The Demise of Distance

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It was a simple idea. Power-equipment giant Siemens Gamesa wanted to decrease the time it took to inspect the blades of its wind turbines before they were shipped out to customers throughout the world. Executives felt maintenance time in the field, which could take up to six hours, was costing too much. Every hour the blades spent in the factory meant they couldn’t produce electricity for Siemens’ utility-company customers.

Offshoring is so 1990s. Welcome to the age of “in-shoring.” The trend, which has been developing over the last few years, turns the 40-year-old practice of farming out jobs to far-flung lands on its head. Companies are now either asking their suppliers to either move their businesses closer or finding new vendors who are already in their neighborhoods.

While companies may appreciate the often lower-cost labor of outsourced work, many executives are beginning to understand that the speed, agility, and flexibility of developing close-proximity partnerships can have far more benefits. “In the digital world, where you work and compete is just as important as how you work and compete,” says Vinay Menon, senior client partner and global leader of Korn Ferry’s AI practice. “It’s important to tap into an ecosystem of start-ups, partners, vendors, and suppliers, rather than being a standalone island of delivery.”

With work conducted in rapid sprints instead of marathon production cycles, proximity is paramount. Beyond that, there are a host of technical, political, and economic factors underlying the trend—everything from the need to develop local jobs and properly skilled talent to improved client relationships.

“Companies are organizing themselves around the twin themes of customer impact and agility, rather than just efficiency or global functions,” says Menon. And, if anything, the need for speed, flexibility, and change will only grow with time.

“In the digital world, where you work and compete is just as important as how you work and compete.”

The benefits of outsourcing are obvious, of course; companies can find skilled manufacturing and IT talent in other regions of the world where wages are usually a lot lower. And even as wages have increased globally, outsourcing likely isn’t going away any time soon. Big IT services firms like Accenture, Capgemini, and IBM each have more than 100,000 employees based in India today, for instance. Meanwhile, such developing countries have built major businesses of their own.

But automation, AI, robotics, and other advanced technologies are making it more cost-efficient to operate locally. By using its local development hubs, Fujitsu not only saved Siemens money but also generated a higher profit margin for itself than if it developed the new AI program offshore. “The decision comes down to what assets do we need to win and where do we need to place them,” says Fujitsu’s Tait.

While offshoring can initially appear cheaper, over time it often ends up being less efficient and more costly, according to Bernard Bourigeaud, founder of the IT firm Atos. He says offshoring isn’t a viable solution for sophisticated IT development projects.

For instance, Atos has been managing the visitor accreditation systems for the Olympic Games since 2002. That requires building a private network and connecting thousands of servers from scratch every two years where each Olympics is located to digitally manage everything from recruiting upward of 60,000 volunteers to communicating event results to the world in real time. Trying to do that from afar would be logistically impossible, he says. “For this kind of project, you have to be close to the client because you cannot be late. You have to deliver on time,” says Bourigeaud, who now serves as chairman of electronic payments provider Ingencio and a director on several publicly listed firms.

Indeed, organizations’ development needs are evolving so rapidly that offshoring could become detrimental to business performance. Delays in hiring and training talent, communication issues related to needs and goals, and people leaving often lead to project overruns. “It ends up being less efficient, takes longer, and costs more,” Bourigeaud says.

Sidebar

Location, Location, Location

Across the world, companies are building innovation hubs and training and educational centers closer to their clients in a bid to cocreate and deliver new services in real time. Here are some examples: