Offshore, Nearshore or Onshore?

Electronics Manufacturing: the beginning

Over the last 30 years, electronics companies, such as IBM and Sony, morphed themselves from vertically integrated, monolithic institutions to that of lean, core-competency focused, global enterprises, with extensive outsourcing of its manufacturing. In this decade, EMS and ODM services are forecasted to grow to a combined 435B (by 2013), representing more than 30% of the overall electronics industry. Advent of wafer foundries such as TSMC and large assemblers such as Foxconn and Flextronics paved the way for ever-increasing “outsourced content”.

Although lower value outsourcing had previously occurred in the textile industry and the like, the electronics migration was clearly the most technologically-advanced to occur... Information technology is next.

IT Services follow suit

Fueled by technology and infrastructure, IT services became another area of great activity over the last 20 years, as companies not only outsourced manufacturing operations, but migrated various business functions to the outsourcing model. Macroscopically, the overall IT market is forecasted to be above $ 1,713B in 2011. The outsourcing piece is estimated to be between 100B and 150B. A lot of room for growth! India comes to mind, with armies of software engineers and service structures.

In addition to cost-driven outsourcing forces, globalization also drove changes to business models. Indeed, outsourcing locations are now typically aligned

The overall outsourcing market can be further segmented as follows:

IT outsourcing (ITO): outsourcing of infrastructure projects, product development, applications development, applications integration, etc…

Business Process Outsourcing (BPO): outsourcing of business activity such as calling centers, accounting, human resources, etc..

Knowledge Process Outsourcing (KPO): can also be seen as the higher end of BPO. Services outsourced are market research, market analytics, legal services

Across many verticals

The outsourcing of IT-related business cuts across all major vertical business segments. The following are typically tracked: Banking/Insurance/Financial, Health Services/Pharma, Manufacturing, Travel/Transportation, Energy, Telecommunications, Retail, Others.

Globalized Outsourcing:

Outsourcing business activity is typically associated with India or China. Offshore outsourcing, as it is called, still represents a large chunk of the overall market.

Nearshoring, which means outsourcing closer to home, has recently seen some significant growth. For US companies, nearshoring equates to outsourcing to Mexico or other Latin America players. Advantages incude:

· Same time-zone logistics

· NAFTA-related ease of doing business

· Culture affinity

Another option picking up steam is known as onshoring. In this scenario, lower wages of some rural US rural areas becomes attractive for ITO or BBO activity.

Outsourcing is not the solution to all problems but when it comes to IT-related activity, a good mix of internal and external activity can be highly effective.

References:

“The offshore services; Global Value Chain”, Gereffi Gary & Karina Fernandez-Stark;

Center on Globalization, Governance and Competitiveness; March 2010

http://www.cggc.duke.edu/pdfs/CGGC-CORFO_The_Offshore_Services_Global_Value_Chain_March_1_2010.pdf