The great rush to outsource jobs to lower-cost labor centers on the other side of the globe appears to be over. While many of the jobs that have been outsourced to those locations will remain there forever, there is a new wave of outsourcing and relocating jobs closer to home.
Typically, these are the kinds of jobs that have never been outsourced out of IT departments. They're considered core to the business and they require much higher skills and training than what is typically available offshore. Moreover, experts don't see that equation changing anytime soon.
Forbes caught up with Aditya Pande, partner at McKinsey, to talk about what's behind these shifts and why it's happening now.
Forbes: What's new in outsourcing?
Aditya Pande: We were working with a very large IT organization, looking at what their global footprint should be over time and where should their various IT functions be placed. Their IT services have grown for years and their offshoring is a long-established and very successful operation. But what we found was a subset of IT services that has not moved because the work is classified as "Cannot be moved" for security or other reasons. There also is a subset of IT--somewhere between 25% and 35%--that is just never part of any move because it requires legacy skills or higher skills than are available in outsourcing centers. Most of this work is in high-cost regions, and when companies model it out it becomes uneconomical to outsource.
So what do you do with it?
This sort of work can find a home onshore or near-shore, and it can provide a significant competitive advantage long term.
Is this all about specialization?
That's a piece of it.
Some companies want diversity in the supply base. In the old model everything was moved offshore to one or two mega-centers in parts of Argentina or India. That led them to question whether some of their work could be outsourced closer to home where inflation is low and the economic climate is more predictable.
And where the political climate may be more stable?
That's exactly right.
Is the goal to find economies of scale closer to home?
Yes. You tap into a provider that has scale.
What's the downside of all of this? Offshoring doesn't always work out as well as planned, such as call centers.
The magic of this--and you can argue the downside is when you don't do this well--is figuring out what should be kept onshore. There is an issue around capacity. These onshore centers are not close to the capacity scale of what you can get in Bangalore or Kuala Lumpur. Each of these centers can house 1,000 or 2,000 skilled jobs, so you have to be thoughtful of what jobs you pick. Even if you could find a region in the U.S. where there was enough skilled labor, if it's for lower-skilled work the cost differential would make your case pretty weak. So you have to be thoughtful about what you move. The higher the skill level, the more likely there is a benefit to moving it onshore.
What kinds of skills are we talking about?
If you think about IT services, it's subject matter expertise in areas such as high-end Unix management, mainframe management, mainframe disk management, project management and architecture. Those kinds of jobs are typically deemed level 2.5, level 3 and level 4 in the IT world.
Those are well-paid jobs as well, right?
Yes, but when you see the arbitrage for those kinds of jobs it's a lot lower than for level 0, level 1 and level 1.5 jobs. The other thing is that inflation and attrition offshore is higher. The biggest hurdle, though, is the maturity and depth of experience is not offshore.
When you outsource onshore, what should a company be looking for?
There are a couple of things. One is incentives. When we started working with clients looking for onshore sites we began with 250 cities. Of those, there were 10 or 15 that offered incentives. You have to be thoughtful of the incentives. But you also need a local infrastructure in place to make it sustainable long term. What is the feeder network of skills and what is the in-place competition for talent? You typically want locations with an educational institution where you can collaborate and have them teach these high-end skills, which are not always readily taught. But you also don't want to go into a center with similar skill requirements or you end up in a local war for talent.
What about quality? Can you measure that objectively?
This is something every client wants to know. The bar is set at least as high as what they have, if not better. In terms of measuring that, there are hard metrics around time to respond, the quality of involvement of that skill group and the expertise. Those are skills that are usually already measured in-house. If not, it forces companies to take those measurements. There are also some soft skills around that, too. You sometimes have to talk to people. Quality of language is not an issue onshore, though. Neither is culture. We also find there are people willing to move to lower cost centers, even if it's just for the short term.
Is there continued growth in outsourcing offshore?
It will continue, although it's not growing at the rate it was. But there are many new enablers that will allow offshoring to continue. What's interesting about onshoring is that it's not in competition with offshoring or outsourcing. This complements the piece of work that had never been considered for outsourcing before. By and large, the jobs that have left will not come back. The exception is the high-level jobs that were originally sent offshore. It's much easier to set up onshore. Those jobs are coming back, particularly legacy skills.
In the lower-cost jobs, will those shift from one region to another based upon cost?
For the lower-skilled jobs, the transition time is shorter and quality issues are lower. What may not happen is hopping from one country to another. The providers offering this will continue to retain that because of investments in automation and process improvements. As the work moves to India you can make the case it should hop to China. It's not happening because of investments.
Do their costs go up because of that?
Yes, but it's such a small fraction of the contract that it's not significant. Most customers value the fact that these providers are making investments proactively.
What will IT be when more and more is outsourced?
In many cases, these higher-end jobs aren't outsourced. They're captively nearshored. They still retain the employees. That's part one. But if they continue to outsource, it enables them to refocus on what the business needs. They become the group in between to enable businesses to get to those goals.
How much changes depending on the size of a company?
If you have sufficient scale, you can run it yourself. You can think about onshore, offshore and internal improvements. They don't reduce headcount. They redeploy. In other cases, where you don't have scale, you can partner with a provider to tap the offshore and the emerging low-cost onshore markets and invest in process improvements.
Do newer companies outsource everything?
There's a break point around scale. If a company has less than 1,000, or maybe even 500 employees, they're proactively understanding what providers can give them. If they are larger, they will still talk with providers. Many of the largest contracts are with very large companies. But in some cases they will also consider setting up their own captive centers.
Is security an issue in all of this?
Security is still one of the top three issues for all CIOs. But security is more robust than it ever was. But it's still high on everyone's mind, and it's particularly high on the list for those who separate the work from the people who do it.