Offshoring - SMEs not feeling the full benefit

Speaking about offshoring with a few of our SME members recently, they were telling me that for smaller companies, offshoring manufacturing isn’t quite as attractive as it used to be. It’s not just rising travel costs and...

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Speaking about offshoring with a few of our SME members recently, they were telling me that for smaller companies, offshoring manufacturing isn’t quite as attractive as it used to be. 

It’s not just rising travel costs and international political turbulence proving a turn-off.  Total cost of offshoring (TCOf) is on the rise - small firms, doing small runs, are probably better off manufacturing locally or near-shoring.   

Traditionally, long distance offshoring was all about labour arbitrage - nowadays, with rising inflation in popular offshore destinations like India and China, the cost of doing business abroad has skyrocketed. Not only that: the costs of supplier management are escalating too. 

One SME MD was telling me that even if offshore labour was free, then it would still be more expensive to offshore purely because of the ever-increasing overheads. But its horses for courses, if you can achieve the economies of scale to reduce unit costs low enough, then offshoring might still be for you. 

The overhead situation isn’t nearly so tight for the big boys: major brands who are shifting enough units to necessitate the big production runs where offshoring come into its own.  Although, in the face of the rising costs of doing business in India and China, many companies are thinking about seeking out cheaper, non-traditional destinations such as Kenya or Argentina. 

But moving destination is not without risk. There are always operational risks in managing the transition. As well as cultural fit, there are both systematic / IP issues. 

There may be problems with releasing or using intellectual property such as the software solutions that all offshoring, not just ITO, could not happen without.  If service delivery is dependent on supplier proprietary software, ensure there are appropriate contingency arrangements on exit. Procuring a suitable solution, dovetailing it with existing systems, and training people to use it present both operational and financial risk. 

But those organisations who are hungry for risk - and the associated rewards - will continue to go for it. 

Recent research suggests that offshoring is set to drop off after 2016. Hackett Group Chief Research Officer Michel Janssen says: "That trend is going to continue to hit us hard in the short-term. But after the offshoring spike driven by the Great Recession in 2009, the well is clearly beginning to dry up.  A decade from now the landscape will have fundamentally changed, and the flow of business services jobs to India and other low-cost countries will have ceased."

That comment seems far-fetched to me. As long as it’s cheaper, companies doing the requisite volume will pack up their processes and head offshore in search of new partners.  

But for smaller companies, highly complex manufacturing or even call centres, the UK is a sagacious choice right now. Local-sourcing and nearshoring, as I advised the SMEs members, is their best outsourcing option in 2012.