicate effectively with callers.
  • Managing across languages, cultures and time zones increases the complexity of the business and can put a strain on supervisors and business processes.
  • Managing data privacy and security across borders has proven challenging.
  • Outsourcing contracts, commonly an integral part of offshoring, has encountered quality issues, increased costs due to rising wages, and workforce attrition and turnover problems.

Other factors have also played a role in the reshoring trend, including:

  • Rising labour costs have erased a large portion of the savings to be gained by 'offshoring' to locations such as India and China. 
  • The global recession brought higher unemployment rates, making it easier and less expensive to find and retain labour in the US and Europe.
  • The US and European publics have reacted negatively to offshoring, spurring companies to bring jobs back in order to find favour with consumers.

Offshoring is frequently equated with outsourcing, but they are not interchangeable terms. 'Outsourcing' refers to contracting with a third party to perform a service. The third party may be in another country, in which case the arrangement is termed 'offshore outsourcing', but it is also possible to outsource domestically or to offshore a company-owned facility. Offshore outsourcing has been a popular approach, designed to capture the cost savings of offshoring without incurring the challenges of an owned facility and direct employees overseas. To fully understand reshoring, it must be noted that in some cases it was offshore outsourcing that did not work, not necessarily offshoring itself. 


Reshoring contact centres

Reshoring activity is occurring in the contact centre sector, particularly from India. However, customer service centres abroad have struggled to maintain acceptable levels of customer satisfaction. 

Many of the returning jobs were outsourced overseas – sent out of the country and to a third-party provider.  In some cases, the companies have brought the jobs back in house; in others, they have outsourced the jobs to domestic third parties. There are even some instances of overseas third-party providers establishing operations in the client company’s home country in order to provide a 'domestic' outsourcing option.

While it is not always possible to distinguish between domestic expansion and reshoring, especially among the third-party call-centre providers, there is renewed interest in US and European locations, particularly secondary and tertiary markets where companies hope to find a balance between close-to-customer quality and lower operating costs. In the US, less urbanised areas in Tennessee, Oklahoma, Texas, Pennsylvania and North Carolina have led the country in recent call-centre activity. 

Despite the reshoring response to quality concerns, cost structures remain critical to call centres. Labour costs constitute a dominant portion of overall operating costs, meaning even small savings on a per job basis can result in significant savings to the organisation. Contact centres are not going to turn their backs on cost savings if they can find a way to manage the quality issues simultaneously. 

These issues will likely lead to greater segmentation of activities, with high-interaction customer service occurring in the home markets, and written work – such as transcription, data entry and instant messaging – remaining offshore. 

Is offshoring over?

To say that reshoring has replaced offshoring as the location strategy of choice would be grossly misleading. To the contrary, many offshore initiatives have proven quite successful, and companies continue to seek out new opportunities to lower costs by offshoring operations. The past few years have seen an increase in reshoring activity, thus this has become the focus of attention, but the 'other-shorings' continue to occur.

Rather than replacing offshoring, reshoring is more accurately characterised as a strategy that accompanies offshoring. It is not indicative of a massive reversal of intercontinental investment flows. Reshoring and offshoring – not to mention near-shoring, in-shoring, and any other type of shoring yet to be coined – are simply part of the continuum of location alternatives available to companies in today’s global economy. 

In fact, the most global companies have so many facilities throughout the world that the entire reshoring/offshoring analysis breaks down, replaced by an 'all-shore' or 'right-shore' approach. Companies have become increasingly sophisticated customers of location, attuned to the changing dynamics of wage arbitrage, consumer preferences and currency exchange rates, and they are prepared to adjust their footprint in response. This means that reshoring and offshoring can be expected to continue into the foreseeable future.

Hard to predict

Whether reshoring and offshoring will continue at the same pace is a different question, and there are no clear cut answers. Some industry experts, though not all, feel the major reshoring adjustments have already occurred in the corporate services sectors. Nevertheless, by most accounts, a fair amount of reshoring activity can be expected over the next year or two at a minimum, particularly among operations that had been outsourced overseas. 

The volume of offshoring activity is equally difficult to forecast, with economic forces working both for and against it. 'Near-shoring' – sending jobs to nearby, neighbouring countries rather than other regions of the world – may take a bite out of offshoring if wage levels in far-away locations are no longer perceived to be advantageous enough to warrant the greater distances.

Another potential dampener is the extent to which companies have already offshored everything feasible. Some clients of Biggins Lacy Shapiro & Co report having reached this point. The jobs that remain in the domestic market are tied to higher level, more strategically oriented functions that companies want to keep in the home country. The companies are still on a quest to achieve cost savings through centralising these higher level jobs outside of tier-one cities, but they are focused on lower cost domestic locations for these initiatives. Meanwhile, they are not planning to leverage offshoring further than they already have.

Despite these forces working against offshoring, overseas labour cost advantages have not evaporated entirely and, for margin-sensitive operations, the potential savings will be hard to bypass, especially for those companies that are able to successfully address quality concerns.

It is clear that reshoring of corporate services jobs is occurring, and for reasons of just cause, but not to the exclusion of offshoring. Offshoring and reshoring are integral components of an effective location strategy, and companies will continue to deploy the 'shoring' strategies as their individual situation requires.

Tracey Hyatt Bosman is the managing director of Biggins Lacy Shapiro & Co, a location economics consultancy. Josefien Glaudemans, a partner at Buck Consultants International, contributed to this article.