Why Offshoring Still Makes Business Sense

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Why Offshoring Still Makes Business Sense
Companies that have moved some of their business processes offshore say they are more flexible and agile, making them better able to adapt to competition in challenging economic environments, according to 2011 findings from the Center for International Business Education (CIBER) and the International Offshoring Research Network project at Duke University’s Fuqua School of Business.
In fact, many business leaders say a corporate-wide strategy to guide offshoring decisions is increasingly critical to achieving global company growth through better service quality and process improvements.
“U.S. companies that have diversified the scale and scope of their global sourcing of business services and processes in recent years say they are reaping operational and financial returns,” Arie Lewin, Fuqua professor of strategy and international business and director of CIBER, said in a statement. “For companies that are engaged in offshoring, we’ve seen a significant jump in the number of respondents who say offshoring activities have led to improved organizational flexibility, from 48 percent in 2009 to 66 percent in 2011.”
According to CIBER, cost-savings are no longer the primary driver of offshoring strategies.
“U.S. companies are transferring more of their professional work abroad, especially in the areas of IT infrastructure, application development and maintenance and innovation processes,” Lewin said. “These companies cite a shortage of qualified personnel among the top reasons for utilizing global sourcing of services.”
According to recent research from Hackett Group, Inc., U.S. corporations are expected to move an additional 750,000 jobs in IT, finance and other business services to low-cost locations by 2016. The Hackett Group’s offshoring report reveals that a total of 2.3 million jobs in finance, IT, procurement and HR will have moved offshore by 2016. This represents about one-third of all jobs in these areas.
Many American firms continue to prefer basing their service operations in foreign locations such as India, China and the Philippines, particularly in the areas of IT infrastructure, contact centers and application development and maintenance. According to Hackett’s research, India is by far the most popular destination, with nearly 40 percent of offshore jobs heading there.
Despite the expected near-term rise of offshoring, various findings indicate that offshoring levels will reach a tipping point in a few years.

Why Reshoring Makes More Business Sense
While the move to reshore may be slow, manufacturers are starting to recognize that many factors previously used to justify offshoring have changed dramatically over the past few years – and the potential cost savings are no longer so impressive.
In some cases, offshoring has negatively affected companies’ competitive advantage, limiting growth and revenue. For example, nearly half of the Accenture survey respondents cited problems encountered with cycle or delivery time, and 46 percent experienced product quality concerns as a result of offshored operations.
According to a Boston Consulting Group (BCG) report in April, however, labor costs (57 percent) are the top factor driving future decisions on production relocations.
“As the wage gap between the U.S. and China shrinks, the days of cheap labor in China are waning. The cost of wages in China is on the rise at a predicted 15-20 percent annually, while U.S. wage rates are increasing at a much slower 2 percent clip,” according to a 2012 report by Reynders, McVeigh Capital Management.
Approximately 92 percent of manufacturing executives surveyed by BCG said they believe that labor costs in China will continue to escalate, and 70 percent agreed that sourcing in China is more costly than it looks on paper.
Labor cost savings are just one factor driving companies to consider reshoring. To compete more effectively, according to BCG, a growing number of U.S. companies are
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