Offshoring – the strategy of locating a business function in another country to reduce operating costs – has been around for a long time. However, the past couple of decades have seen US and European companies embracing the strategy at a pace never seen before. Enabled by improving technology and communications infrastructures, companies have been seeking ways to move operations to lower cost markets, particularly countries such as China, India and the Philippines.

While the media and business world have spent a great deal of time discussing offshoring, a new term has come into use in recent years: 'reshoring'. Reshoring means bringing a business operation back to its home country after having located it abroad. It is a confirmed phenomenon, occurring in response to factors which will be explored in this article. However, reshoring has not replaced offshoring, as some headlines may suggest, and reshoring is unlikely to happen at the same speed as offshoring, at least in the business process outsourcing (BPO), IT and shared services sectors.

Who is reshoring and why?

While a variety of entities have attempted to characterize the extent of reshoring among manufacturing operations, there has been relatively little tracking of such movements in the corporate services sectors. Anecdotal information available through the media serves to identify the trend but has not gone so far as to quantify the trend. Furthermore, reshoring is an appealing topic in the US and Europe, which has likely led to more media coverage and political discourse than is actually warranted.

Additionally, mixed in the conversation are investment projects which five or 10 years ago would have automatically been slated for offshoring but are now being launched in domestic markets. These projects, while evidence of the reemergence of certain job types in the US and Europe, are not associated with a recall of something currently being done overseas, and should therefore not be counted as reshoring.

Nevertheless, in the US a wide range of companies, including IBM, Bank of America, General Motors, American Express, Accenture, Carbonite, AT&T and several airlines, have made the decision to bring IT, customer service or other functions back home, particularly from India.

A return journey

While manufacturing reshoring activity has been driven largely by cost considerations, BPO, IT and shared services reshoring decisions have tended to cite quality of service as the primary concern. Companies have felt the impact that distance can have on quality, speed to market and the ability to adapt to changing customer demands, finding specifically that:

• Thick accents and a lack of local context have made it difficult for offshore customer service representatives to communicate effectively with callers.
• Managing across languages, cultures and time zones increases the complexity of the business and can put a strain on supervisors and business processes.
• Managing data privacy and security across borders has proven challenging.
• Outsourcing contracts, commonly an integral part of offshoring, has encountered quality issues, increased costs due to rising wages, and workforce attrition and turnover problems.

Other factors have also played a role in the reshoring trend, including:

• Rising labor costs have erased a large portion of the savings to be gained by 'offshoring' to locations such as India and China.
• The global recession brought higher unemployment rates, making it easier and less expensive to find and retain labor in the US and Europe.
• The US and European publics have reacted negatively to offshoring, spurring companies to bring jobs back in order to find favor with consumers.

Offshoring is frequently equated with outsourcing, but they are not interchangeable terms. 'Outsourcing' refers to contracting with a third party to perform a service. The third party may be in another country, in which case the arrangement is termed 'offshore outsourcing', but it is also possible to outsource domestically or to offshore a company-owned facility. Offshore outsourcing has been a popular approach, designed to capture the cost savings of offshoring without incurring the challenges of an owned facility and direct employees overseas. To fully understand reshoring, it must be noted that in some cases it was offshore outsourcing that did not work, not necessarily offshoring itself.