SINGAPORE--More western companies will be turning to "nearshoring" as they come under pressure from factors arising from politics and the changing cost-benefit dynamics of labor versus transportation.
According to Brian Prentice, research vice president of Gartner, the trend will be partly driven by the onset of new European Union (EU) initiatives by 2014. These are aimed at driving laws to protect jobs and reduce offshoring by 20 percent through 2016, he pointed out during the Gartner Predicts 2013 conference held here Friday.
In contrast with offshoring, nearshoring is the transfer of business or IT processes to companies in a nearby country, typically with one which shares borders. This is usually due to capitalize on benefits of proximity which include time zones, cultural and linguistic similarities, and political factors.
It also overcomes several constraints of offshoring, such as the differences in local employment laws and practices, and oversight to tackle risks of intellectual property theft and fraud.
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There are already signs of this happening with European companies turning to places like Poland and Spain for outsourcing service, said Prentice. The benefits of offshoring have started to diminish in the face of transportation costs outweighing the savings, the research vice president said. "We've already started seeing some companies moving their manufacturing back to America especially now with increased automation," he added.
"A lot of this also has to do with politics," Prentice pointed out. He cited how there was increasing pressure for governments to keep jobs at home or nearby, especially with the continuing upward trend in umemployment in the EU with little expectation of any short term recovery.
Establish local footprint As a result of this trend of nearshoring by European firms, Indian services providers have started to go beyond having sales office near their customers to put up delivery centers, noted Prentice.
He added non-EU organizations must establish a local footprint to avoid being squeezed out, and should consider low cost regions to improve their attractiveness.
Business processes outsourcing players such as Tata Consultancy Services (TCS) and Infosys have been among those expanding to be closer to their customers. Last September, TCS opened its new U.S. facility in Minneapolis in Minnesota.
Low-growth projects and the increasing industrialization of IT in western organizations will limit staffing demand, noted the Gartner executive. This could be a chance for Asian companies with higher growth to take advantage of the opportunity to expand into these markets, by increasing their onshore presence through local IT hiring, he added.