Backshoring: Just PR, or Long-Term Business Strategy?

Some companies, sensitive to the consumer backlash against offshoring, are cancelling their offshore outsourcing contracts and bringing work back home. Economists say that backshoring will help the U.S. and other foreign economies emerge from the recession much more quickly.

Some economists are recommending that U.S.-based companies that have sent work overseas bring it back to the U.S. They advocate for "on-shoring" or "backshoring" - not as a protectionist trade policy-but as a strategic move designed to conserve a market (namely, U.S. consumers.)

These economists argue that backshoring or reverse offshoring, as the practice is also known, will help stabilize the world's largest consumer market-the U.S.-as well as the world economies that depend on U.S. spending. They add that backshoring will also yield larger profit margins over the long term.

"The recession experienced in the U.S. has and will continue to have adverse consequences for other countries," says Dr. Felix Rioja, an associate professor of economics at Georgia State University, who has also consulted with the World Bank. "We are the biggest economy in the world and we buy many imported products from the rest of the world. But demand [for those products] has fallen as Americans have lost jobs and have less income."

Rioja believes that backshoring will help the U.S. and the foreign economies that depend on American spending emerge from the recession. By creating jobs in the U.S. through back-sourcing, unemployment will fall and more Americans will again have the income to spend on products and services sourced domestically and overseas, which will in turn help foreign economies rebound from the recession.

Several major U.S. companies including Sallie Mae, Delta, Dell and the Home Shopping Network are moving some of the work that they had offshored back home. IBM announced in January that it would open a new technology service center in Dubuque, Iowa. The company plans to employ up to 1,300 white-collar workers at the new center by the end of 2010. According to the Iowa Department of Economic Development, the incentive package, which is worth US$55 million over 10 years, includes a portion that will be forgiven once hiring numbers are met and a historic department store is refurbished.

But skeptics say the back-sourcing movement is more window-dressing than bricked substance.

"Keep in mind that even IBM, just two months after its big 'onshore' splash of 1200 jobs to Iowa, announced it was sending 20,000 jobs to India," says Christine Ferrusi Ross, Forrester Research's vice president and research director of sourcing and vendor management.

Ross notes that many companies that engage in offshore outsourcing and that are worried about the public relations fallout at a time when unemployment is so high in the U.S. are likely to keep highly visible jobs in the States. She adds that aside from IBM, there aren't many other companies bringing work back to the U.S., though there's anecdotal evidence that rising energy and transportation costs and declining labor costs in the U.S. are encouraging some manufacturers to do more production state-side. "Particularly in industries where there are concerns about risks. Think about recent scares with lead paint in toys or chemicals in baby formula."

Full Petential, a maker of treats and supplements for dogs and cats, is an example of a U.S.-based company that is planning to produce more of its products at home as a result of recent pet food scares. Currently, 80 percent of Full Petential's product line is manufactured in China.

"All of the bad press on the quality of food products from China has been a bit of a problem for our company," says Dale Greenbury, Full Petential's president. "We work with a very high quality manufacturer, and I am very confident in the security of our supply chain, but I am tired of fighting the never-ending battle with consumers."

Greenbury plans to continue manufacturing a small portion of its product line overseas, but he's going to bring back the majority of the production work to partners in the U.S. or in-house. And he thinks Full Petential's top line revenue will benefit from the decision.

"Because the consumer base has been conditioned to think that 'Made in the U.S.' is somehow better quality, we would definitely be playing up the 'Made in America' angle," says Greenbury. "I definitely expect that our sales will increase dramatically with the 'Made in USA' badge."

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