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Backshoring: Coming full circle

The new term (one that thankfully cannot be made into an acronym) hitting the psyche of operations professionals is ‘backshoring’. The term is surprisingly self-explanatory and refers to the process of bringing back onshore operations that were previously conducted offshore.

Backshoring is most prevalent in the manufacturing sector, where businesses are beginning to move operations previously sent to offshore “low-cost” locations back on to home soil. The movement is driven by a predominantly economic rationale, the key factors of which are as follows:

  • Inflation – Many of the chosen ‘low cost’ locations are now falling foul of their own success in that increased employment opportunity brings both growth and inflationary pressure to the local economy. This inflation has driven up both salary and infrastructure costs. In short the financial benefits of cheaper manufacturing costs have been eroded.
  • High employment – The increased adoption of the offshoring model has led to increased demand on the work force and has created an increasingly competitive recruitment market. This has led to high attrition rates, which in turn has led to the loss of knowledge, skill and therefore quality.
  • Increased automation – The final rationale given by many is that technological advances have negated the need for a large workforce, thus depleting the business case for a low cost offshore resource.

However, it is not only the manufacturing industry that is adopting backshoring. A number of Banks have brought their call centres back onshore, NatWest and Santander to name but two. I think most would agree that offshore call centres have not been a hit in terms of meeting customer satisfaction and, as such, the backshoring of these functions does not come as a surprise. This considered, how likely is it that the many other operations that have been migrated to offshore locations will also be brought back onshore?

My view is that it is not a case of ‘if’ but ‘when’ this will happen. As balance sheets diminish, banks are left with an inflated operating model. There will be a need to rationalise these models, increase straight through processing (STP), maximise self-services and ‘right size’ at lower costs. To this end, location strategy will be front and centre of discussions.

As managing offshore operations becomes evermore difficult and problematic, an increasing number of operations mangers are seeking to move their operations to nearshore locations. Nearshore locations are attracting a great deal of attention as they enable firms to reap all the benefits of offshoring whilst avoiding the problems outlined above, i.e. inflation and high employment. Additionally, nearshore locations have the added benefit of being located in geographies with time-zones that are closely aligned with those of onshore operations, which eases communications between geographies. Unsurprisingly, in a time where budgets are being squeezed and available resources are being targeted at regulatory compliance initiatives, nearshoring is proving to be an extremely attractive option.

Whether or not firms decide to backshore or nearshore their operations, the days of offshoring are certainly numbered. Lets hope the leases on the offshore buildings in question are negotiable!

Comments: (1)

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 20 September, 2013, 13:25Be the first to give this comment the thumbs up 0 likes

A leading bank in the US reportedly saved 40% of its operating costs by shifting one of its tech shops from Wall Street to New Jersey and another from Long Island to Ohio. Such a shift from metros to semiurban or rural areas - or "middleshoring" as I'll call this trend - is another factor that drives backshoring. However, I expect the impact of this factor to be temporary since middleshoring proves equally cost effective even in the offshore country. Once rural infrastructure improves in India and other offshore countries, the  cost arbitrage between onsite and offshore locations will be restored to its traditional levels, thereby making offshoring from "Middle USA" to "Middle India" as attractive as ever before.