Supply Chain Management Concerns Prompt Trend Toward Backsourcing

2011 witnessed an increase in backsourcing, which included severing ties with offshore contractors and returning business operations to domestic and local spheres, or even entirely in-house. That trend is continuing even into 2013 as American manufacturing is being reinvigorated by supply chain management concerns that are bringing more positions back home. The individual circumstances behind these failed contracts vary but involve one or more economic, political or business factors:

Increased costs

Quite simply, outsourcing is proving to be more expensive than it was even a few years ago. Wages in popular outsourcing destinations, such as China and India, have been on the rise, narrowing corporations’ predicted profit margins. In 2011, salaries in India, China and the Philippines are expected to rise 13%, 9% and 7%, respectively (Business Standard, Survey Predicts 13% Salary Rise This Year). Rising oil prices are impacting shipping costs, making transportation more prohibitive and some countries, such as China, are restricting or eliminating foreign investment incentives. Due to the initial expense of implementing an offshore operation and the extra costs of travel, training, transitional growing pains and productivity impact of layoffs on even retained employees, companies’ savings are slowly slipping away.

Inconsistency

Though several outsourcing destinations are working to develop an attractive infrastructure and labor force for companies, many businesses are encountering challenges in terms of securing a reliable, knowledgeable foreign workforce, due in part to the extremely high turnover rate and inconsistent English-speaking skills. India has a highly-educated population, but due to varying standards between institutions, command of technology and the English language can run the spectrum between polished and insufficient. For some companies, repatriating their business processes has become necessary enough to absorb the costs, such as in the case of WatchGuard Technologies. “The lack of technical knowledge and experience or qualified candidates and reports of poor customer support make the potential costs seem less important” (Dubie, WatchGuard Pulls Outsourcing Business Out of India).

Political uncertainties

Outsourcing is a hot button in Washington right now, with rampant discussion of altering the tax code to affect companies that outsource positions overseas. The potential for offshoring penalties paired with tax breaks and monetary incentives for those who repatriate jobs is prompting business executives to take note. For instance, one piece of bipartisan legislation put forth by Senator Mark Warner (D) and Representative Frank Wolf (R) calls for a $5,000 loan per repatriated job, to be forgiven after five years (Hoover, Politicos Want to Entice Jobs Back to U.S.).

Customer perception

Customer backlash due to poor service, communication difficulties or negative reaction often prompt a business’ decision to back-source their offshore positions. Some companies view repatriation as a means of smoothing and even improving customer relations. For instance, in 2003, Dell chose to recall jobs it had outsourced to an Indian call center in order to address customer complaints about poor service.

Restoration of control

Corporations that choose not to renew their outsourced contracts typically look to regain more control of their business. Culture clashes can lead to a disconnect between the needs of the company and the service of the contractor, creating a feeling of lost control over essential business processes. Additionally, some corporations find it difficult to uphold quality and visibility standards with segments of their business centralized half a world away. To exacerbate matters for manufacturers, waiting weeks for goods to ship and clear customs delays products reaching store shelves.

Lithe and lean

Modern economic and business climates require companies to transform themselves; successful industry leaders continually look for ways to operate in a leaner, more streamlined fashion. Swift adaptability to changing business trends and requirements is vital, but quickly shifting gears to take advantage of changing markets can be difficult when business operations are scattered across the globe.

Security

Sarbanes-Oxley compliance demands a certain level of data security that can be compromised when handled by overseas contractors. There is sometimes minimal input in the security procedures, hiring decisions or subcontracting processes implemented by the contractor, which is akin to handing over the keys to a cherished car and having little control over who is allowed to drive it. Additionally, outsourcing companies have been battling Intellectual Property theft for years. Most foreign countries do not have the strict IP laws that the United States uses to protect business owners, leaving corporations vulnerable to lost revenue and damaged reputations due to image and idea theft, lax regulations and insufficient enforcement on the part of foreign governments. In some cases, foreign governments actively enable these threats against businesses operating within their borders. “CFOs, asserts [Charles] Dodd, simply do not grasp how profoundly insecure operating in China is. “What happens when you have these corporations in China transmitting sensitive IP [intellectual property] back to headquarters or communicating with their marketing or manufacturing arms in China, and all that information is being monitored?” he asks. “The Chinese see your products in the development stage, so you’re teaching them how to do whatever you’re doing” (Rosenbaum, Playing Dumb with China — and Stupid with Security).

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