Building a Case for Reshoring: Total Cost of Ownership and Beyond
As organizations increasingly question the value of offshoring (due in large part to rising wages and the adoption of automation) the concept of reshoring is gaining favor both as a solution to address the perceived declining value of offshoring as well as to enable enterprises to better incorporate overall business objectives beyond cost savings.
By removing business barriers created by offshoring, notably communications, efficiency, agility, delivery management, and regulatory compliance, reshoring helps organizations to achieve better overall business outcomes. Although reshoring is likely to be more expensive than offshoring, the non-financial benefits – faster time-to-market, better knowledge retention, lower attrition, and comparative ease of management – make for a compelling sourcing model.
Determining Total Cost of Ownership
In order to build a case for reshoring, it is first necessary to evaluate the total cost of ownership. When considering cost variances between the two models, one must consider both direct and indirect, or hidden, costs to determine a Total Cost of Ownership (TCO). All too often in their analyses, organizations look only at direct spend or visible costs, missing key elements of the TCO.
According to Everest Group's research, the key elements of a TCO framework are:
- Direct spend
- Transition and onboarding cost
- Governance cost
- Relationship/account management cost
- Productivity savings
The research also identifies best practices organizations should integrate into their offshore-versus-reshore TCO analysis. First, the analysis should take a five-year view of TCO for each sourcing model because
- A five-year timeframe is needed to ensure a realistic picture of all phases of transition and operations
- The reshored model needs time to bear fruit – it has high set-up and transition costs in the initial years, and takes time to stabilize and ultimately reflect the impact of productivity gains
- Key assumptions in the reshored model (inflation, transition, governance, etc.) are most accurate over a five-year timeframe
Second, as with any challenge, it is beneficial to view the TCO for each model from several vantage points:
- Average annual cost across all five years
- Final year’s cost, reflecting true steady state for each model
- Cumulative five-year cost, capturing the full cost of each model
- Year-over-year cost, demonstrating cost drivers, by model, by year
Looking Beyond Cost
Although even a highly optimized onshore model is likely to have a higher TCO than an offshore model, the onshore model offers significant non-quantifiable benefits. A nearby delivery location can afford greater visibility into operations, from customer complaints to product problems, from employee challenges to inventory management. For example, the process efficiency and agility offered by reshoring can help companies to reduce the new product development lifecycle and accelerate speed-to-market. Although it is difficult to quantify the non-financial benefits of reshoring, they are vital to a well-informed sourcing decision.
Optimize Before You Leap
Finally, a potentially counterintuitive, but informative, component of the reshoring business case is essentially to build a case against it: organizations should fully explore optimizing the existing offshoring model (and taking advantage of sunk costs and effort), making sure to fully understand key issues and all potential mitigation options, before deciding to reshore.
Note: The metrics/parameters for each TOC component are described in the report Developing a Business Case for Reshoring, among additional details on how to integrate them into your business case.