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Bringing the Jobs Back Home: How 'Re-shoring' Is Coming to America

For years companies have looked to outsource jobs to cut costs, but now more U.S. employers are looking to beef up operations domestically. It's a trend known as 're-shoring.'

February 7, 2013

It's a workforce planning theme for 2013: "Made in America."

Employers and labor-market experts say the pendulum is swinging away from offshore labor strategies and toward a more home-grown approach. That is, U.S. employers are recognizing the limits of shipping work abroad and looking to beef up operations domestically. The reasons include skill sets largely specific to the U.S., increased costs of overseas operations and a desire by U.S. employers for a more stable workforce, even when using contingent labor.

Among the signs of "re-shoring" was Apple Inc.'s recent announcement that it would manufacture some of its computers in the United States—a break from the iconic company's longstanding practice of making products in China.

The results of the trend include a U.S. labor market that is heating up for some skills. And there's a renewed push to bring foreign labor here.

Microsoft Corp., for example, recently proposed raising the annual cap on H-1B visas, which let skilled foreign workers enter the country. That effort has drawn fire from critics who say the visas are mostly used to undercut U.S. wages and fuel age discrimination.

Virtually all observers agree, though, that a shift is under way to locate more work in America.

Ravin Jesuthasan, global practice leader for talent management at consulting firm Towers Watson & Co., says organizations in some cases rushed to send work overseas and didn't recognize the downsides. Offshoring human resources processes could lead to a lower-quality employee experience and potentially reduce productivity as U.S. workers and managers seeking HR support are not served well by foreign call centers, he says. Now there's growing interest in bringing some operations back to America's shores.

We're "reaching a point of balance with offshoring," Jesuthasan says.

For several decades, U.S. employers have looked to send work abroad. The trend began in the 1970s and '80s with manufacturing moving to lower-wage nations. In the past decade or so, a growing number of services have been shipped to China, India and the Philippines.

To be sure, the practice continues. A 2012 study by research firm Oxford Economics and co-sponsored by Towers Watson & Co. projects that during the next five to 10 years in developing Asian countries, demand for industrial talent will rise 37.7 percent and demand for business services workers will grow 40 percent.

More companies are global in their scope, and they increasingly scour the planet when seeking to fulfill leadership positions. What's more, teleconferencing technologies along with collaboration software enable geographically distributed teams to be productive.

The nascent shift of work back to U.S. shores does not spell the end of offshoring, says Gad Levanon, an economist with The Conference Board research firm. "It's going to be a gradual thing," he says. "It will be more rare to see companies actually shut down existing, functioning operations in emerging countries."

At the same time, there's an emerging consensus that the virtual workplace has its weaknesses, global collaboration has its limits and offshoring may have gone too far. In 2011, for example, The Boston Consulting Group published a report titled Made in America, Again: Why Manufacturing Will Return to the U.S. It concluded that China's manufacturing cost advantage over the U.S. is shrinking fast and that within five years the gap will virtually close for many goods consumed in North America because of factors including rising Chinese wages, higher U.S. productivity and shipping costs.

"Wage and benefit increases of 15 to 20 percent per year at the average Chinese factory will slash China's labor-cost advantage over low-cost states in the U.S., from 55 percent today to 39 percent in 2015, when adjusted for the higher productivity of U.S. workers," the consulting firm wrote. "Because labor accounts for a small portion of a product's manufacturing costs, the savings gained from outsourcing to China will drop to single digits for many products."

Apple made a splash last December when it announced it would shift the manufacturing of one of its Macintosh computer products from China to the United States. Apple CEO Tim Cook said his company would invest $100 million to bring the manufacturing back to the U.S. this year.

Concern about its reputation may have played some role in Apple's decision. The company has come under fire in recent years amid reports that its outsourced labor force in China works under harsh, unsafe conditions in making hot-selling products such as the iPad. In addition, Apple's runaway success amid a still-tepid U.S. economic recovery has led observers including President Barack Obama to question whether it could locate operations in America.

"I don't think we have a responsibility to create a certain kind of job," Cook told Bloomberg Businessweek in announcing the manufacturing shift. "But I think we do have a responsibility to create jobs."

A sense of responsibility to U.S. communities also helps explain why India-based technology services company HCL Technologies is hiring in America. HCL Technologies is among the India-based firms that have touted the benefits of offshoring work over the past decade or so. But HCL, whose U.S. operations are based in Sunnyvale, California, is now highlighting its efforts to beef up its U.S. workforce.

"We are committed to expanding local talent pools in the communities where we operate to ensure we staff the right skills, in the right place, at the right time, for the right cost," says Prithvi Shergill, HCL's chief human resources officer, in an email. "By investing in education and training, and collaborating with universities, governmental and nongovernmental organizations, we've created a more sustainable and socially responsible business model for fulfilling talent needs."

