Bestshoring
The expression "IT offshoring" —the outsourcing of processes to geographically remote regions—first came into use when, in response to the Y2K computer threat, programming and software activities were outsourced on a grand scale to low-cost software firms in India. Among the main drivers for offshoring to India were the cost advantages and educational levels comparable to those in the West.
The initial hype was soon followed by disillusionment, however. Outsourcing turned out to be more expensive than envisaged, deadlines weren't met, cooperation proved difficult, and many companies were dissatisfied with the results. The reason for this failure was the one-dimensional nature of the outsourcing decision, which was based solely on costs and failed to account for other factors such as productivity, quality levels, operating risks, manpower availability, and cultural issues.
The bestshoring strategy involves a comprehensive evaluation of which region or country is the most suitable match for producing a certain item or service. Basically, there are three different types of bestshoring: onshore, nearshore, and offshore. Onshore refers to production of the goods or service in the home region, where cost structures are similar (in Europe, this would mean Western European countries, and in North America it would refer to Canada and the United States); nearshore refers to a region that is geographically and culturally close but offers major cost advantages (in Western Europe this would particularly include Eastern Europe and Turkey and in North America, Mexico); and offshore refers to a geographically distant region (traditional offshoring countries for both Europe and the United States are India, China, Malaysia, and the Philippines).
The bestshoring evaluation process selects the most favorable location by applying a comprehensive set of criteria which includes not only cost-effectiveness and scenario analyses, but also an assessment of service and quality levels, the question of warranty, and risk analysis and assessment:
Experience shows that cost-effectiveness analyses tend to lowball both the expenses involved in managing resources in the new region and transaction costs for know-how transfer and training. For example, many companies that shifted production processes to Eastern Europe underestimated the rate of subsequent pay increases, which in some regions were in the double-digits. The cost-effectiveness analysis should encompass detailed consideration of all relevant personnel costs. Also, wages / salaries and payroll deductions, costs associated with the availability of qualified personnel, productivity issues, and possible wage increases need to be factored in.
Besides cost effectiveness, it is critical to evaluate service and quality. Managing service and quality over great distances and across cultural divides is difficult at the best of times; the current short supply of skilled personnel (which is the case even in India) increases the challenge.
A further factor that needs to be considered when evaluating locations is the possibility of making warranty claims. Warranty claims are virtually unknown in some low-cost countries. Further, for some industries, damage or compensation claims can threaten the very survival of the business. The issue of warranty claims needs to be taken very seriously.
Finally, the bestshoring strategy also includes analysis and assessment of potential areas of risk such as difficult, emotionally fraught know-how transfer, high levels of personnel fluctuation, political instability, and limiting bundling to one location.