Should businesses cut their losses and bring offshore IT back to the UK?

Offshoring IT made sense ten years ago because labour costs in countries such as India were so much lower than the UK. But is this still the case?

In this guest blog post Andrew Holley, founder partner at Holley Holland argues that some businesses with offshore operations should cut their losses and come home.

Offshore or off course?

By Andrew Holley

“It’s time for a re-think on offshoring. A decade or so ago it may have made sense for UK-based organisations to send some of their jobs and business processes to areas of the world where labour costs were lower. There were reports of overheads cut by around three-quarters. Yet, any company still following an outdated offshoring strategy needs to ask: ‘Does the maths still add up?’

Think back to the London Olympics.  Overnight, the UK re-defined itself as a 21st century, vibrant and highly-capable nation; a welcome change from its previous heritage-based image. We should use this updated image to optimise our identity business-wise, bringing jobs back to the UK and encouraging European companies with bases in this country to see that the UK is better served by local jobs and services.

The tide is already turning; more competitive onshore wage bills are being negotiated through the unions and the cost of offshore manpower is rising. Gartner is predicting that by 2014, EU directives will drive legislation to protect jobs, reducing offshoring by 20 per cent by 2016.

The unemployment figures are fuelling frustration. Returning work to the UK would be good for brand image. Onshoring or nearshoring also helps reduce an organisation’s carbon footprint.

There are hard economic reasons to return too. Previous estimates of cost savings though offshoring now seem naïve. For some, the loss of customers has eaten away at any initial savings. Santander was an early backtracker, announcing in 2011 that it would replace its Indian call centres with those in Glasgow, Leicester and Liverpool.

Wages in fast-developing countries such as Brazil, China and India have risen steadily. Last year The Economist reported a rise in Chinese labour costs of 20% year on year over the past four years. One company, New Call Telecom, is reported as discovering that it was cheaper to set up its datacentre in Burnley, Lancashire than Mumbai.

Job mobility in India and other offshoring destinations is high. Consequently, training has to be continuously repeated and becomes an ongoing cost. In some sectors, the annual attrition/staff turnover rate can reach 30%.

It’s no wonder that nearshoring – the transfer of business operations to a nearby region – is becoming the favoured option. Doing so can mean becoming eligible for various incentives. Those relocating to an Enterprise Area in Scotland, for example may enjoy discounted business rates and enhanced capital allowances, training support and planning concessions.

There are still reasons why offshoring makes sense for some businesses; for example, for those that need to ‘”follow the sun” and provide a worldwide, 24/7 service. However, many companies that offshored on purely financial grounds are now left with a dilemma.

A move back could make sense financially and earn the trust and respect that has waned in the financial services sector of late.”