One of biggest trends of American business in the last several decades has been “outsourcing” also known as “offshoring.” However, due to a number of reasons that trend is changing. One well known futurist even says “insourcing” will become the next big macro trend in business and will drive many changes.
Reasons for the reversal
An article in a June issue of The Economist stated that the offshoring phenomenon started by Jack Welsh of GE is in the process of being reversed, also by GE, only this time led by Jeff Immelt. He is even quoted as saying it was “yesterday’s model.” The article said there are several reasons driving the reversal. These include:
- Political– Politicians are tired of getting beat up for letting jobs exit the U.S. The perceived loss of jobs had a rallying effect at the ballot box. I say “perceived effect” because the article said that offshoring really didn’t have as much impact as people thought. They said more jobs have been lost to software as to foreign workers. But the perception of loss to foreign workers is a powerful image.
- Economic– The changes in high technology have made the allure of cheaper labor in other countries less attractive. The time savings in shipment of products is one reason. Having inventory in the pipeline to cover for two months of shipping time is expensive. The quality of product is another. Companies are finding collaboration helps offset cheaper labor. Also because of automation the labor component of the formula is no longer as big. In many cases the reason many U.S. companies continue to have facilities overseas is to be close to emerging markets as opposed to labor savings.
Futurist Thomas Frey has said that “insourcing” will be a major trend in the future. He identifies a number of reasons. I am not going give you all of them, rather I am going to focus on the reasons that are HR related. These include:
- Unions have been forced to face reality. Very high wages made business disappear in the past. Subsequently many, such as the unions at GE, had to accept a two tier wage system. (This means that newer workers come in at lower wages than legacy workers.) As Frey says “70 percent of the jobs there are on the lower tier, which starts at just over $13.50 an hour, almost $8 less than what the starting wage used to be.” This, coupled with wages in China now being five times higher than they were a decade ago, convinces companies to have work in the U.S.
- American businesses have become much more efficient. Frey says “U.S. productivity continues to find gains through efficiency, and labor costs have become a smaller and smaller proportion of the total cost of finished goods. It’s far more difficult to save money by chasing wages anymore.” Between automation and robotics American workers have had to become more effective and efficient.
- The combination of how quickly products need to get to market and the distances they had to travel has required U.S. companies to be more responsive. I think many people have also gotten tired of poor products from China. This has led to an increase in what Frey calls American craftsmanship. “Engineers who work directly with manufacturing personnel are able to build a far better product. In one example…a design team was able cut the work hours necessary to assemble a water heater from 10 hours in China to two hours in Louisville, KY.
Frey concludes “Look for ‘insourcing’ to be a long term trend. It certainly won’t work in all industries, and it may not even work in most. But the playing field has shifted, and those who aren’t paying close attention may soon end up as little more than a footnote in the annals of business history.”
Food for thought
How do you see your industry shifting? Do you see some competitive advantages shifting in your direction by the fact that work is coming back to the U.S.? Are there opportunities to drive your industry or at least your company in that direction? To understand this you will need to have a handle on how technology is currently affecting your industry. Talk to your engineers. Then you can be ready with the people aspects of this change.
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