HCL has about 8,600 employees in the United States, 40 percent of whom are local hires. Last year, HCL said it planned to hire 10,000 local employees in the U.S. and Europe.

More than just labor savings and social responsibility are behind the re-shoring trend. Companies are recognizing the value of physical proximity when it comes to their teams. InterContinental Hotels Group requires key people on its Web development team to work out of its regional headquarters in Atlanta, says Keith Credendino, vice president for global e-commerce technology. The hotel chain still sends some technology work, such as software testing, overseas to countries including India and Russia. But for strategic tasks such as rebuilding the InterContinental website, it is important for developers to be co-located with company business partners, Credendino says.

What's more, Credendino's team uses a highly interactive software delivery method called "Scrum." That's not an acronym, but rather a reference to actual rugby scrums where players bind together as they square off against an opponent. Software development as scrum does not work nearly as well if team members are scattered across the globe. "Think about rugby," Credendino says. "You move together. You work together as one team."

Then there are skills particular to the United States. Credendino says that the talent needed to develop mobile device applications tends to be American. That is, U.S. coders rather than their overseas counterparts are more likely to be familiar with writing apps for the iOS or Android platforms. "It's very hard to find people outside the U.S. who have experience in 'native mobile apps' development," he says.

Greater interest in workforce stability also is spurring more work to be done in America, says Wade Hughes, managing partner at consulting and staffing firm The Intersect Group. He says clients are requiring their staffing providers to complete assignments with workers who are "W-2" employees rather than contractors or employees at a subcontracting firm. Clients seem to be imposing the W-2 requirement to ensure that their technology projects and other assignments are staffed with a reliable set of workers, Hughes says. "They want continuity."

The made-in-America shift is contributing to labor market tightness in a number of fields. The nation's overall unemployment rate for 2012 was 8.1 percent, according to the U.S.

Bureau of Labor Statistics. But the unemployment rate for computer and mathematical occupations in 2012 was 3.6 percent for 2012—below the 4 percent threshold that some observers consider the rate corresponding to "full employment" in the overall economy. Another job area in relatively high demand is for accountants and auditors, who experienced an unemployment rate of 4.2 percent in 2012.

And marketing and sales managers enjoyed an unemployment rate of just 1.4 percent.

Food and facilities services provider Sodexo USA is among the employers wrestling with a tighter talent market. Information technology and sales professionals can be hard to find, says Arie Ball, vice president of talent acquisition for Sodexo. And Sodexo's hiring needs are picking up. Over a recent six-week period, the number of open positions was up 25 percent compared with the same period a year ago, Ball says.

One of the running debates about the labor market is whether employers have been too picky in their hiring. It's a conversation playing out at Sodexo, as well. "For some of our jobs, do we need a four-year degree or is a two-year degree acceptable? Those are the questions we need to be asking," Ball says. "It's not always necessary."

With respect to jobs in science, technology, engineering and mathematics—the STEM skills—some U.S. employers say they can't get the talent they need in the United States. That complaint has refocused attention on the H-1B visa program, which allows skilled foreign professionals to work in the United States for a limited period. The number of visas that can be given out in a given year currently is capped at 65,000, subject to some exceptions.

In September, Microsoft suggested adding 20,000 H-1B visas annually for STEM skills that are in short supply. The recommendation came as part of a broader Microsoft proposal to improve the talent pool in science and technology, including broader access to computer science in high school and 20,000 new permanent residency cards—or green cards—for workers with STEM skills.

Brad Smith, Microsoft's general counsel and executive vice president for legal and corporate affairs, said his company had more than 6,000 open jobs in the country, an increase of 15 percent over the past year.

"Our nation faces the paradox of a crisis in unemployment at the same time that many companies cannot fill the jobs they have to offer," Smith said in a blog post. "In addition to the short-term consequences for businesses and individuals, we risk these jobs migrating from the U.S., creating even bigger challenges for our long-term competitiveness and economic growth."

More recently, 20 organizations backed Microsoft's proposal, including the National Science Teachers Association.

But Norm Matloff, a professor of computer science at the University of California at Davis and longtime critic of the H-1B visa program, says Microsoft's proposal amounts to a quest for cheap labor and an attempt to avoid hiring older workers. He cites a study by the Economic Policy Institute think tank finding that, from 2000 to 2011, the average hourly wage for workers possessing at least a bachelor's degree in computer and math occupations rose less than half a percent per year—not the kind of increase you'd expect to see from a severe dearth of talent.

"The data just don't indicate a shortage," Matloff says. "The age issue is still very much with us."

Despite the warning from Smith that U.S. jobs will move overseas in the absence of more H-1B visas, the purpose of the visas is to fill jobs in the United States. In other words, the push to expand the visa program is another indication that—at least for now—re-shoring is under way.

Ed Frauenheim is Workforce's senior editor. Comment below or email editors@workforce.com.