For many years, the lines between outsourcing and offshoring were quite blurred, but not anymore. This might come as a surprise as outsourcing usually meant shipping off IT functions to countries in Asia, Latin America or Eastern Europe.
According to the strategic IT consulting and research firm Everest Group, in North America the proportion of onshore versus offshore delivery centers grew from 45% in 2014 to 52% for the period of 2015-H1 2016.
During the same period of time, onshore setup activity also increased by 20% among the leading service providers. Further, when it comes to onshoring, North America was the most favored location and was closely followed by Continental Europe.
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In the UK, £6.6 billion worth of outsourcing deals were made in 2015. What may come as a surprise is that 90% of these deals involved onshore services with about half being awarded to new local operators.
This phenomenon is being driven by the following:
- New data security regulations
- Easier coordination
- Better alignment and training with clients
- Need for a highly skilled talent pool to support complex services
- Growing credibility of tier-2 onshore locations for service delivery
The High Cost of Short-Term Savings
In the late 1990s, the trend in the IT sector was to move business operations offshore as it appeared highly attractive at the time. Further, a lot of companies went on to outsource every function possible overseas.
However, over the years the appeal of offshoring is waning as a result of management overheads, high transaction costs, and the need for increased quality. At the same time, this doesn’t mean that offshoring is going to be obsolete as the cost is still a primary reason for global sourcing.
While offshoring will continue, businesses will be wary of the hidden costs associated with bulk outsourcing. Further, it’s also a massive challenge to reshore already offshored services (and it can be very, very costly).
As new operations get outsourced onshore to access flexibility and technical expertise, subcontractors will become less like distant suppliers and more like trusted business partners.
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The Emergence of Boutique Providers
This new paradigm in outsourcing is supported by local boutique providers who are growing in strength while the opposite is true for their offshore counterparts. A key factor here is the fact that companies are now taking a more strategic approach and prefer outsourcing providers who can also function as business partners.
By outsourcing different product development project tasks to several specialist onshore outsourcing companies under one umbrella – in a “boutique collective” way – local outsourcers can step up to offer local companies the best of both worlds: manageable costs and high quality of delivery.
The primary reason for the popularity of boutique providers is their ability to be a genuine extension of in-house teams. Further, several outsourcing providers can be stronger as a consolidated force and can also reap considerable win-win benefits from being partnered under one umbrella.
Currently, we can observe a global shift away from low cost solutions towards higher value professional services that are capable to add hard to find business, technology and managerial skills to in-house teams and, thus, make them more efficient and business savvy.
When it comes to onshore outsourcing in general, the most useful operations and functions to outsource will be strategically important short- to mid-term projects that will require regular and close contact with the service provider, or sourcing partner. However, it's highly unprofitable to hire additional staff in-house to undertake such projects. The optimal solution here would be to hire additional resources externally available at short notice from a locally based ally with 1) tribal knowledge about how to deliver high quality products/services, and 2) access to pools of pre-qualified and readily available specialists to work as part-time consultants or full-time teleconsultants. Boutique providers have exactly these specialisms.
For outsourcing service buyers, boutique providers are a perfect fit, as they allow clients to keep control of everything that has something to do with their strategy and strategic product development, their technical architecture and IP protection.
The Boutique Paradox
A boutique paradox can occur in the future if companies keep returning to the same boutique provider because they are so happy with the service. As a result, this can create boutique specialisms which can turn the company into yet another bulk outsourcing solution.
One way to avoid this can be to function as brokers between the client and the boutique collective. By being in the middle and managing the contract with several specialized outsourcing partners, the broker can work closely with the in-house team.
This, in turn, can enable a higher level of understanding of business needs and functions while offering in-house teams the freedom of choice when it comes to outsourcing services they need help with and when they need them (while retaining inherent specialisms).
But it can only work if brokering is carefully managed as the costs can quickly accelerate and drive up margins.
The other scenario could be that a group of smaller local outsourcing providers (e.g. development houses or test centers) join forces and establish an alliance to work on projects jointly (sort of crowdsourcing, but in a more consolidated way when the entire alliance, or boutique collective acts as a service provider). Alternatively, companies based in the same physical location (e.g., business center or co-working place) partner to offer shared services, particularly for startups and SMEs with small budgets and simpler needs.
As such, IT outsourcing will be delivered through a combination of specialist service providers (e.g. QA companies undertake QA and testing work, design companies undertake UX/UI design work, development houses undertake programming, etc). At initial stages this will inevitably increase overheads compared to using a single provider and would require a more comprehensive coordination approach from in-house teams / stronger internal PM resources. However, in the long run, as specialist providers form boutique collectives, it'll be possible for buyers to reduce overhead costs and avoid additional administration.
Outsourcing both onshore and offshore will continue, but there won’t be a single model when it comes to how it should be managed. As a result, it will be interesting to see how boutique providers will make a difference and evolve in a marketplace that’s rapidly changing.
And what's your take on this?