Inside the Hollow Argument that Reshoring is Gaining Momentum in Services
While the headlines may convince you that reshoring is developing into a game-changing trend for our industry, the reality on the ground is far more complex.
We’ve all seen the headlines (well, maybe not the last one): reshoring has supposedly been developing into a game-changing trend for our industry. But is it really that prominent, and should nearshore BPO and services companies be worried?
There’s no doubt that reshoring is happening, particularly in the manufacturing industry. Just look at Ford Motors: the automotive giant just cancelled its $1.6 billion investment in San Luis Potosi, Mexico and chose instead to invest $700 million in its Flat Rock Assembly Plant in Michigan, creating 700 new direct jobs.
While this example of reshoring is certainly one of the biggest, fear not: it definitely doesn’t symbolize the start of a disruptive trend in BPO and IT services.
BPO Reshoring is “Marginal” as Offshoring Expands
According to Cushman & Wakefield, a global real estate services firm, the BPO and shared services industry still represents an “industry on the cusp of dramatic change”. The company’s new report, Where in the World? Business Process Outsourcing and Shared Service Location Index 2016, highlights the challenges that the industry faces on a global level as it continues to expand.
That’s right, as it continues to expand.
The report estimates that based on “robust demand” the global BPO industry is expected to grow annually by 6% until 2022, and predicts even more growth if certain business sectors continue to underpin activity levels.
The authors also point out the on-the-ground realities that contradict the barrage of reshoring headlines. They explain that while reshoring strategies in many consumer-focused sectors such as telecoms and financial services may gain traction, the reality is far more complex.
Tamás Polster, Co-head of Strategic Consulting EMEA & Global Occupier Services at Cushman & Wakefield
“Whilst the few projects taking place are hugely over publicized, it is impossible to have a comprehensive oversight of the job movements taking place within multinationals,” said Tamás Polster, Co-head of Strategic Consulting EMEA & Global Occupier Services at Cushman & Wakefield. “Proportions for white collars are impossible to track but they are massively lower [than in manufacturing]. All my experience, especially in continental Europe, is that reshoring is absolutely marginal.”
Variations in B2B/B2C Reshoring
“The scale of reshoring is relative to the situation,” said Neil McLocklin, Partner & Co-Head of Strategic Consulting EMEA at Cushman & Wakefield. “People love a good news story, so the headlines show that a company returns onshore, but compared to the number of people that went in the first place, it is relatively small.”
McLocklin explains that, in BPO terms, reshoring is mainly happening in customer service, and is a means to enhance the service offered in the B2C markets, such as telecoms, banking, and financial services. “This occurs where foreign dialects or accents distract from the overall customer experience,” he said. “Self-service is the order of the day, so they are reducing the number of people abroad and repatriating some of the jobs, but the biggest drive is to automate in those areas.”
Comparatively, in the B2B market, there is still a massive migration to offshore/nearshore due to increasing competitive pressure to increase value and reduce cost. “Companies across all sectors are constantly re-evaluating which resources should be in high-cost locations and who should be in low-cost locations,” said McLocklin. “In the old days, businesses might have had one or two locations servicing a market, but now they are focusing on creating global centers of excellence. One example is analytics: if there is a balance of cost, access to graduates, a deep knowledge base, and a lack of completion, a location may result in a fantastic center of excellence for analytics as opposed to procurement or more process-driven functions.”
This supports the fact that companies are operating in much more well-defined niches, rather than just focusing in the BPO market in general.
Cost Versus Labor
Anther prediction in the report is that, by 2030, wage levels in emerging markets may become closer to the European and U.S. donor markets, but in the near-term the cost advantage isn’t going anywhere. “Any reduction [in cost] is unlikely to come at the cost of the significant scale demand we have been witnessing and expect to witness over the next five- to ten-year period in cost competitive nearshore and offshore locations,” the report states.
Peter Ryan, Principal at Ryan Strategic Advisory, agrees: “When talking about IT and BPO, the overall cost of reshoring is huge and would need to be passed on to the consumer or the client,” he said. “Secondly, there’s the question of labor force availability. We all know that current attrition levels in the U.S. are catastrophic in the call center space, so being able to find the volume of labor required in the event of a wide scale reshoring trend could be very difficult.”
The wage gap between offshore and nearshore services may be expected to shrink, but for most locations this will take decades to happen, meaning it’s unlikely to be a part of business strategy in the short term.
Relax, there’s No Immediate Threat to Nearshore
Yes, reshoring is happening in BPO, particularly in customer service. There is also an element of B2B reshoring in certain niches, particularly where the back-end is becoming the front-end, such as data analytics. However, against that trend, there is still a huge drive toward lower cost locations that is expected to continue for decades.
Furthermore, experts agree that job creation onshore is more than balancing the scales as technology drives a new waves of careers. “There is no doubt that there are more jobs being offshored than re-shored right now, but there are also new jobs being created onshore that have never existed before, and they are equal if not greater to the quantity being offshored,” concludes McLocklin.