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Tales of Backshoring

When sending work abroad doesn’t work, companies sometimes bring it home.

December 20, 2007
A torrent of jobs are offshored every year. And every year, a trickle of jobs return home—or are "backshored"—after companies experience disappointment and frustration with remote, foreign workforces.

    Accurate counts of both flows are elusive. Perhaps one dollar’s worth of work gets backshored for every $10 offshored, according to some experts. Others say the numbers could be much higher. Companies don’t reveal numbers of offshored or backshored jobs. Although efforts have been made to count offshored jobs, backshoring reports are anecdotal.

    Backshoring does happen, though, and five factors drive most of it: cultural misunderstandings, unexpected management needs, high turnover in the offshore workforce, low skill levels and work that’s too complex. The offshoring experiences of two companies show what happened when they encountered these factors. Although both companies are small businesses, enterprises of any size can relate to their experiences. The challenges they faced are textbook examples of why work gets backshored.

    When offshoring fails, bringing the work back home to the parent company, or at least a domestic outsourcer, seems like a logical solution. But especially for large companies, it takes just as much planning and forethought to make backshoring succeed as it does to make offshoring succeed. For backshoring to turn out well, a transition plan is crucial.

Guessing the numbers
   The offshoring of blue-collar jobs is an accepted way of doing business. Sending white-collar, highly skilled jobs abroad is a much more recent phenomenon. "I was fascinated by the rise of the Indian software industry," says Ron Hira, assistant professor of public policy at the Rochester Institute of Technology and author of Outsourcing America. "I saw their competitiveness emerge in 2002 and 2003, and it exploded in 2004."

    Hira also observes that no one has a good estimate of the number of offshored high-tech services jobs. "The government doesn’t collect proper data on services," he says. "In 2003, the U.S. government said the country imported $400 million in services from India. [In the same year,] the Indian government said it exported $8.4 billion worth of services to the U.S. The numbers should be the same."

    Opinions diverge on the size of the backshoring phenomenon. Erran Carmel, associate professor and chair of the information technology department of American University’s Kogod School of Business, estimates that one dollar’s worth of work comes back to the U.S. for every $10 that is offshored. He doesn’t, however, think backshoring is going to go away.

    "Offshoring is an innovation," he says. "Organizations experiment. They reassess, stumble, make mistakes. [Backshoring] is a natural phenomenon of this large economic change we’re going through."

    Rafiq Dossani, a senior research scholar at Stanford University and the author of India Arriving, agrees that the offshoring trend continues to be strong. But he also believes that more backshoring may occur than anyone realizes.

    In travel for his research, Dossani says, "I’ve visited more than 200 companies in the last five years. Seventy percent of them have brought work back." The primary reason was the offshored company’s failure to understand the U.S. company’s corporate culture.

Reasons for backshoring
   Carmel cites as an example Indian software engineers working for Big Three automakers. The engineers typically never had a car or even a driver’s license. "They don’t know much about the car culture in the U.S.," Carmel says. "This has a subtle impact on their understanding of the business impacts their work has."

    Companies that look just at low pay rates are surprised when offshore workers need a lot of hand-holding. "From a workforce management perspective, you’re asking a lot of managers who are tasked with managing an offshore workforce," says Martin Kinney, professor in human and community development at the University of California, Davis. "Your workforce must go there to see the environment and monitor turnover in India. You can’t ever get rid of your workforce management responsibilities."

    Turnover has become a huge offshoring issue. "Today, call center attrition rates are around 40 percent to 50 percent, and information technology rates are around 15 percent to 20 percent," Dossani says. Those with the greatest talents and skills will go first, since they are the most heavily recruited by the competition.

    Pay rates may be cheap in developing nations, but it’s for a reason—the skills sets among workers there might not be as well developed as in the U.S. "Lots of outsourcing is still about cost arbitrage, not about skills," says Joseph Greco, director of the Center for the Study of Emerging markets at California State University, Fullerton. Consequently, if a company tries to offshore highly complex work, "it can’t find the skills, and it can’t train the people because they don’t have the background," he says.

    Sometimes the work is just too high-tech for people with minimal skills and knowledge. "The more cutting edge the technology, the harder it is to offshore," Dossani says. Well-defined tasks are better for offshoring.

Rapid prototyping, slow failure
   Decision Design encountered all five backshoring factors when it experimented with offshoring from 2000 through early 2003. With offices in Bannockburn, Illinois, and Pleasanton, California, the 20-person company specializes in software development for the corporate and government market. It has a number of Fortune 500 clients.

    The company’s development approach is known as rapid prototyping, in which software is quickly designed, built and tested. Problems are rapidly identified and fixed, and the next round of design, build and testing proceeds. Succeeding stages often overlap. It’s an approach that requires flexibility, quick response to change and a keen understanding of the client’s needs.

