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(originally published by Booz & Company)


Is Backshoring the New Offshoring?

The business press is touting a return of offshored jobs to the U.S. — but we’re not buying it.

Dell. Apple. American Express. Much hay has been made of the decision by these and other U.S. companies to scale back some of their offshore customer service operations after learning some hard lessons. In particular, companies discovered that angry customers have little tolerance for complaint desks located thousands of miles away in distant countries.

But do these repatriations of offshore jobs mark significant new attitudes toward offshoring? The business press appears to consider it a trend, even going so far as to point to a new twist: reverse offshoring or “backshoring,” exemplified by information providers like India’s Wipro and TCS, which have recently increased their presence in the United States.

This has sparked a lively discussion, much hand-wringing, and many articles in the Wall Street Journal, Business Week, and other business publications. But the question should come down to this: Are we witnessing a major shift in the direction and dynamics of offshoring? The answer, we have concluded, is no. Or, at least, not yet.

As the concept of offshoring matures and settles, companies and vendors can expect a natural rebalancing as they determine what work can best be performed where. The U.S. will, no doubt, gain and lose some ground in the process. Indeed, companies have begun to rethink their offshoring decisions in a way that ultimately will render “offshore” and “onshore” no longer meaningful or relevant. Instead, companies are making choices about the best place to do a given piece of work — be it offshore, onshore, or nearshore. As this transformation occurs, work is being spread throughout the world and companies are globalizing to keep up. But we’re only at the beginning of that process, and we won’t witness the full effects for quite some time. Traditional offshoring, as we know it, is by no means dead.

Backshore decisions are occurring now only under unusual circumstances. For example, when Dell’s customers began to grouse about the perceived inability of foreign-sounding customer service representatives to solve their problems, the company’s sales were already suffering due to complaints about poor product quality and service. Consequently, to eliminate a black mark on its reputation that it couldn’t afford in a highly competitive market — and to remove the thorn in the side of customers who were in no mood for more inconvenience — Dell chose to repatriate telephone service operations from India to semirural locations in the U.S., such as Twin Falls, Idaho.

At present, moves like Dell’s are fairly rare. In fact, a survey of more than 600 global companies conducted this year by Duke University found that three-quarters of U.S. businesses plan to offshore more customer service operations. Despite the falling dollar and relatively low labor and real estate costs in semirural America, the U.S. cannot compete with the economics or demographics of India and other emerging markets players. Although warnings about rising offshore labor costs make for juicy copy, the sheer number of new entrants into the skilled labor pool in developing countries will keep offshore labor prices competitive relative to the U.S. for the foreseeable future. Indeed, as America’s baby boomers enter their retirement years, it will be hard for many would-be backshoring companies to find skilled workers in the U.S. to do the tasks that they offshore now. In negotiations with one of its unions last year, AT&T agreed to return home 5,000 customer service jobs from India. But CEO Randall Stephenson reported that the company couldn’t find enough workers with the right skills to fill the jobs; AT&T had to saddle itself with an unanticipated training program to bring new workers up to snuff. The experience caused the company to slow down moves toward job repatriation.

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  1. Amy Bernstein, editor, Outsourcing Thought Leaders: Managing Business without Borders (strategy+business Books, 2006): Executives of outsourcing providers and companies that outsource discuss the latest trends.
  2. Vinay Couto and Ashok Divakaran, “How to Be an Outsourcing Virtuoso,” s+b, Autumn 2006: Details the ways in which the outsourcing industry is becoming ever more sophisticated and, for many customers, indispensable.
  3. Vinay Couto, Mahadeva Mani, Arie Y. Lewin , and Carine Peeters, “The Globalization of White-Collar Work: The Facts and Fallout of Next-Generation Offshoring” (PDF), Booz & Company white paper, May 2008: Discusses results of an offshoring survey and argues that outsourcing is no longer about moving jobs elsewhere; it’s about sourcing all types of jobs everywhere.
  4. Vinay Couto, Arie Y. Lewin, Mahadeva Mani, and Vikas Sehgal, “Offshoring the Brains as Well as the Brawn: Companies Seek Intellectual Talent Beyond Their Borders” (PDF), Booz & Company white paper, September 2008: A survey of global companies finds that innovation is increasingly a target of offshoring.
  5. Kevin Dehoff and Vikas Sehgal, “Innovators without Borders,” s+b, Autumn 2006: Companies offshore their innovation engines to take advantage of global talent and proximity to burgeoning markets.
  6. Arie Y. Lewin, Silvia Massini, and Carine Peeters, “Why Are Companies Offshoring Innovation? The Emerging Global Race for Talent” (PDF), Solvay Business School, CEB Working Paper No. 08/009, March 2008: Researchers in the U.S., U.K., and Belgium argue that more companies are offshoring research and development not just to trim labor costs but for greater efficiency and speed to market. 
  7. Offshoring Research Network Web site: The ORN project at the Fuqua School of Business at Duke University provides stats and other data on offshoring, with links to outside research and analysis.
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