ELECTRONICALLY REPRINTED FROM
DECEMBER 3, 2013
7 Key Factors Driving the Offshoring of Services
The service sector is increasingly global, and manufacturers employing these firms must
be sure to match their needs to the appropriate resources.
By Jeff Postma, Sandeep Agarwal and Mohit Mohal
R
eshoring, or the return of offshore jobs to highcost U.S. and Western European countries, has
captured the interest of the general public. This
interest has largely been driven by economic recession, high unemployment levels and recent political
rhetoric, supported by extensive media coverage. The
press has often presented reshoring as poetic justice for
profit-hungry corporations that offshored operations to
lower-cost destinations at the expense of local workers
and are now being forced to recant their decisions.
Mainstream media outlets have often presented reshoring as a growing trend, providing select examples
from large corporations. Although the majority of
reshoring examples cited are manufacturing-related
(e.g. Ford, GE, Whirlpool, etc.), a few examples are
cited within the services sector as well (e.g. General
Motors scaling back on IT outsourcing and bringing
jobs to the U.S., airlines closing offshore call centers
and moving them to the U.S.). Different reasons have
been cited for bringing jobs back, including increasing offshore labor costs, poor quality, longer lead
times, and complexity of logistics in moving goods
to the United States. Service jobs, in particular, appear to be repatriated largely to improve the customer
experience.
These observations beg the question: Is reshoring of services an emerging market trend? Although
reshoring has received extensive press coverage,
our assessment shows that reshoring of service jobs
will not be a trend within the foreseeable future. Job
migration in service sectors will continue outward, in
the direction of offshore locations – both to companyowned and outsourced centers.
Seven key factors will drive the continued shift to
offshoring:
Table 1: What are people really looking
for?
Search results in thousands per month
787
19
OUTSOURCING
INSOURCING
Sources: A.T. Kearney Analysis;
Google Adwords
1.Number of search results included under
outsourcing include related keywords
(i.e. Outsourcing, Outsource, Offshoring,
Offshore, IT Outsourcing, BPO, Business
Process Outsourcing)
2.Number of search results included under
insourcing include related keywords (i.e.
Insourcing, Insource, Reshoring)
1. Select Talent Shortage: For large multinationals, especially technology firms, the war for talent
is global. Companies such as Google, Microsoft and
IBM have repeatedly lobbied the U.S. government
for easing of visa sanctions to allow more foreign
workers to expatriate to the U.S. According to the Bureau of Labor Statistics, the unemployment rate for
computer and mathematical occupations in 2012 was
3.6% - below the 4% that observers consider “full
employment.” In the absence of legislative reform,
companies will continue to look offshore to source
talent (see table 2). According to a recent 2013 Talent
Shortage Survey (conducted by Manpower) ~50% of
U.S. employers are facing difficulty in filling jobs,
with the most challenging areas being skilled trades,
engineers and IT staff. A major revamp of America’s
education and immigration policies is needed to address the talent gap and, in the absence of any near- to
medium-term solutions, reshoring of service jobs on
a large scale will be extraordinarily challenging.
Table 2: Engineering Graduates
(per year in thousands)
1,200
1,000
100
China
India
US
23
UK
Sources: WSJ article, AICTE, Fortune
2. Cost Economics: Different dynamics drive repatriation of manufacturing, as compared to services.
A fundamental difference is the ratio of labor cost
as input. As any student of economics will attest, in
manufacturing, investment of capital and automation
can replace labor costs to a large extent. Services,
however, are different. Typical IT, BPO and call center operations have the majority of their costs tied to
labor (~80-90% of total cost).
As the wage gap between high-cost countries and
popular offshoring locations has remained significant
over time, and is unlikely to close anytime soon, we
expect to see a preponderance of outbound, versus
inbound, traffic in the services sector. And this trend
is likely to be supported by the strengthening of some
foreign exchange rates.
