February 8, 2010
In recent years, “backshoring” has occasionally been noticed by outsourcing observers (including us) and the media. However, backshoring may increasingly become the buzzword of the future as the global economic downturn is proving to be a game changer for outsourcing and globalization in general. In fact, here are some backshoring trends or statistics that have recently been mentioned by the media:
- Last December, a columnist in The Scotsmen noted a survey by UK manufacturers trade body EEF and accountancy firm BDO which purported to show that disenchantment has set in with “abroad.” According to the survey, 14% of manufacturers who had moved production overseas in the past two years had already moved it back to the UK. The two major factors cited were shoddy quality from overseas work and rising logistics costs. In addition, rising labor cost along with rising living standards in parts of Eastern Europe and Asia and the weakness of the pound now means that shifting production overseas is not the no-brainer decision it once was. Moreover, the survey also revealed that three in five companies were concerned about the financial health of their suppliers overseas.
- Last January, Newsweek’s Wealth of Nations blog noted that US$145-a-barrel oil which sent shipping costs sky high in 2008 was the first hint that there may be limitations with globalization while the downturn is now forcing companies to rethink their strategy of heading abroad. The blog post then mentioned a recent survey by IT outsourcing firm Cognizant that found that 40% of European firms had cut back their outsourcing plans in 2009. In addition, the post mentioned a survey by Germany’s Fraunhofer Institute which showed a trend towards bringing production back home. In fact, one firm is now returning to Germany for every three firms going abroad compared with one in six back in 2003 while some companies are abandoning China for the first time since 1995. According to the author of the study, firms are now focused on cutting excess capacity rather than just slashing costs and if countries begin to put a price on carbon emissions which results in a rise in the cost of shipping, there could be a revival of Western manufacturing.
- Last January, an article in the Toronto Star quoted Information Week as saying that confidence is dropping in the ability of Indian IT outsourcers to deliver value for a company and its shareholders. In fact, 58% of US firms surveyed in January had indicated that they believe less strongly than they did two years ago in the value proposition offered by Indian IT outsourcers. Moreover, the article quoted a survey by BDO Seidman LLP that showed that 22% of survey respondents had indicated the USA was the most likely outsourcing destination they considered in 2009 compared with 16% for China and 13% for India.
Of course, most of the backshoring trends or statistics that are cited above or in other accounts over the years involve the manufacturing sector – which tends to get whacked by rising freight costs due to changes in the price of oil. However, the tyranny of distance combined with any decrease in quality, rise in labor costs and risks associated with suppliers or subcontractors are all concerns associated with the outsourcing of services. Hence, backshoring may be a buzzword we hear more about in the future.