I’d like to devote a few posts to a topic rarely discussed on this blog, or even in the wider offshore journalism world. It’s the concept of ‘onshoring’ or ‘rural sourcing’. In other words, US companies outsourcing to US vendors. The vendors set up operations in rural towns where wages are a fraction of what they would be in larger cities, but because of the recession and all the tech job cuts, skilled IT workers are readily available and very eager to work. Driving costs down even further, most of those employees are able to work from home, which means the vendor usually does not even have to pay for a brick-and-mortar delivery center, or worry about many overheads.
And for the buy-side, it’s very easy to see the attraction. After the global recession, companies are still searching for ways to make their operations more streamlined and cost effective. Yes, offshore locations are still much cheaper than working in the US, but with rising wage inflation in outsourcing standbys like India and Brazil, that may not be the case for long.
Location vs new methodology
Last year, onshoring seemed to be the biggest topic out there, but not so much anymore. The reason is that last year everyone was still focused on location. In other words, if I can find the cheapest location for my project, that will bring my costs down. Not anymore. Now executives are thinking, if I can raise my productivity, that will make my profits go up, even if the costs are higher. New technologies like cloud are quickly diminishing the need for location-specific IT software sourcing.
On the other hand, new methodologies like Agile are where the onshore really has the advantage. The highly iterative and collaborative software work required between the vendor’s and client’s teams, means that Agile development is best performed as close as possible.
Among the wave of companies moving onshore in the aftermath of the recession have been many Indian players like Infosys, HCL, Wipro and TCS, and also notably, Softtek. Much of that effort comes from these vendors focusing on US clients to grow their business, but part of it is the desire to grow their delivery capabilities onshore.
But the main drivers of the onshore wave are smaller IT providers in rural American towns that have built a virtual network across the US. They can’t handle the scale that the multinational vendors can, but they’re reporting huge demand for their services. And they all push higher productivity and more qualified workers as their main advantages, not cost.
The purpose of the onshore industry is not really to be the main service location for clients, but rather be a complement to locations like India and Latin America. Many companies have implemented a model in which the standardized or labor intensive work is done offshore where costs are low and labor scalability is an option, while the more complex functions are performed onshore. That allows companies to be much more involved, especially in high end software development. It seems to be working well.
In my next post, we’ll try to get at the real costs of onshoring, and whether they can be justified.