Tag Archives: Offshoring

Reshoring of Services: Is It Just A Matter of Time?

There is a new addition to the x-shoring lexicography—reshoring. Well, I say new because, at the time of writing this, Wikipedia still does not have an entry for it. Else, the trend has been on the rise in the last couple of years. Today, it has reached a stage where one can easily call it a trend, if not the dominating trend.

Reshoring, put simply, is moving offshored operations of a company, back to the country from where it had moved, typically the home country of the company.

“In the last two years, there has been a lot of discussion and excitement around reshoring, as the trend to move manufacturing back to the U.S. is called. In parallel, a growing number of U.S. executives are repatriating their manufacturing capabilities—moving some production operations back from overseas,” noted a report recently published by the MIT Forum For Supply Chain Innovation. The report, titled U.S. Re-shoring: A Turning Point, was conducted among members of the MIT Forum for Supply Chain Innovation and members of the Supply Chain Digest community. As many as 340 participants completed the survey. Some 33.6% respondents stated that they were “considering” bringing manufacturing back to the U.S, though only 15.3% of said that they are “definitively” planning to re-shore activities to the U.S.

The tendency to reshore is not specific to companies of any particular size. Neither is it to any particular segment within manufacturing. Some of the big names that have taken to this include Apple, Caterpillar, NCR, Ford, Master Lock, and Foxconn, representing all types of manufacturing segments, from capital goods to electronics and from contract manufacturing to automotive. And yes, GE, which once led the offshoring wave, has also started reshoring. This very interesting article, The Insourcing Boom in The Atlantic, gives a nice overview of GE Appliance’s genesis of reshoring efforts.  The articles raises some interesting questions that take on the logic of offshoring head on. But I will return to that. Just to make sure, the reshoring trend is not restricted to the likes of GE, Apple and Caterpilar. Smaller companies have also found value in that. Here is a first person account from a small sports apparel company.

Estimates about the magnitude of reshoring varies. But 40,000 to 65,000 jobs in the last three years is a decent range to go by.

While it is early days yet, the opinion seems to be turning in favor of re-shoring. In a recent Economist debate, Do multinational corporations have a duty to maintain a strong presence in their home countries? as many as 54% voted for the motion. While Harry Moser, Founder, Reshoring Initiative, an initiative that aims at mobilizing opinion in favor of reshoring defended the motion, noted economist and author of the book, In Defense of Globalization, Prof Jagdish Bhagwati argued against it.

The debate about offshoring is not new. It has been there ever since offshoring begun and has never really ceased, though it comes to the forefront only during certain phases such as presidential elections.
But usually, the tone has been political. It has been emotions vs cold logic. It has been “politics” vs economics, as some practitioners of offshoring put it.

But for the first time, it seems, cold logic and economics are being used to challenge the benefits of offshoring. This article in The AtlanticWhy We Can All Stop Worrying About Offshoring and Outsourcing, puts forth some arguments, that applies to logic, something that businesses ultimately go by.

One, it argues that labor costs for many businesses may no longer be the critical or even primary factor in global location decisions. Two, it says that the old practice of designing at home and then manufacturing abroad can slow the pace of innovation and product change. And finally, it argues that companies are questioning some of the “outsourcing”  logic and bringing certain functions in-house. While that can still be done by a company owned offshore centre, many re-shoring enthusiasts still see it as a reversal.

The jury is still out on if reshoring will be an industry-wide phenomenon,  one cannot ignore the trend any more.

Will services be affected?

So far, the trend has been seen in the manufacturing industry. All the arguments and facts are about manufacturing industry. What about services—something that really affects India? So far, I haven’t read much about reshoring in services, except for some passing mention of India in some articles while talking about broader offshoring wave.

Does it mean that services offshoring is irreversible? Or does it mean that it is only a matter of time? After all, didn’t offshoring of manufacturing precede services offshoring by a few decades?

To examine if services could follow the same reshoring trend, we must see if the factors that are driving manufacturing reshoring can impact services as well.

Let us start with the the arguments put forward by The Atlantic, as listed above.

Take the first one: labor costs for many businesses may no longer be the critical or even primary factor. We can safely say that when it comes to services industry per se, it is not going to be the case in foreseeable future. So that logic does not really apply.

The second one is more pertinent. And has different dimensions. The old practice of designing at home and then manufacturing abroad can slow the pace of innovation and product change, it argues. That essentially suggests co-location of R&D, design, and manufacturing, and preferably closer to market. Which essentially means that if the demand in emerging markets go up, there is some cold logic for having manufacturing and design there. If one examines from India’s perspectives, for example, it calls for manufacturing capability in India, assuming that the design and R&D capability are well-developed. So, it brings us back to the old debate: whether China develops services capability faster or India develops manufacturing capability faster.

