Some fascinating articles into the future of work, sourcing strategies, and the global flow of trade and jobs – have surfaced recently – including a landmark report by The Economist entitled “Coming Home”.

These point to a growing trend towards “re-shoring” – bringing home work which was formerly sent offshore (often chasing lower costs) – to be closer to key markets, customers and partners.

The Economist article is just one of dozens, including another closer to home just this week by the Australian Financial Review – “Offshoring Comes Home” - chronicling this phenomenon.

Indeed there is an increasingly widely held view that these deep currents of change to the way services and products are designed, manufactured and delivered are nothing less than the opening salvos in a so-called ‘3rd Industrial Revolution‘.

Without doubt, offshoring and outsourcing (not necessarily, or even often, the same thing) have driven countless cost savings and benefits, and aided the free flow of trade and capital around the globe – but often with a price.

Organisations are now understanding that offshoring in particular, can bring its share of unintended risks and issues, including:

  • Increased supply chain lag, as goods in particular can suffer lengthy and costly delays at sea and even in the air (6 weeks being common for sea voyages)
  • Inefficiencies in service delivery – even if organisations are service based – the cost of timezone lag on getting an answer or result when you or your customers need it – can be dramatic, and costly
  • Proximity to key markets – Apple’s famous “Designed in California. Made in China.” product marketing strap-line seemed well considered – even funny – when it was first used, but where’s the logic when those same products come back to California (and elsewhere) to end consumers – but now with a 6-8 week lag had they been assembled locally.  An issue exacerbated by levels of competition that are sky-rocketing – giving companies like Apple real cause to look at decreasing lead times and increasing customer intimacy
  • Diminishing labour arbitrage – some analysts are now forecasting that by the end of the decade, if not well before, the unit cost of labour in China will have equalised with North America.  Talk about a short-lived labour arbitrage equation!  Labour in developing countries is rapidly attaining the kinds of working conditions, rates and rights that took decades to achieve in the West – fast closing the gap, and making traditional arguments for offshoring moot or at least challenging their fiscal underpinnings
  • Access to key skills – organisations are finding that as the labour component of products and services diminishes (due to technology and automation – in products and services), the skills that are required are knowledge workers. And the supply for these highly sought after workers is finite
  • Sovereign and commercial risk – why send your best designs and technology overseas and risk the theft of valuable IP?  Levels of commercial and state-sponsored espionage are now higher than during the Cold War – leading to a boon in the security industry.  And cases of ‘nationalisations’ of foreign assets and technology are sadly not a thing of the past. One need only need look at recent events in parts of South America

The list goes on – but that’s not the point we’re trying to make here.  We’re not at all against offshoring, or outsourcing.

Offshoring and outsourcing strategies make sense when they are well thought through – and they will surely continue to be well used by business – albeit with vastly more rigorous business cases and sober assessments of the goals sought.

Instead, we’re making the case for ‘Intelligent Sourcing‘, delivered by change-aware organisations, with the explicit goal of driving enduring competitive advantage.

The opportunities afforded by ‘intelligent sourcing’ (of which we would argue reshoring and outsourcing are merely components) include:

  1. To selectively locate design, production and service facilities closer to customers and markets – not only to reduce supply chain latency, but also to gain greater customer intimacy.  American Express famously relocated its offshored call centres back to Sydney a number of years ago, responding to customer dissatisfaction over service levels.  Even the offshore-based outsourcing leaders themselves are getting on the case, with Infosys and other global Indian titans opening dozens of local offices in USA and other Western markets – and competing on complex capabilities over transporting time-consuming basic work overseas
  2. To think in terms of achieving durable competitive advantage and capabilities, rather than just cost.  One of Catalyste’s clients is in the process of offshoring and outsourcing several hundred key customer service and sales roles to a global leader in its field.  A familiar sounding story, perhaps…  But this transaction will not only reduce transaction costs, it will give the organisation access to capability that it simply wouldn’t have been able to develop economically in-house, in rapid time.  Oh, and they’ve also carefully selected a location which is known as a premium location for customer service delivery
  3. To analyse their own business models, take a look at what they genuinely do better than anyone else, and partner to deliver the rest the most cost effectively.  This was the original USP of outsourcing, but organisations today have access to so much better technology and capability delivered realt-time on the web (and billed flexibly)  - that whole new possibilities are opening up.  Why do we need to maintain an entire IT infrastructure onsite when Google Apps provides us (and increasingly many of our clients) with a virtual ‘IT capability in a box’ for $5 per user per month (or less)?!  Yes, I know, this is just one example, but without doubt business has changed irrevocably – something I refer to as the ‘Business 2.0′ phenomenon

All of the above applies to nations as well.  The nations (and organisations) that will lead tomorrow (and even today) will be those who nurture and develop talent; foster a truly flexible and productive workforce; and who partner intelligently with organisations and even other nations to attract capital of all kinds.

And its worth remembering as well, that none of this will happen – either at organisational level or beyond – without managers and leaders who can effectively set out, lead and manage the transitions necessary for their organisations and people to succeed.

Change can be driven forward – even forcefully – but at what cost to the same individuals we are relying on to deliver the exceptional customer service, innovation, critical thinking and ability to tailor solutions to increasingly finessed customer needs?  Surely we’ve learned something from the nearly 10 decades since the Hawthorne Studies

This is where intelligence needs to apply to leadership development, strategy execution, program delivery and organisational change management.

Those organisations in particular who invest and develop these capabilities – and build a culture of learning and participation in the process – will reap the rewards faster and more effectively than their competitors.

And it is this combination of capabilities and exceptional execution of strategy, delivered in a ‘change aware’ way – not just great ideas or management fads – that  will deliver durable competitive advantage.  I look forward to the exciting times ahead !

Gavin Ger
Managing Director – Catalyste
February, 2013