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The boomerang outsource

Posted: 05/26/2016 - 00:49

Offshore outsourcing is controversial. No news there. For over 15 years customers have been moving services offshore as part of their global souring strategy. In the early '00s businesses couldn't offshore quick enough. Opponents of offshoring frequently quote the loss of domestic jobs, damage to economies, poor communication and quality, while proponents insist it facilitates competition and actually makes economies more efficient. But amid the furore, there is a rise in organisations returning from offshore.

The main driver behind this trend is likely to be the decrease in the cost differential in labour between the domestic and offshore markets. The economic maturation of offshore locations over the past five to ten years (partly fueled by demand for skilled labour for the global outsourcing industry), has facilitated the establishment of global businesses. As a result salaries and other overheads are rising. Other drivers may include customer (dis)satisfaction, advances in technology and the importance of skills and talent retention to customer organisations. Together with a tangible shift toward value rather than simple cost reduction, these factors are causing many organisations to pursue the challenge of the "boomerang outsource": bringing services back in-house.

An initial step for customers considering this challenge would be to review its live contracts. Some early adopters of the offshore strategy signed up to arrangements of 10 to 15 years, meaning that their contracts are likely near expiry – another factor which might be driving the current volume of customers seeking to return onshore. However, if the contract has years left to run, exiting may be difficult and expensive. Customers should first review the termination provisions and explore the associated costs. Early termination may include break fees and payment of unspent minimum revenue guarantees.

From an operational perspective, customers should consider how comprehensively they understand the current environment – including both the direct cost of the provider, but also the indirect costs of managing and inter-facing with the provider). Does the current contract provide for the provision of frequent management information and reporting? Or will this be made available on exit? A customer will need to consider what effort it can expect from its current provider. Is there a robust exit plan in place? At the start of an outsourcing relationship few minds immediately spring to exit, reverse transition or the potentially colossal work effort and expertise involved. A provider may be obligated to assist at no cost, or it may charge through the nose.

Another factor to consider is the current workforce. This is potentially a sizeable cost associated with bringing services back in-house. What is the customer responsible for? Does the current contract envisage a transfer of supplier employees to the customer on exit? Is the customer liable for redundancy costs?

Businesses will also need to consider service run costs and whether it has the specialist knowledge required to run an efficient and integrated service. Automation and digitalisation are two of the current prominent (and disruptive) trends in sourcing right now. They offer customers the opportunity to streamline key services, reduce run costs while increasing productivity. The question then of whether that automated service is provided offshore or in-house is almost redundant – almost because if the function is brought back in-house the organisation will need to consider investing in its workforce. Most minds leap to redundancies when discussing the streamlining-effect of automation, but while some immediate low-skilled job losses are perhaps inevitable, one of the key challenges facing organisations in 2016 is the shortage of technology skills and retention of talent. Therefore, organisations should consider re-investing in its workforce to up-skill and re-train it so that they can fully understand and run the new environment, maintain low attrition rates and future-proof its services, governance and communications structure.

A return to in-house can pose significant legal, operational and financial challenges. Like with any sourcing initiative, it must first start with a comprehensive review of the financial and non-financial benefits together with the direct and indirect costs. Understanding the current environment and what IT and investment may be required will take time and effort – both from the customer and the current provider. If a successful return is what you want, make sure you know what's coming back, and how to catch it.


 

About the Authors

PeterDickinsonPeter Dickinson is a Partner and Co-Head of the Business Technology Sourcing Practice at international law firm Mayer Brown. Peter specialises in advising on large-scale multi-jurisdictional outsourcing projects.

 

 

 

 

 

MeganPaulMegan Paul is a senior associate in the Corporate team at international law firm Mayer Brown. Megan, part of the Business Technology Sourcing Practice, has significant experience with outsourcing transactions, acting on behalf of suppliers and customers across multi-jurisdictions and in a variety of industry sectors.

 

Comments

I think the article presents a limited view of the motivation for any re-shoring. I have provided a link to some comments I have made referencing this article. The issue is really more about the nature of Digital Transformation than any shrinking in cost differences.

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