US Onshoring: The Real Costs Are Yet to Come

Last time we explored why onshoring would be extremely attractive to US companies, especially those engaged in complex ITO or software development. The benefits of being in the same country and having English-fluent workers of the same culture are numerous, and the productivity of each human resource will be greater than in most offshore locations. But the fact is that the costs of onshoring, even if it’s rural sourcing, may be too high to justify in a sourcing operation. 

I’d like to refer to an article by John Dragisic on Nearshore Americas titled Facing a Cold, Hard Fact: It’s Costly to Do Business in the US. Dragisic argues that for many outsourced functions, it’s not only less expensive, but more effective to perform them offshore. 

New US labor laws 

In the next four years, new labor laws will come into effect in the US, including higher minimum wage rates, mandated vacation benefits and many other workplace rules, that will all make it more costly for even rural sourcing companies to operate. As Dragisic says, “When the new mandates come into force, it is likely that many US call centers will see their direct and indirect labor costs increase by 10-20%. This will be equivalent to a total cost increase of 5-10%, because labor and benefits represent 50% of total costs for the typical telemarketing company.” For the ones that don’t go out of business because of this, you can bet that at least some of those higher costs will be passed on to their clients. 

Now, I realize that the above argument is restricted to a call center situation. More value added sourcing like IT or software development may benefit more from being in the same country, and from the ability of teams to work closely together in real time. But the main driver for outsourcing is still the need to cut costs. So the question becomes, is the same IT talent available in the Nearshore? Latin America is the next best thing in terms of geographic proximity, and usually a good bargain in terms of wages. Countries like Mexico, Chile and Colombia have some of the most talented IT workforces in the region. 

But technical skill level is not all that’s important. “Firms must determine whether the offshore agents will be able to communicate in English, whether they will be able to understand American consumers or businesspeople, and whether they have a cultural affinity to markets in which they operate” says Dragisic. “After all, saving a buck accomplishes nothing if performance and the quality of service deteriorate.” 

This is all to say that if you’re a US buyer, don’t immediately get caught up in the onshore wave. It has its benefits, but the most successful firms are those that use it as a complement to their other offshore operations.

In my next post, we’ll try to understand whether the rural sourcing trend will actually have an impact on the global services market.