While it is important to note that the emergence of
Integrated Voice Response (IVR) has reduced the human component for some services (e.g., bank balance
inquiries), complex calls will continue to require a
human interface for the foreseeable future. And we
expect this human interface to continue to be provided, very significantly, via offshore service groups.
3. Learning Curve: Over 1 million jobs in IT, call
centers, and other outsourced business processes
have been offshored from the U.S. over the last few
years. In addition to the service jobs themselves, the
supervisory roles that are required to manage them,
including schedulers and delivery center managers,
have also left U.S. shores, and the people who filled
those roles in the U.S. have been retrained into other
functions. Conversely, firms in India and the Philippines, for example, have gained (and continued to
develop) expertise for managing service functions,
including oversight of global delivery, large, complex teams and projects, workforce scheduling, and
call queuing and handling routines. Reshoring these
jobs would lead to the loss of efficiencies, potential
customer disruptions, and higher costs than just labor
arbitrage.
4. Globalization: Over the years, outsourcing firms
have become more global. Large IT-focused firms
such as IBM, Accenture, ACS and CapGemini have
expanded their capabilities significantly in low-cost
locations such as India, many to the extent that nonU.S. employees form the majority of their employee
bases. For example, IBM is now India’s second largest private-sector employer, immediately behind Tata
Consulting Services (TCS). On the flip side, large
India-based outsourcing companies (e.g. TCS, Infosys and Wipro) are pushing to increase their presence
in the U.S. through local hiring.
To summarize, large companies today, both in the
U.S. and elsewhere, are much more global than a few
decades back. With greater emphasis on emerging
economies and BRIC countries, companies now want
to be located in, or close to, their biggest markets. As
companies and outsourcing firms become increasingly global, the issue of bringing jobs home becomes
increasingly irrelevant.
5. Political Tides: Over the years, federal and state
governments have taken protectionist steps and enacted policies to discourage outsourcing and offshoring (e.g. prohibiting companies with state and federal
contracts from sending work overseas, levying statelevel tax laws). The Bring Jobs Home Act, a recent development, aims to encourage reshoring (by allowing a
tax credit associated with reshoring jobs) and discourage outsourcing (by denying a tax deduction). Even
if this legislation is enacted, it does not provide an
adequate incentive for corporations to disrupt service
delivery and reshore jobs. Further, denying tax deduc-
Monthly Wage Rates (in USD) –
Call Center Agents
$1800-3200
$800-900
$300-600
US
Philippines
India
Eroding labor arbitrage in India – Myth or reality?
Offshoring critics and pundits have long argued that rising
wage inflation in India will erode the financial attractiveness
of outsourcing. Based on pure economics, assuming ~2%
wage inflation in the U.S. and ~12% inflation in India, it will
take another 25 years for wage arbitrage to erode. The rate of
wage inflation in India varies significantly across different tiers
(i.e. lower at entry level and higher in management and senior
positions). The gap is unlikely to close in the near future – and
even when it does, it is likely that there will be other low-cost
countries where the traffic will be routed.
The other key dynamic to consider is exchange rate—the Indian
Rupee has depreciated 50% in the last 2 years—and as Indian
employees are paid in Rupees, any wage increases only diminish
when the Rupee’s depreciation is taken into account.
Sources: A.T. Kearney research
tions for outsourcing would be tantamount to levying a
punitive tax, which does not work well in a free market
economy. As the U.S. economy stabilizes post-recession, and the fiscal deficit widens, the government’s
ability to fund and enact any laws that will have companies rethink reshoring will be reduced further.
6. Data mobilization and regulations: Initial issues
curtailing the offshoring of many jobs were concerns
about the security of customer-specific data and regulations around what data could (and could not) be
shared with third parties in a different geography. Over
time, however, these more provincial perspectives
have been reshaped to embrace the global nature of
today’s economy. Customer data is a target for hackers irrespective of geographic location. Recent high
profile break-ins in U.S.-based companies (and the Department of Defense) have raised awareness of these
issues to the larger public. And this favorably positions
the largest global outsourcing companies. While most
large outsourcing firms (e.g. IBM, TCS, etc.) have
large organizations and technical solutions dedicated
to securing data and systems, smaller companies cannot afford risk mitigation on such a grand scale.
