Backshoring-Reverse Globalization

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:

reverse Globalization Backshoring Reverse Globalization

  • 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.


Comments

2 Responses to “Backshoring-Reverse Globalization”

  1. Johnny Daugaard on February 11th, 2010 3:27 am

    Companies increasingly consider communications and trust being important parameters when evaluating their outsourcing strategy. The cultural differences are now recognized as being a major factor to why outsourcing agreements succeed or fail.

    In this context is is important to look at how individual companies act and market themselves when offering their outsourcing services to corporations abroad. And it is important to accept that countries build up a reputation, which in fact is very fragile.

    A very comprehensive study was made a couple of years ago by Stefan Maard in how trust and confidence effects decision taking in IT outsourcing. It was very clear from this study that trust had a major effect in who corporations initially selected as potential suppliers, but when it came down to the wire when contracts were signed trust was no longer an issue. Expectations, control mechanisms and penalty clauses had replaced the softer considerations behind the choice of supplier.

    When subsequently +65% of all outsourcing agreements are considered not meeting expectations by neither the customer nor the supplier the main argument is that they no longer trust each other doing the utmost to deliver according to the promises which originally were the reason for choosing each other for a partnership. Trust comes back as a hot issue.

    So its all about communications and managing expectations. No outsourcing agreement will ever turn out successful if the parties only act according to the words of the contract. No supplier will ever be successful if he only delivers according to specifications.

    In this context cultures are so extremely important. Look at the asian countries. The “smaller” countries have the advantage that culturally they never were able to live in “their own world”. The were forced to listen and to adapt. Contrary to especially China, who never really listened to anybody.

    Therefore low prices on labour is no longer enough. Therefore, after the first euphoria, corporations looking for outsourcing partners are looking towards a broader spectrum of countries. Therefore backsourcing will be a hotter and hotter theme until a new equilibrium is being reached.

    And therefore the articles in the economist or in any other magazine or newspaper are NOT symptoms of reverse globalization. They are symptoms of much more mature corporations, who have recognized low price does not equal high quality.

    When all this is said it cannot be ignored that in the so called financial crisis situation a lot a companies have excess production capacity, which can be filled by backsourcing. The conclusion made from this is that buying outsourcing services is still to a high degree considered a operational method of increasing flexibility rather than a strategic sourcing decision.

  2. Steve Cunningham on February 15th, 2010 12:46 pm

    As a supplier of outsourced sales & marketing solutions for complex sales in North America. We are seeing the trend mentioned in this article. Corporations that sell complex products/services such as technology solutions and bio-tech solutions are experiencing two main factors as the result of going offshore for sales services.
    1) The quality is not sufficient due to the cultural barriers which go beyond the ability to speak the buyers’ language. There is a gap in understanding the buyers needs, expectations, and desired next steps.
    2) Burning up the prospect list. Corporations selling complex/products and services are realizing that they may be burning up their prospects by portraying a compromising initial image that deminishes trust and relationship.

    There is no way around the fact that a relationship is truly one of the most important factors of a complex sale.

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