From Offshoring to Insourcing
Managing complexity,
increasing efficiency
and mitigating geopolitical risks
War in Ukraine, trouble spots in the Middle East, tensions in Asia. At the same time, the fundamental conflict between democracies and autocracies is smoldering. All these developments, together with the already existing pressure to be efficient, are causing more and more entrepreneurs and executives to think about offshoring, nearshoring, friendshoring and insourcing. Which of these is suitable needs to be well thought out and planned.
Jeremy Board has been working internationally for more than 30 years as an independent project manager for companies from various industries, ranging from construction projects in South Africa to telecommunications in Saudi Arabia and relocation of industrial production from Hungary to Romania to the merger of five companies in the UK. What he is currently experiencing is an unprecedented hesitation. “Since the COVID-19 pandemic and now intensified by the current geopolitical situation, there has been a lack of strong leadership and decision-making,” says Board. “Most companies downplay this problem because they don’t know how to solve it. Often no decision is made at all in fear that it is the wrong one. The status quo is easiest for management – but it’s a problem for the business.”
Lack of clarity slows down decisions
According to Jeremy Board, the hesitant attitude is related to the fact that there is a great deal of ambiguity in the current, constantly changing geopolitical situation. “Many decision-makers are aware that the environment is changing. But because they would have to deviate from the norm with some decisions, they wait – until it’s too late, which then only deepens the problem.” Therefore, those who proactively deal with relocations have an advantage.
Offshoring
When a company moves its business activities, especially production or service functions, to another country, it is offshoring. This approach is typically taken to reduce costs. Significant savings can be achieved by relocating to countries with lower wages and operating costs. In addition, some offshoring destinations offer special tax incentives and access to new markets. Countries such as India, China, and the Philippines are popular destinations thanks to their relatively low labor costs and skilled workforce.
Nearshoring
If a company relocates certain business processes to a neighboring country that is geographically and culturally closer to the company’s home, this is nearshoring. This can be an attractive option for companies that want to take advantage of offshoring without the challenges of long distance and time difference. Nearshoring also offers cultural benefits and facilitates communication and collaboration between teams. In Europe, for instance, activities are often relocated to countries such as Poland or the Czech Republic in order to benefit from comparatively low energy and labour costs as well as cultural similarities in the same time zone.
Friendshoring
In light of geopolitical tensions, friendshoring is gaining in importance. In this respect, the focus is on relocating business processes to friendly or politically stable countries. This reduces the risk of political and economic instability that can arise when offshoring to less stable countries. It also reduces the risk of supply chain disruptions. However, lower risks and higher stability are usually offset by higher production costs and a limited selection of low-cost production locations.
Insourcing
In the recent past, in view of the experiences during the COVID-19 pandemic and also the war in Ukraine, it has become apparent that companies are increasingly bringing outsourced business processes back in-house. This usually has the purpose of gaining more control over quality standards or reacting more quickly to market changes. Especially in times of technological innovation, insourcing can help secure know-how and competitive advantages. This is usually associated with higher production and personnel costs as well as the need to invest in one’s own infrastructure and thus enter into higher capital commitment.
Experience with relocation
Be it offshoring, nearshoring, friendshoring or insourcing – whenever operations are being relocated, there are some fundamental aspects to consider. These include factors such as the cost of the relocation, impact on employees, potential disruption to operations, legal obligations, and the benefits of the new location. Cultural differences, regulatory hurdles, lack of skilled workers, infrastructure or supply chain problems play a role in cross-border relocations. “In my experience, decision-makers tend to focus on the financial benefits of relocating. The social and political aspects are often treated secondarily,” says Board. To ensure the success of the relocation, aspects such as market access, political relationships, availability of resources and skills, and the loss of internal knowledge should be considered equally.
Focus on financial aspects narrows the view
Because of the focus on financial aspects, Board observes that the disadvantages of relocating often fade into the background. “These include job cuts in the home country, loss of internal knowledge or unrest in the workforce,” explains Board. In addition, there are often problems with quality control during and after the relocation due to different skills, standards and regulations. Cultural differences, currency fluctuations and changing tariffs, as well as political instability, could also become a challenge. To handle these aspects, management needs a proactive approach – and the courage to make decisions.
Board Journal – February 27th, 2025
