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Reverse Outsourcing--aka 'Back to America'

Dangelo, Mark
(Mark Dangelo is managing principal and creator of MPD Organizations LLC, including books, industry reports and articles. He is a known as a strategic management consultant, outsourcing advisor and analytics specialist with extensive process, technology and financial results. He is a frequent contributor to MBA NewsLink. He can be reached at
m_dangelo@innovative-relevance.com or at 440/725-9402.)

Welcome to the age of reverse outsourcing. After decades of acrimonious private and public outsourcing debates, the United States is witnessing a movement that returns outsourced offshore jobs from a distant country back to its geographical borders. 

Like most trends or practices that reach their extremes, companies and their outsourcing firms are increasingly teaming up (or sometimes separating via a dissolution) to find domestic job solutions that before 2006 seemed random or even dangerous.

Skeptics point that the idea of moving jobs from foreign staffs to domestic workers is mere branding or marketing gimmicks--the 5 percent exception to the proven rule. Others argue that these so-called trends are just the normal rebalancing of moving from the extreme sourcing boundaries as common sense takes the place of blameless labor arbitrage forecasts. Additionally, there are naysayers that dismiss the idea altogether as the raging dilutions of firms, consultants or academics trying to use arcane statistics to prove something that is non-existent. 

However, regardless of the proponents and distracters, there is a mounting and robust movement by companies and their seasoned executives which is considering the entire package of risks and benefits associated with process (e.g., BPO and ITO) and manufacturing outsourcing (i.e., onshore, offshore, near shore and co-shore). They are seeking new win-win solutions that benefit their customers, investors, staffs, business partners, politicians and, of course, national opinions.

Whereas the traditional benefits of costs, black-box fit and dynamic expansion and contractions are commonly accepted using 30 years of outsourcing data, the changing risks and acknowledgment of total life-cycle costs are under constant inspection using iterative adjustments, new interpretations and discrete functional compartmentalization. 

Economic Climate and a Global Reality Shift
Rest assured with 2013’s economic growth projected to be at 2 percent from 2012’s 3.2 percent, every job lost or gained with be under the watchful eye of numerous political factions. 

With organizational executive and state rhetoric focused on revenues and expenses, progressive public and private financial officers and board members are looking at every job function to ensure profitability and domestic economic support. Residential housing and the vast number of dependent industries are teetering on a recovery, which like two children playing on a seesaw could be in for a positive cyclical recovery, or an abrupt painful “cherry bump.”  In general the smooth expansion or cliff fall is for the most part outside the direct control of industry personnel.

For those organizations involved or receiving government support during the last five years, any “persona non grata” will invite a backlash that will linger--just ask AIG and those banking heads that criticized the bailouts. One false move or public mistake can mean the end of an era, a merger or acquisition, bankruptcy or worse, political retribution at the hands of public censure. 

Moreover, looking to keep jobs within economic boundaries is no longer considered protectionist as public sentiment, cyber security, distribution disturbances, reputation risk, national interests, quality of service or delivery, changing technology needs, visa issues and operating cost margins are in flux and in some cases completely eliminating arbitrage only advantages. In short, the decision to move jobs offshore has increasingly become one about moving jobs back to domestic operations rather than initially assuming outsourcing is the first choice of consideration. The economics and risks to keep jobs locally or near shore are far more compelling when examined holistically across a realm of upside possibilities and downside permutations.

As the models for outsourcing valuation change, so do the discussions for embryonic or emerging knowledge areas that required highly specialized skills--which lack the scale of mass outsourcing efforts and economies of scale. A few of these outsourcing areas not covered or under siege from traditional thoughts include risk management, fixed income and securitization, covered bonds, mobile apps and required market segment innovations tailored to deliver made to order product and service offerings.

An example data source to support this development can be found in published materials from Congressional Research Services and from recent audio publications from Charles Schwab. Whereas the conventional doctrine has been to outsource to foreign lands BP and IT services, there are those who are deciding to reverse or revamp services to make them more profitable domestically. This restructuring also is reducing time-to-market challenges required to exceed customer demands, delivery rework and improve quality of service. Being nimble and market aggressiveness is has become the new currency for surviving and for growth (e.g., General Motors).

Even in industries that are looking to outsourcers to help deliver mandated government programs (e.g., healthcare), the short-term wins (nearly $500 million and counting) may be negated or set aside by tax consequences and treatments (e.g., President Obama’s desire to impose tax consequences for firms offshoring American jobs). As politicians look towards the next midterm elections (e.g., Ohio and traditional middle-class factory states), corporate actions taken to sustain or return jobs domestically will likely yield greater leeway for segments facing stringent regulatory compliance environments. 

In total, and after recent election results, a host of lengthy-debated bills and issues will be approved to support the repatriation of domestic jobs, GSE “next-steps” and for restarting of the private securitizations markets thereby reducing the 90 plus percent of government guarantees (e.g., U.S. covered bond bill which will support globally approved Basel III requirements). Taken in isolation, reverse outsourcing seems an unlikely trend. However when inserted into the comprehensive mix of numerous private and government actions, it makes sense across the loosely coupled multi-national economies (including a stagnant EU and rising Asian nationalism) and tightly coupled equity and bond markets (i.e., the averages are at five year highs for more than domestic rationale).

