Offshoring: Up or Down, In or Down and Out?

I’ve been waiting for a real solid sign that U.S. companies are finally turning away from offshoring their IT services and other operations and bringing that business back home. Waiting, mind you, not because they should (that’s a story, er, debate, for another day) but because despite all the noise and foot-stomping and suggestions and proposed legislation and… well, frankly, the signs I see point to growth in offshoring. The companies that provide offshore services continue to grow, and make money. And ask any of them and they’ll tell you a big chunk of that money comes from companies based in North America.

Well, BDO USA begs to differ, at least when considering technology companies. The U.S. member of U.K. company BDO International Limited that provides assurance, tax, financial advisory and consulting services to a range of publicly traded and privately held companies, recently queried 100 chief financial officers (CFOs) about their current outsourcing practices. The findings? Only 35 percent of U.S. technology companies surveyed are currently outsourcing services or manufacturing to companies outside of the U.S. This represents a 43 percent decrease from the 2009 high when 62 percent of companies were outsourcing and a slight decline from 2010 (37%).

The study also found that of the companies who are not currently outsourcing (65%), the majority would not consider outsourcing beyond their backyard (58%), either choosing the U.S. (25%), Canada (13%), or indicating no plans to outsource at all (20%). And while some U.S. regulations have CFOs concerned (83% note concern with the changing national tax landscape), jobs and operations are not expected to head overseas any time soon.

The survey was conducted in January. One of BDO USA’s partners, Don Jones, says in a prepared statement announcing the survey findings that outsourcing can be a bellwether of the economy. Thus, the higher levels of outsourcing in 2009 were symptoms of a weak and struggling economy, and that the lower numbers indicate better times. “Tech companies turned to outsourcing in 2009 in order to reduce operating costs and ride out the recession. Since then, we’ve seen a marked decrease as companies recover and look to create jobs and growth close to home,” said Jones, who is a partner in the Technology and Life Sciences Practice at BDO USA.

I think Jones has a good point. And I think it is important to point out that this survey doesn’t specify what type of business a company might outsource; it could be manufacturing, IT services, research and development, etc. The top one was manufacturing, and right behind it (you guessed it) IT services. More specifically, it broke down like this:

Of the 35 percent of respondents that are currently outsourcing outside of the U.S., their outsourced services include manufacturing (53%), IT services and programming (43%), R&D (38%), distribution (26%) and call or help centers (12%). “Manufacturing is most commonly outsourced because it can be both labor and capital intensive,” said Jones in the statmeent. “When done right, an outsourced manufacturing function can cut operating costs and help tech companies to realize significant savings.”

All regions, except Western Europe, saw a decrease in the number of CFOs choosing them as outsourcing destinations. When asked about their current outsourcing destinations, China came in at the top with 35 percent of the CFOs picking that country (down from 44 percent in 2010 but only 19 percent in 2009). India was second, with 29 percent (down from 36 percent in 2010 and 50 percent in 2009).

Another interesting (but not surprising) finding from the survey: For the first time since 2008, India surpassed China as the leading location for future outsourcing. The CFOs who are currently outsourcing (35%) were asked to choose one country where they are considering outsourcing to in the future, and for the first time since 2008, India surpassed China as the leading location. In fact, 24 percent picked India, compared with 18 percent who picked China. In 2008, by the way, 30 percent chose India while 23 chose China. Latin America as a prospect continues to grow, up to 9 percent chose this region compared with 4 percent last year. This year 15 percent of CFOs also said they would not consider additional outsourcing in the future, according to the study.

I certainly think the BDO sheds some interesting light on the current state of offshoring. But is it a sign that offshoring’s days are numbered? I’m not convinced. What about you, readers? Will offshoring continue to grow or is the downfall here?