Declining ‘Globalization’: Reshoring, Localization and Today’s Politics

Date: September 19, 2017

ReshoreRevenue growth projections for offshoring software services and business-process outsourcing (BPO) activities are deteriorating – across the globe. 2017 sales projections for the big players have been reduced multiple times. Industry analysts are downgrading their projections as offshoring firms are continuously battered with increasing headwinds.

With the passing of Brexit, the United Kingdom voted for local command of immigration, regulations and the economy – effectively a rejection of globalization and a vote for control. Increasing protectionism in two of the largest financial services centers – the United States and the United Kingdom have dramatically changed the landscape. This drives uncertainty, and at best, delays decisions by large outsourcing players in the financial services and health care sectors. This is not a new phenomenon, however.

A Boston Consulting Group study found that by 2015, companies were already looking to shift new investment to localized production. It appears that chasing the lowest labor costs is an outdated strategy that western executives have been aware of for some time. What started as an unspoken gradual strategy shift is now front-and-center in the daily political discourse.

Buttressing this changing attitude is a dramatically different field-of-play. The technology demands are rapidly evolving.  In a financial services sector embracing automation and robotics to revitalize itself, there is an evaporating demand for traditional IT outsourcing – meaning routine software and application development/maintenance; and even less for BPO, defined as the export of routine work such as customer care, insurance-claims processing, or data scrubbing. Many of the large outsourcing firms know that they cannot continue their growth by solely playing the cost-arbitrage game.

This changing focus on technology has wiped out many of the previous jobs that would have been offshored. But the evolving productivity demand isn’t the only factor. Many organizations are now more aware of the pitfalls of losing control. Until recently, the most important factor in sending large portions of business functions to offshore locations was to drive down costs. Ten plus years ago, the cost basis in emerging markets was a tenth of what it is today. During the recession of 2008-09, many firms saw offshoring as an opportunity to retain profit margins. But as the pace of sending jobs and activities overseas increased, higher-value and more complex work was sent overseas too. Companies now see that they have lost control over important business functions. What started as a pure cost-reduction strategy, take this ‘thing’ and run it for me cheaper, is no longer a viable model. The huge labor turnover, which ultimately limits quality, the reduction of cost arbitrage, and high inflation, mean that the viable benefits of “your mess for less” are nearly gone.

In response, many outsourcing firms have gone to entire platform-based offerings to keep pace with the changing demands – evolving from an IT provider or ‘bodyshop’ to a business partner. Rather than taking orders from CIOs and CTOs, firms are going after the marketing, business development and product management budgets to truly partner with organizations enabling growth, and to remain competitive.

These changes aren’t accidental either, rather they are a clear shift in political and economic thinking. It won’t happen overnight; things like this are subtle and slow. But rest-assured, the C-level business leaders in the United States and the United Kingdom had already lost the blind faith in globalization – well before the 23rd of June 2016 in the U.K. or the 8th of November 2016 in the U.S.

For good and bad, we face a world that is demanding control over its future – driven particularly by the emergence of robotics, artificial intelligence and other disruptive digital technologies. And that trend is likely to outlast any particular presidential administration or Brexit negotiation.

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