    With the Y2K software bug making it hard that year to find good programmers at reasonable costs, company president Monty Davis decided to try offshoring.

    "One of our goals is to keep our costs well below the rate structures of big companies like Accenture or Deloitte," Davis says. "We need to keep salaries low, but get good people." To do that, he hired a U.S.-born Indian-American who wanted to build partnerships with his cousin in Delhi, India.

    Through Davis’ Indian-American liaison, Decision Design contracted with Max Ateev, a billion-dollar Indian software development company. Davis went with a large company because he thought it would do better work and pose less risk than a small company. Six developers, a project manager and a quality assurance specialist were to be dedicated to Decision Design. Davis sent his Indian-American contact to work with the team and explain Decision Design’s corporate culture and rapid prototyping methods.

    "They’d be like our employees, except they’d only cost $20, and the time zone would work to our advantage," Davis says.

    Instead, the Indian software engineers produced "buggy" products, didn’t foresee problems and took too long. "Our liaison went over there once or twice a quarter to try to work with them on the methodology. This team could not adapt," Davis says. He also suspected, though could never prove, that his "dedicated" team was in fact often working on other projects. When the work from India came in, Decision Design had to redo it. "It’s always at the end of the project you find this out," he says. "It adds cost and stress."

    Davis pulled the work around the end of 2002, but gave offshoring one more try. The company rented office space and equipment and directly hired three Indian employees for $10 an hour. "It didn’t work," Davis says. "It got cheaper, but they still weren’t able to do the work. We had done this for more than two years. It wasn’t cheap and it wasn’t good." Davis brought all development back in-house in the spring of 2003, absorbing the small quantity of work the Indian workers had been doing with Decision Design’s existing employees.

    Davis offshored in part to show customers the company was doing the "modern thing." Now he thinks that not offshoring is a business advantage. "It really simplified management," he says. "We didn’t have to worry about an offshore workforce."

From dream to nightmare
   Los Angeles-based Arvani Group is a boutique management consulting firm that helps international mobile and wireless companies expand into emerging markets. The company’s clients include Casio, PalmSource/Access, the research and development labs of Japanese telecom/wireless giant DoCoMo, and others. The core company is just three people, but through contractor agreements, it can quickly scale up to 50 people when necessary—and scale back down just as fast.

    "As a small company, we are always looking for ways to use the latest methods to optimize our productivity," says Azita Arvani, president of the firm. In February and March of 2007, the company decided to make the most of its productivity by sending some basic research offshore. "From the start, we emphasized that we absolutely require the highest-quality research, reliability and responsiveness," Arvani said. "We were also hoping the time zone would work to our advantage. You know the dream: We provide a request, they take care of it while we sleep and it is ready the next morning."

    Arvani contracted with an Indian company and provided ample sources for the research. "We wanted the Indians to get data about potential European and American partners for our clients," she says. "We needed research done overnight on about a dozen companies, and we wanted the data structured for easy reading."

    The research reports came back a week late. Worse, they contained the same information that Arvani had sent, except in a new format. After another week passed with no results, Arvani pulled the job and assigned it to U.S.-based contractors she’d used for such tasks in the past.

    "The Indians really never understood the urgency of the task, and the quality wasn’t good," Arvani says. "Whenever I complained, they’d say, ‘We’ll fix it,’ but we’d still be talking about it a week later. It took too long."

    Arvani was disappointed and frustrated not only by the late work and low quality, but especially by the management demands. "I didn’t have time to baby-sit and didn’t see why I should have to," she says. "Total costs were much higher because the management costs were so much higher. All the extra effort and anxiety wasn’t worth it."

Transition plans required
   Arvani was fortunate in that she had a contingency plan—her U.S.-based contractors—in case things went wrong with her offshore experiment. Many companies don’t adequately plan for offshoring—or backshoring.

    "We do see outsourced work coming back, and it isn’t always a success," says Stan LePeak, managing director of research with Houston-based EquaTerra, a global management consulting firm specializing in outsourcing and business process change. "In some cases, organizations forgot why they outsourced. Frequently, they weren’t doing the work as well as they thought [before they outsourced it] and they didn’t get better by not doing it for a while."

    If backshoring is to succeed, LePeak says a transition plan is necessary, especially if the work is strategic, touches the customer or hasn’t been done by the company for a while. "Human resources needs to ensure that the organization has sufficient people with the necessary skills to do the work," he says. "Set expectations, establish a time frame, identify the benefits of backshoring and identify who to call for help in case of problems and other such transitional issues."

    Even if offshored work is brought back to a domestic outsourcing company, a transition plan is needed. "Companies shouldn’t assume that migrating work back isn’t happening a lot—or that it is painless," LePeak says.