Rethinking outsourcing and offshoring for businesses

Over the past decade, multinational companies have been engaging the practices of outsourcing and offshoring of business operations. A special report by Tamzin Booth for The Economist says that today, however, a lot of companies are rethinking their offshoring and outsourcing strategies.

In the article entitled Here, there and everywhere, Booth claims that there are three reasons why the offshoring approach is losing its charm among rich-world businesses.

But before anything else, it is important to demarcate between outsourcing and offshoring – two terms that are often used interchangeably, and incorrectly, at that. Outsourcing is simply the process of sending work to be done outside the company to another firm in the same or a foreign country; while offshoring is sending work from one country to another, either to the company’s branch in another country or to another firm.

According to the article, the first reason behind this drop in outsourcing and offshoring among American and European companies is the fact that the global labour arbitrage that has existed for the past few decades has gone away (or been reduced). The term “global labour arbitrage” was used to refer to the big gap in labour costs and wage rates between the rich world and the developing world.

Another reason is that this labour arbitrage of sorts simply does not matter so much anymore. This because the great increase in industrial automation has rendered the difference in labour costs insignificantly and therefore with less impact.

The third reason is that because of differences in the way operations are made in offshore firms, the “savings” that companies supposed they would make by hiring low-cost employees do not materialise.

One good example cited in the article is the case of General Motors, which decided to bring previously outsourced processes back to their own house. The reason behind this, Booth explains is that in outsourcing, the focus is on “running things just as they are” or simply getting the job done, as opposed to innovating and improving the current and traditional practices. However, what General Motors wants is new and innovative ideas, something that Booth says is much better done in-house.

Another case used in the report is that of Lenovo’s. The tech company has decided to restore its PC-manufacturing aspect back to the United States in an effort to personalize and customize its services by moving closer to its primary market. And the thing is that the labour cost cap is not that big, like it was before, because the company now has more automation in its US factories.

Additionally, Booth reveals that a great number of call centres (which, for a long time, flooded developing countries with English-speaking workers, such as India and the Philippines) have moved back to rich world markets. While call centres and other services are still widely outsourced in different countries, some research firms predict that outsourcing of services will stop entirely by 2022.

This issue may not seem relevant for small and mid-sized businesses as it is for multinationals; but it speaks so much about the fleeting nature of “business trends” and the sheer importance of innovation and constant change for all businesses. Furthermore, aside from examining the impacts of such practices on big businesses, it is also worthwhile to ask: how does this affect the economy and employment levels in developing countries wherein business processes were previously outsourced?

Knut Harald Nylænde is the CEO and founder of the Moxie Group, an investments firm based in Oslo. Founded in 1999, Moxie is an investment and advisory company engaged in different industries such as company funds security, technology, trade, commerce, consulting services, real estate investment and business development.