Following Donald Trump‘s election, the corporate world continues to wait in limbo until he takes office and his governing policies become clearer. Uncertain of what business climate is on the horizon, companies with plans to implement an offshore shared services or captive model are particularly concerned, primarily due to Trump’s stance on outsourcing and his protectionism threats.
With over 25 years of experience in shared services, technology, and outsourcing, Phil Searle is a globally recognized expert on these topics, covering both the private and public sectors. Searle is Founder and CEO of Chazey Partners, a global advisory service for business transformation, where he has been the engagement partner on numerous transformation projects all over the world for over ten years. We spoke to Searle to find out what he expects the incoming environment for shared services and captives to look like under Trump’s reign.
Nearshore Americas: Donald Trump’s position on U.S. companies “sending” jobs abroad has been quite clear. Now that the election dust has settled, how have his campaign promises altered the view of potential offshoring deals in the country, if at all?
Phil Searle: There has already been a natural pushback to offshoring jobs to a third-party provider to some degree, not because of Trump, but because of economics and reality. Following the initial “one time” benefit from outsourcing jobs to a lower labor cost location, there has in practice been limited subsequent benefit. This is because “innovative outsourcing”, per se, has not been as prevalent or successful as was once predicted. One could debate the reasons for this; whether this is because of the limitation of the outsourcer or the reluctance of the buyer, or probably a bit of both. Furthermore, ongoing advances in technology, including the recent arrival of robotics process automation (RPA) and similar technologies, have reduced the requirement to outsource or move things offshore.
The expression that I have used for more than 20 years now is that “it’s better to eliminate than relocate”, through process optimization and better automation. It makes more sense to improve and make a process more efficient, and thereby reduce the amount of “effort” required, than it does to simply offshore that same “bad” process to simply reduce the labor cost component required to support that process. This applies to both third-party outsourcing and internal captive offshoring.
There has been a lot of rhetoric leading up to the election of Donald Trump as next U.S. president. However, even in the short period since the election, a lot of that rhetoric has already been toned down to some extent. Trump is a businessman, and, at the end of the day, if a business decides for good economic reasons that it needs to lower its cost base by moving the provision of certain support services nearshore, then I think that is still going to happen.
Nearshore Americas: How might the President-elect’s protectionism threats impact shared service centers and captives coming out of the United States?
Phil Searle: From what I understand, the “threat” comes down to potentially charging a 35% tariff to U.S. companies on parts and goods that are manufactured overseas and then brought back into the U.S. The focus of comments and observations has therefore related more to manufacturing than services. That is largely because the move for manufacturing overseas has been significant over the last 10 to 20 years, resulting in significant job losses in the manufacturing sector in the U.S. In addition, it is theoretically easier to place a tariff on physical parts and finished goods coming across the border than it is on services provided from a non-U.S. location. Therefore, I would suspect that this is not going to be a significant threat for American companies thinking of offshoring the provision of certain back office processes and other support services, either via an outsourcing arrangement or through an offshore internal captive.
I would also add that the offshoring of jobs outside of the United States has not been a focus or desire of the public sector in the U.S., including the federal government. There is a significant move towards implementing shared services models within the public sector and with advanced private-public partnerships, but within the borders of the U.S., rather than overseas.
In the private sector, concern about protectionism in the shared services and captive space will probably not be as significant as people seem to have emphasized, although the “politics” surrounding plans might slow things down a bit. We will have to wait and see how this plays out.
Nearshore Americas: Following the deal that Trump made with Carrier last week, there is concern that more companies will start announcing offshore or nearshore job relocations in order to claim their own incentives. Do you also expect this to happen, and what ripple effects could arise as a result?
Phil Searle: In the short term, I can see companies trying to do that, for sure. I mean, why wouldn’t they? However, I think that the idea has a lot of focus, “noise”, and politics surrounding it right now, which will likely settle down in the near future. With the Carrier deal to which you refer, actually only half of the jobs are now being retained within the U.S., and the other half are still moving to Mexico, so an economic sense of reality and compromise was already factored into the final result here.
I would probably want to see how the “macro” picture plays out, rather than individual case by case examples. One of the proposed incentives to keep companies in the U.S. is corporate tax cuts, which could well have a significant impact. In the end, whether or not a U.S. company decides to nearshore a substantial number of its service-based people will come down to total value, including corporate tax rates, labor rates, tariffs, etc., as well as the need for appropriately skilled labor.
Nearshore Americas: The conversation of cost has dropped further down the list of requirements when it comes to shared services and global captives; quality of talent is now the top concern. In what ways might the incentive conversation change how companies prioritize talent over cost?
Phil Searle: It is not just about access to talent, but also about process optimization, as well as the improvement and effective leveraging of available technology. Cost then becomes an extension of that. While cost is less of a factor in the shared services space than before, it still is a factor, so we can’t pretend it’s gone away. Other factors that are taken into consideration include quality of service provision, impact on visibility and control, and, more so than ever before, the ability to provide and analyze data.
In terms of the more transactional and administrative roles, if you can provide the same level of service with five people in the U.S. through more efficient operating models supported by appropriate technology, you wouldn’t want to nearshore it to a team of ten to Latin America with more inefficient processes and worse technology just because you can. This is just an example, and I am not saying that would always be the case, but when making these decisions one needs to consider total cost and total value.
Continuing this train of thought, if you perhaps needed three more technical specialists, you might find that they cost three times as much in the U.S. when compared to certain parts of Latin America. So, it partly depends on type of service up the value chain you are looking at. For higher-value services, the premium on human intelligence is probably going to be more relevant to the labor cost per person discussion than in the more transactional and administrative space.