Only 5% of US technology firms plan to offshore business services or manufacturing in the near future, a new survey by professional services firm BDO USA has found. Furthermore, almost one third of the tech firms that do offshore are considering bringing at least part of that work back to the US, the 2014 Technology Outlook Survey showed.
These tendencies owe to rising costs in traditional offshore locations and a growing desire on the part of tech firms to retain greater control over mission-critical aspects of their operations, according to Aftab Jamil, partner and leader of the Technology and Life Sciences Practice at BDO USA.
While relatively few US tech firms currently nearshore to Latin America, more than half consider it their most likely future destination, due to the region’s economic growth, improving infrastructure, increasingly skilled labor pool, low costs and geographic proximity. Drawing on the results of the survey and his own extensive experience in Silicon Valley, Jamil discussed the latest outsourcing trends among US tech firms with Nearshore Americas.
Nearshore Americas: The survey says only 5% of CFOs plan to offshore services or manufacturing in the near future, down from 16% last year and 20% in 2012. Why do you think that so few companies plan to offshore? And why has there been such a significant drop?
Aftab Jamil: That trend is certainly becoming more and more pronounced. Companies are beginning to challenge their initial decisions – whether offshoring everything, including mission critical functions, continues to make sense or not. Some of the dynamics that existed many years ago from a cost-benefit standpoint – some of those benefits have eroded over the years given the rising cost of doing business in the locations where they’re offshored their operations to. I think that’s one of the main reasons that’s causing the management teams to challenge their initial decisions. But it’s not just down to economic factors. [Many companies are also wary of] the risk of offshoring something and suddenly there’s a mission-critical element of your overall operation that’s ousted from your control.
NSAM: Could the decline in offshoring also be partly because US companies feel that it’s good PR to keep jobs in America?
Jamil: Absolutely. The geopolitical factor cannot be underestimated. There’s been comments, all the way up to the highest political office in this country, where it’s been pointed out that manufacturing jobs, or other jobs, have been shipped overseas and they’re not coming back. And people question ‘why shouldn’t these jobs be here in the US?’ So there’s that mounting pressure as well. But I think the economic factors and the loss of control over mission-critical elements that I mentioned are more fundamental than the geopolitical issues, which have only accelerated this trend.
NSAM: 29% of the surveyed companies that do offshore said they are considering bringing at least part of that work back to the U.S. Why do you think that is?
Jamil: The pace of those jobs going offshore has slowed down considerably and I think it’s difficult for companies that have already set up operations to bring those back, but I think they’re being a lot more strategic and cautious in shipping additional functions overseas. So I think it makes sense for them to stop the further erosion of their (onshore) capabilities and then to start bringing [jobs] back. There are examples of high-profile companies that are deciding to expand their operations in the US as opposed to ten years ago when they would never have thought twice about sending those jobs to whatever location made sense for them. But now the tide is changing and those jobs tend to stay in the US more than they did ten years ago.
NSAM: Only 14% of respondents said they currently outsource to Latin America. Why do you think the region lags behind not only China, and Southeast Asia, but also Western Europe?
Jamil: The cost of doing business in places like India or China seven or eight years ago made that a very attractive option. They have the right infrastructure, in terms of having the critical mass of software capabilities, back-office support functions, and support and call centers. Once you have that critical mass it becomes easy from an infrastructure standpoint for businesses to go into those locations like India because they’re not starting from scratch.
NSAM: But why are more US firms outsourcing to Western Europe (19%) than to Latin America? Surely that must be more expensive?
Jamil: Absolutely. But technology companies need a certain skillset and technology background. So they’re going to go where the workers have the language ability and the academic background. But as the level of sophistication and expertise is increasing in [Latin America] then suddenly companies start looking and saying “OK, well I can get a similar of workforce there, language ability is getting better, it’s closer to home, and it’s either cheaper or equally expensive,” and perhaps that would draw decisions toward Latin America, when historically they would automatically have gone to China or India. Historically, Latin America has been lagging far behind, but the survey shows that more and more companies would consider outsourcing there in the future. As it’s right in our backyard, a lot of people think it’s much easier to have more control over the operation than if you were to go to China or India.
NSAM: As you alluded to, 57% of respondents said Latin America was the place they would be most likely to consider outsourcing to in the future. What will it take for their interest in the region to become fulfilled or is it just a matter of time?
Jamil: I think it is just a matter of time. But stability is also an issue. From an investor’s standpoint that is very important because most management teams will hate to go into areas where there’s going to be disruption of their operations. In the last three or four years there have been some very high profile disruptions of the supply chain, because of natural disasters or geopolitical regions. So it’s a matter of time while these countries continue developing the necessary infrastructure, but I do think companies are paying more attention to the region now. I used to have a client that had a call center in the Philippines and about 18 months ago they switched that over to Latin America. So from my perspective, not just based on this survey but also from dealing with tech companies on a day-to-day basis, they are looking at the region a lot more closely now. As the economy and purchasing power grows in places like Brazil, it would be silly to ignore a market like that in your own backyard.
NSAM: The survey showed a higher proportion of U.S. tech companies outsource manufacturing (59%) and research and development (54%) than IT services and programming (41%) and call or help centers (28%). Why is that?
Jamil: I think the biggest factor is obviously the cost – for manufacturing companies to squeeze the most cost out of their manufacturing process. In some of those locations there are regulations that are less strict from an environmental standpoint or a labor policy. [And less expertise is required in manufacturing] in terms of having the ability to follow the process or instructions, whereas other support functions require a high level of expertise in terms of human interaction, language ability, and not just repeating a function and producing the same thing. So I also think when you’re talking about network maintenance or IT services, those jobs will go to different places.
NSAM: Finally, almost half of the companies surveyed (49%) said they plan to hire the most new staff in sales and marketing in 2014. Why do you think this sector in particular is growing more than any other?
Jamil: Almost every contact we spoke with is expecting their revenues to grow and when you are expecting revenues to grow you need to make sure your sales and marketing infrastructure is being developed to support that growth. Whereas in the downturn when you’re trying to cut costs and you’re not seeing a huge element of the market that’s willing to spend money then you’re obviously going to cut back on those kinds of sectors.