New Onshore IT Outsourcing Centers Outnumber New Offshore Locations

New IT outsourcing center activity was down overall for the first quarter, according to outsourcing consultancy Everest’s Group quarterly market report, with service providers announcing just seven new centers globally versus 19 in the previous quarter. But of those, five were based in the U.S. (compared to just one in the fourth quarter of 2012) and just two were located offshore (compared to 18 in the previous quarter), according to the report.

That’s a big shift from previous quarters, says H. Karthik, vice president of Everest Group’s global sourcing research practice, and is attributable to lower demand for global services. The trend was consistent across both traditional U.S. outsourcers and offshore-centric service providers, says Salil Dani, practice director of Everest Group’s global sourcing team.

Accenture Leads the Onshoring Pack

Accenture made the most onshore announcements, beginning with plans to hire 300 employees at its new Austin, Texas-based delivery center focused on software products for state health and human service agencies across the country. That will bring Accenture’s Texas-based workforce to around 5,000 employees.

Accenture is also investing in an SAP-focused innovation center in Toronto to serve industries including mining, banking, consumer goods, retail and the public sector as well as a Calgary-based office to help employees collaborate locally and around the world.

CanvasM Technologies, a subsidiary of India’s Tech Mahindra, launched its second device test lab in New Jersey, which will provide third party test and certification services. And IBM Global Services is opening a customer experience lab at its Thomas J. Watson Research Center in New York to help companies improve the way customers interact with their brands through the use of mobile, social, cloud, and analytics technologies.

But, Dani points out, the data on new deliver centers does not represent overall growth or contraction in either the onshore or offshore category. “While service providers did not set up a large number of new centers in offshore geographies during the first quarter this year, they continued to expand their headcount [at existing offshore centers],” Dani says.

Onshore IT centers are typically smaller in scale than provider’s offshore locations in India or the Philippines for example, says Dani. “They also usually support niche skills or customer-sensitive processes that may be difficult to serve from offshore geographies. Many recent instances of onshore setups have been due to customer-specific needs and considerations.”

IT Onshore Locations Bring Challenges

Onshore centers can present unique challenges to service providers, including higher wages and overall cost of operations, reduced scalability, and–perhaps surprisingly–increased attrition rates. “Attrition in onshore locations for some transactional skills, such as basic applications development work or transaction processing, may be higher than offshore locations given availability of alternate career options in these locations, says Dani.

The predominance of new centers onshore at the beginning of 2013 is unlikely to signal a move by service providers away from offshore locations, says Karthik. “While there has been recent increase in onshore activity, this should not be viewed as a secular trend or shift away from offshore locations,” says Karthik. “In fact, both locations continue to grow in terms of headcount and scope of processes. In company-specific instances, there has been some rebalancing of the location portfolio–for example, customer service work being moved onshore.”

For the balance of 2013, the Everest researchers predict that both onshore and offshore locations will grow, with most of the onshore activity concentrated in the U.S. and some limited onshore growth in Western Europe.

Stephanie Overby is regular contributor to CIO.com’s IT Outsourcing section. Follow everything from CIO.com on Twitter @CIOonline, Facebook, Google + and LinkedIn.