For real estate, housing and residential lending on their way to becoming extraordinarily regulated industry segments, the demand by oversight and market conditions will necessitate a reformation of process linkages and technology solutions. As a result, the jobs gained or lost will be cast into the court of public opinion. 

While as a country we have fought over manufacturing and financial services jobs for two decades, we have just begun to deal with security and privacy of outsourcers encircling individual medical records, big data and insurance use on a comprehensive scale. For consumers, financial record access is one thing they accept--but don’t necessarily like. But foreign access, manipulation and storage of public and individual health records within cavernous data repositories will be a horse of a different color. 

A New Dawn
Over the past three decades, more than $13 trillion has been invested by U.S. firms into foreign operations and workforces--nearly matching the entire outstanding debt of the U.S. government. 

Moreover, with favorable currency exchange rates, multi-national firms have created cash hoards previously deemed unfathomable--some place this number in excess of $2 trillion. Yet, while U.S. firms were expanding their foreign operations and adding skills to distant personnel, foreign based firms invested less than one-half as much as their U.S. counterparts onto American soil and personnel over the same period. 

But, as services grow more bespoke and customer demands more insistent (i.e., use of highly secure, custom tailored mobile apps and data), placement of middle and back office workforces next to marketing, sales and service functions is needed to ensure accuracy and time commitments. 

Coupled with stubbornly high national unemployment (ranging by geographic segmentation and taxonomies) from 5 percent to 11 percent, the base costs of domestic workforces is now being offset by rising wages and standard-of-living demands by the same workforces originally sought after by the U.S. investments offshore. The circle is doubling back upon itself as part of a new cycle where the foreign trained are now focused on educating domestic workforces. Its irony is not lost on displaced workers or their government representatives.

With China set to overtake U.S. economic leadership within the next 10 to 12 years, the disparity and turnkey simplicity of geographic process service shifts is being marginalized by macro and micro economic realities of rising national statuses. As domestic and near shore corporations look to offer products and services into Asia, South America and Africa, the availability of cooperative and available workforces is putting pressure on wages in addition to facilities that may take up to two decades to rectify with organic growth in-country operations.

Tempered by country-to-country distrust and hostilities (e.g., U.S., Russia, Mideastern countries, China, Japan and EU), the WTO and UN will be busy policing complaints and misdeeds run amuck. Therefore, the common sense, customer-centric and pragmatic idea of reverse outsourcing, back to the shores, is no longer just a marketing ploy used by PR firms for their clients. It is an operational tactic that is laser-focused and driven by the aftermath of a punishing and often times opaque recessionary lessons learned. 

As the U.S. economy and workforces began an unwelcome retraining starting in 2008, it formed a new class of entrepreneurs determined to remain innovatively relevant. They looked beyond local borders and started with those individuals and classes that put them out of work. 

These innovators accepted that future growth resides with “know-thy-replacement” and have crafted new industries in cloud solutions, technology management, mobile and wireless connectivity/provisioning, layering, app compartmentalization, vast or big data (which represents more than 25 percent of all data stored typically unstructured), cyber-security and rapid deployment approaches to name but a few. Perhaps this is why huge outsourcing deals have been year-over-year waning in favor of compartmentalization and orchestration of discrete service segmented offerings supporting domestic recoveries?

In summary, outsourcing has greatly matured in the past decade, with many corporate names and the lion share of the $100 billion industry based outside of the U.S. By and large, traditional outsourcing players are seeking new options and relevancy within and across global-domestic firms, industries and economies. 

What is striking and troublesome for many outsourcing operators is the models and principles that built their wealth and status for the past 20 plus years are quickly becoming obsolete as their clients increasingly adopt reverse outsourcing trends--that is put the jobs, even if outsourced to an offshore firm, on domestic soil using efficiencies and innovations. 

Some of us remember a few of the household giants that once dominated our industries--MCI, AT&T, GM, IBM, Anderson, Countrywide, Enron, RIM, Nokia, Microsoft et al. Some firms failed to recognize the trends, others committed fraud, some are still languishing and still others reinvented themselves and remained formidable competitors. 

Yet, we all knew one axiom from history--cost effective workforces in support of customer demands continue to produce lasting profits and repeat business. That principle does not change. It is just the rationale and implications of implementation which are sometimes widely affected. The customer needs for today and tomorrow are no different from historical trends in this regard.

I think we will look back five years from now and ask, “Who were the pragmatic leadership teams who took advantage of changes using reverse outsourcing?” For the others, they will be forgotten to time and if lucky, a footnote within a history book. 

Welcome to the age of reverse outsourcing. 

(The views expressed in this article do not necessarily reflect the views or policies of the Mortgage Bankers Association. MBA NewsLink welcomes your contributions; articles or inquiries should be submitted to Mike Sorohan, editor, at msorohan@mortgagebankers.org.)