Technical solutions have also helped overcome
many of the security-related issues resulting from
rogue agent behavior (although it still occurs). For
example, virtual desktops enabled by high bandwidth
connections allow agents to see—but not store—data
on their systems. In many parts of the world, strict
employee regulations, many of which would be un-
enforceable in North America, also help to maintain
data security and prevent fraudulent transactions.
These regulations include banning mobile phones
on agent floors, paperless offices, and airport-level
frisking of employees on arrival and departure from
the office, including checking office bags. Reshoring
previously offshored positions would require many
of these regulations and processes to be set up locally, which, aside from being a challenge to enforce,
would offer no incremental advantage to the companies or their customers.
OFFSHORING: THE NEW NORMAL
7. Offshoring is becoming the new normal: Offshoring was relatively new to the customers of virtually all types of corporations in the late 1990s and
early years of the 21st century. It received a lot of
poor press, some of it well deserved, as firms rushed
to reap the benefits of offshoring without considering the impact on customers. However, the practice
has since gained gradual acceptance from customers,
who now expect—or are resigned to the fact— that
their calls may be answered by an offshore agent.
Today, companies approach offshoring more holistically, evaluating carefully the core objectives and
benefits of doing so.
Within the evolving outsourcing and offshoring
environment, ‘rightshoring’ is a critical consideration (i.e., defining what services should be retained
onshore and specifically what geographic locations
across the globe make most sense for services being
outsourced). For example, “soft” calls with significant customer interaction may go to the Philippines,
bilinguals may go to Latin America, but technical
calls—or those with more challenging solutions
(think mid-stage collections)—may still be better
routed to India. In cases where the level of daily interaction between headquarters and outsourced service
centers is high, ‘nearshoring’ within a similar time
zone may be an important consideration, as well.
Organizations that ignore the matching of service
types to location often face difficult and unrewarding
offshoring experiences. Given the trend toward rightshoring, third-party suppliers no longer offer a single
location solution to clients, but instead, offer a menu
of services across different locations to facilitate a
holistic customer experience.
Reshoring is recalibration, not a broad trend: In
manufacturing, reshoring is found, at most, to a limited degree. For services, most of the traffic today is
outbound and, in absence of any significant legislative
changes, we expect this trend to continue. Nevertheless, select examples of high value work being brought
back onshore will continue to exist, garnering media
attention and fascinating the broader public.
As outsourcing evolves, India will no longer be the
right answer for all offshoring efforts. In the last two
decades, companies went to India primarily for cost
savings and talent. We believe that, with the increasing maturity of the outsourcing market, other key
offshoring locations (mainly the Philippines, Poland,
Romania, and Mexico) will continue to challenge the
established destination leaders. Smaller centers will
continue to exist (e.g. the Caribbean, Guatemala) but
will likely not grow. And the U.S. will continue to
retain high value work onshore (e.g. customer-facing
voice, mobile app development).
So what does this mean for an executive looking at
offshoring?
1. The value from offshoring as an important
element of a multinational delivery strategy
is here to stay, and successful companies and
business executives will continue to offshore
increasingly complex work, moving it to lower
cost locations.
2. Offshoring dynamics are changing, and outsourcing strategies should focus primarily on
addressing rightshoring.
3. Businesses that have already outsourced specific functions need to continue to refine their
scope, as their suppliers become increasingly
mature and their customers become increasingly demanding.
Jeff Postma is a principal with A.T. Kearney. He is
based in Chicago and can be reached at jeff.postma@
atkearney.com. Sandeep Agarwal and Mohit Mohal
are consultants with A.T. Kearney. They are based in
Toronto and Chicago respectively.
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