Category Archives: International Strategy

A recent issue of The Economist magazine contained a timely special report on offshoring and outsourcing.

In a series of insightful articles, the magazine highlighted the trend of companies rethinking their offshoring strategies and bringing work back home (see Welcome Home).

According to The Economist, the “reshoring” trend is being driven not only by increased automation in manufacturing, but also by rising labor costs.

…The pull of low-wage countries is weakening. In a survey of big American manufacturers by the Boston Consulting Group last spring, nearly two-fifths of firms said they were either planning to move or thinking about moving production facilities from China back home…Consultants at both BCG and Alix Partners reckon that by 2015 it will cost about the same for an American firm to manufacture in America as in China.

It is only natural that as labor becomes increasingly more expensive overseas, and as automation tools become increasingly cost competitive, companies will reconsider their decision to offshore work. But the calculus doesn’t end there.

Western firms are also finding that innovation is easier when manufacturing is in the same place as research…early pioneers of services offshoring are bringing work back home, having discovered that looking after customers and developing new IT tools are in fact a “core” part of business.

It’s not solely about the nominal wage differences, but the hidden costs associated with managing far-flung activities. In many cases, cost differentials don’t compensate for quality differentials or its long-term strategic consequences. As I mentioned in prior blog posts (see Small Business Reevaluate Outsourcing and Revisiting Outsourcing Again):

…managers typically overestimate the benefits of offshore outsourcing (i.e., the ability to access cheap labor) and underestimate its costs (e.g., those born out of cultural, political, economic, and regulatory differences across countries)…[offshore] outsourcing is not without strategic consequences.

Although the economics of outsourcing can seem compelling on its face, the trend toward “reshoring” seems to suggest that managers are finally starting to recognize that the benefits are not quite what they seem.

With all that in mind, I invite you to take a closer look at The Economist special report. You can also watch the accompanying (embedded) video introducing the special report. Enjoy!