Is Reshoring of IT Services Losing Steam?

May 18, 2016 3:21 pm | Updated 5 months ago.

Over the last few decades, outsourcing has seemingly gone through a full circle. Let us take a brief look at the various phases that the outsourcing model has gone through:

  1. Phase I: Outsourcing to a local vendor: As the organizations started getting bigger and the markets started getting more and more competitive, the strategic need for each organization was to focus on its core competency and outsource the remaining activities. The companies then reached out to their local vendors and outsourced the work that was considered to be not critical to their core business.
  2. Phase II: Off-shoring: With increased pressure on the companies to reduce cost, find talent to perform diverse set of tasks competently, reduce time to market, support a global customer base and last but not the least to ensure that the organization is ready for the next change in the market scenario, the companies started off-shoring their work, especially relating to Manufacturing, IT, BPO and KPO.
  3. Phase III: Captives: To manage the issues associated with off-shoring relating to cultural differences, language and communication issues, infrastructure incompatibility etc., some large customers opted to have their own captive centers at the offshore location. The idea was to replicate, to the extent possible, the environment that exists within the company at the off-shore location and also having a small number of their people relocating to the Captive Center at the offshore location to manage the cultural and communication differences between the staff of the customer and the vendor.
  4. Phase IV: Near-shoring: While the captives addressed the Cultural and Communication issues to some extent, the customers still needed to deal with the issues relating to distance management and time zone differences. This gave rise to near-shoring where the work was outsourced to a vendor in a nearby country and in a similar time zone.
  5. Phase V: Re-shoring: Re-shoring is a more recent trend where the companies are trying to bring the work that was earlier outsourced, back into the organization or building a new center of excellence that would specialize in a specific service line or product line with the objective of having better management control and creating more local employment.

In the recent past, we have seen some of the large conglomerates like GE, GM, Caterpillar and Star Bucks announce re-shoring of their IT and Manufacturing jobs. Is this trend likely to accelerate or are there only certain types of work that are suitable for re-shoring and hence only those work will be re-shored?

While a number of factors, like rising cost of off-shoring due to salary increases at the vendor end and hike in H1B fees etc. are being cited as the factors that no longer make off-shoring attractive, the strategic reasons that gave rise to off-shoring in the first place are still very pertinent. Due to the competitive market scenario, the companies will continue to be governed by cost, quality, time to market and availability of talent pool. Any organization trying to build all types of skills and expertise in-house may find it to be not only difficult but outright impractical. In-sourcing should, therefore, be considered only for those areas that are very closely integrated with the business of the company. In-sourcing should not be in the areas that are continuously changing and, therefore, forcing the company to make continuous investments simply to keep pace with the changes taking place. Such areas should be left for the outsourced vendors to manage while the company continues to focus on its core competency.

The companies are, therefore, beginning to look at “Right-sourcing” that meets the specific needs of the individual organizations and more importantly aligned to their business goal.