The Emerging Onshore Alternative

Slide Show

Check out highlights from Rural Sourcing Inc. CEO Monty Hamilton's presentation at the 2010 Outsourcing World Summit.

Earlier this year I wrote about a CIOUpdate piece on 10 up-and-coming outsourcing destinations and welcomed the fact that one of the entries on its list was low-cost U.S. locations. IT Business Edge contributor Don Tennant recently spoke to a couple of executives of companies offering these kinds of onshore services.


A couple of interesting data points from a presentation given by one of them, Monty Hamilton, CEO of Rural Sourcing, at the 2010 World Outsourcing Summit: Sixty million Americans live in non-metro areas, where wages are lower than in larger cities, and $7.2 billion in federal stimulus funds have been earmarked for the expansion of broadband in rural areas.


A recent McKinsey Quarterly piece recognizes onshoring as a growing trend, though it refers to it as close-shoring. (Po-tay-to, po-tah-to.) It shares several stories of companies that enjoyed labor savings of 30 to 40 percent by moving operations from large metropolitan areas in the United States or Europe to less-populated and lower-cost areas. Looking at the map accompanying the piece, it appears U.S. labor costs are lowest in the South and the Midwest.


True, those labor costs likely aren't as low as ones they could obtain in offshore locales like India, but there are other benefits as well. Local governments are often eager to offer economic incentives to attract such investments, and local educational institutions sometimes partner with employers to ensure there's a supply of workers with desired skills. Working with local partners is especially advantageous when trying to create a labor pool with specialized skills.


Not to mention it's a good idea to diversify global IT service facilities to reduce the operational risks that can arise due to inflationary pressures, currency volatility, political instability and other factors in offshore locations. The article's authors point out India's inflation rate rose to 11 percent in 2008, while the rupee's value against the euro and the dollar fluctuated by 20 to 30 percent. Certain services, often involving sensitive data, must remain onshore to satisfy regulatory requirements.


The authors' advice: Companies should segment their IT labor forces into broad areas of talent needs, skill classes and experience levels, assessing both their near-term and long-term needs, then compare the cost structures of different locations. After narrowing down potential sites to a short list of candidates, companies can begin meeting with local government and educational representatives to discuss incentives.


The authors' research shows that metropolitan areas with populations under 200,000 can accommodate only one or two large IT centers before supply constraints drive up wages. Thus early movers will enjoy the greatest advantage, they conclude.