The History of Offshoring: Rise, Fall, Resurgence and Fall again?
The complex evolution of offshoring, from its manufacturing roots to today's remote work revolution, and examining what lies ahead for global operations.
Business operations have undergone significant transformation over the past several decades. Offshoring is one strategy companies use to gain competitive advantage through:
Access to larger labor markets
Talent acquisition from competitors
Cost reduction
Other strategic benefits
In this post, we'll explore the history of offshoring and speculate about current worldwide trends and future developments.
Key Definitions: Offshoring is often confused with outsourcing, though they are distinct concepts:
Outsourcing involves contracting work to external parties, but can occur within the same country—for example, using contractors rather than employees
Offshoring specifically means moving work to a different country
Companies can also combine both approaches through offshore outsourcing.
The Birth and Evolution of Offshoring
The practice of relocating business processes from one country to another has a history spanning more than half a century. Its origins trace back to the 1960s and 1970s when large corporations began transferring their manufacturing operations to lower-cost countries. General Electric is widely recognized as one of the early pioneers in this movement.
In America, firms moved production to factories in Mexico under the Maquiladora system. This program allowed manufacturing plants in Mexico to operate with parent company administration facilities in the US. Companies operating in the US could send equipment, supplies, machinery, raw materials, and other assets to their Mexican plants without paying import duties. The finished products could then be exported back to the US or third countries. This arrangement improved employment rates in northern Mexico while helping US companies maintain competitiveness.
However, this shift heavily impacted smaller industrial towns across America, leading to high unemployment rates as industries left these areas. As a result of this trend, the term "outsourcing" emerged from the phrase "outside resourcing," which originated around 1981.
The IT Revolution and Second Wave (1990s)
The 1990s brought a new wave of offshoring with the rise of the Internet and telecommunications revolution. These technological advances made physical location less significant for many business functions.
Companies like Dell and IBM began tapping overseas markets to fill call center, financial, and IT positions. During this period, management consultant Peter Drucker coined the influential business tagline:
"Do what you do best and outsource the rest"
This philosophy encouraged companies to focus on their core competencies while subcontracting areas where they held no unique advantage.
However, this strategy shifted dramatically in the early 2000s.
The Knowledge Work Boom (2000s-2015)
During this period, there was an essential shift as knowledge-intensive business functions like R&D, product design, and engineering were affected. These are considered core functions for many companies. Engineering work—especially software development—began surging to India, where engineers received significantly lower compensation than in America or Europe.
The First Wave of Disillusionment (Mid-2000s)
Shortly after this wave began, companies started questioning their offshoring strategy. A 2005 Deloitte Consulting survey revealed that a quarter of companies outsourcing tasks eventually reversed their decision. Several factors contributed to this reversal:
Rising salaries in offshore locations due to increased competition
Communication challenges stemming from language and cultural differences
The disadvantages of working across different time zones
This led to a reshoring movement from 2010 to 2015, with many companies bringing work back to their home countries. Businesses began recognizing the value of domestic workers who better understood local markets, culture, and consumer expectations.
As wages rose in established offshore locations, companies began seeking new countries as potential offshoring destinations.
Resurgence (2016-)
Despite reshoring trends, offshoring evolved into a more nuanced business strategy. Experience from previous decades revealed several key trends:
Companies recognized that offshoring wasn't merely a cost-cutting exercise, as there were significant hidden costs to consider
Core business functions became crucial considerations, as hasty outsourcing could negatively impact operations
Organizations learned that offshoring's effectiveness varies significantly across industries and companies
The COVID-19 pandemic transformed the landscape as remote work became standard practice. With companies already equipped to handle remote operations, the logistical costs of managing offshore teams decreased substantially, giving offshoring renewed momentum.
Success Stories About Offshoring
WhatsApp
The founders initially moved engineering operations to Eastern Europe due to a lack of in-house expertise while maintaining customer support in the US. This arrangement evolved, with engineering gradually moving in-house until Facebook acquired the company.
Google
Google maintains a strong engineering presence in the US while strategically acquiring companies worldwide to establish global hubs. This approach demonstrates that offshoring isn't solely driven by cost reduction but also by pursuing specialized talent and knowledge across different regions.
When Offshoring Goes Wrong
Failed offshoring stories tend to make headlines, while successful cases often go unnoticed. Stories of failure spread quickly and dramatically, whereas successful offshoring typically operates quietly in the background.
Dell's Customer Support
Dell offshored its support to India in 2001 but ultimately reversed this decision due to customer dissatisfaction. Customers are sensitive to changes in support services, and moving customer interactions overseas can backfire. While offshoring may initially reduce costs, its long-term consequences can be problematic. Many customers view the absence of domestic support as a significant issue. Though customers might not be able to switch providers immediately, this dissatisfaction often leads to customer loss over time.
Outsourcing Which Leads to Offshoring
Companies frequently begin by outsourcing their IT operations to large providers relying heavily on offshoring. Many such projects fail because providers overpromise and underdeliver in short timeframes. Accenture, in particular, has been associated with several notable failures, including:
→ Hertz sued Accenture for failing to deliver on contractual obligations
→ Marriott experienced a major data breach
→ Ohio's Medicaid system suffered from numerous defects and breaches
The ongoing offshore debate
Offshoring remains controversial, with implications that extend beyond business into politics. Even when implemented well, offshoring presents several challenging issues:
Communication and culture: Differences can create significant barriers to collaboration and understanding. Additional challenges include time zone mismatches and travel distances. Nearshoring—offshoring to neighboring countries in the same time zone—can help address these issues.
Quality concerns: Maintaining quality standards becomes more difficult as a company grows. This challenge intensifies when business processes are offshored. Companies must carefully consider which roles to offshore and to what extent before quality impacts become visible.
Political impact: Poor offshoring practices—particularly when companies offshore solely for cost-cutting—can lead to job losses in origin countries. This often results in stricter government regulations designed to protect against harmful offshoring practices.
Best Practices for Successful Offshoring
Over the past decades, several key best practices have emerged for successful offshoring:
Collaborative Work Approaches—Offshore teams should not be treated differently, and they should work together in hybrid arrangements. This gives both sides valuable perspective.
Slow & Steady Implementation—Don't rush to move entire teams offshore or set aggressive growth targets in unfamiliar countries where you lack experience. This approach will likely fail.
Relationship Building—When establishing an offshore site, invest in face-to-face initiatives. Strong relationships improve productivity and quality. Many companies try to cut costs by skipping this crucial step, then wonder why their teams struggle to collaborate effectively.
The Future of Offshoring
What does the future hold for offshoring? When implemented thoughtfully, businesses can benefit from accessing a wider talent pool. However, many companies still pursue offshoring solely to reduce costs. Currently, we're witnessing a political shift, though its full impact remains unclear.
Political parties in many countries are gaining power by promising to bring jobs back home, potentially reversing offshoring trends. Yet our global economy has created deep interdependencies that can't easily be undone.
Different regions worldwide have developed specialized talent pools, making it impractical for companies to find all the expertise they need in a single country.
Throughout history, offshoring has created opportunities for countries to acquire knowledge and develop their economies. Policies that prevent or reverse offshoring could hamper overall economic growth.
We must ensure businesses don't pursue offshoring purely for short-term gains without considering long-term consequences. How this balance develops over the coming is unclear. At least we can say it is an interesting time to live in.
The message for businesses should be clear: while offshoring offers opportunities and access to global talent, focusing solely on cost reduction will lead to short-term benefits but long-term challenges.