The third point in the article is about inhouse offshore centres. They are not new to India. Popularly called captives and now being labeled as Global Inhouse Centres (GICs), their importance is being acknowledged. One of the NASSCOM forums that actually is seeing a lot of rising interest is the NASSCOM GIC Conclave.

The MIT study identifies six top reasons for reshoring decisions. Time to market was the top reason cited by the manufacturing companies. That only partially affects services industries. The main reason for time lag is not there as there is no movement of atoms,  as in manufacturing. Movement of bits happen in almost real time. However, not co-locating different functional teams could have some impact. But that is usually addressed in a mature offshore services operations. In fact, sometimes having people in different time zones accelerates services delivery, as many companies have found out. The other reasons cited by the respondents from manufacturing industry is cost reduction (I assume supply chain costs as oil prices keep going up), product quality, more control, and IP protection. IP protection is the only reason out of this which could be as important for services as it is for manufacturing.

Reshoring Initiatives, in its website, lists the following reasons for companies to consider reshoring.

1. Reduces Total Cost of Ownership
2. Improves quality and consistency of inputs
3. Reduces pipeline and surge inventory impact on just-in-time operations
4. Clusters manufacturing near R&D facilities, enhancing innovation
5. Reduces intellectual property and regulatory compliance risk
6. Eliminates the waste and instability caused by offshoring

Except for reason 5, none of these apply too much to services.

So, in effect, it does not seem that services would be a candidate for reshoring anytime soon. The only thing that can trigger companies looking at services reshoring is lack of availability of manpower in pockets of skill areas. But those are tactical and not strategic decisions.
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The Not-so-new Arguments of Protectionists

Politicians everywhere are the same. Many a times they are really ignorant. And many times, they just act ignorant. Then, there are the classic fundamentalists in a debate, who are dogmatic, and no logic would convince them. The most dangerous, however, are those who take help of logic and selective facts to argue their point. In reality, they are as dogmatic, but they use logic to project themselves as liberal rationalists because few know the facts and sources that they quote. They often shift the debate to a completely different point in which they may be on stronger wickets but that is of little relevance to the original debate. Apart from some politicians, many in this category happen to be from my profession: media.

I came across this post in ComputerWorld Blog, called Clueless in White House. The whole piece, taken on its face value, argues that the US Vice president Joe Biden “doesn’t know a thing about H1-B visa” and the president Barack Obama was evasive about a question related to US job loss and probably he is also ignorant. So what? Didn’t Michael Moore write about this long back? But that is not the point. What is it that the author is actually hinting at?

You get the answer to that when you read this other piece of his, Indian IT firms heading for a fall. It starts with the sentence, “Indian IT firms understand software but not America.”

And you know what to expect.

The piece cites a few lawsuits that have been filed against Infosys, TCS and L&T Infotech to argue that these lawsuits are the results of the Indian companies’  lack of understanding of America, American spirit and so on, with a conclusion that they are heading for a fall, which comes right on the headline.

It goes on…

The lawsuits are a problem for each of the companies. But taken together, the cases are a major threat to the Indian IT industry in America.

India’s IT firms are dependent on American businesses for about half of their revenue. They can’t operate in this country without work visas, such as H-1B and L-1 visas.

Indian IT firms are dependent on American business. That is a fact. But it is time to put the other side of the story as well: The American businesses are equally dependent on Indian IT workers.  

Anyone who follows the outsourcing trends knows that the share of US revenue as a percentage of overall revenue is falling for most Indian IT companies. The share of offshoring to India as a percentage of total outsourcing contracts in the US is on the rise year after year. Ten years back, Indian companies would not have survived without American business. Ten years hence, American business would not survive without Indian workers.

As Tom Friedman put it so well in his 2005 book, The World is Flat: America must choose the future and not the past.

But let us even forget all that for a moment. Let us go back to the original debate. What is it about? Is it about H1-B visas and L-1 visas? Well, that may the most immediate issue, but the actual debate is whether you need people from outside America to do some of the IT work more efficiently or not?

And let us, for sake of argument, assume that the US government decides it does not need foreign workers. In that case, it must say so rather than creating hurdles in the visa process.

And who is saying that? It is not just Infosys, TCS and L&T Infotech but Accenture, eBay, Microsoft, and GE as well. The letter that the industry sent to the president on this issue is signed by more American companies than Indian companies.

Protectionism is not about politics. It is about fear. America is still the most open society, the most innovative among large nations, and of course, still the biggest economic and military power globally. It may get concerned about employment levels but there is no reason to panic.

 

 

 

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