As technology becomes ever more central to business operations, IT costs are spiraling, while offshoring and outsourcing — traditional means of cutting IT costs — are undergoing radical changes. An organization’s location strategy can be a means both to optimize costs and leverage innovation, but achieving that balance requires rethinking how to approach it from vision to implementation.
Modern outsourcing and the global rush for tech skills
Modern outsourcing now extends beyond basic services to help enterprises keep pace with rapid advancements in areas such as cloud migration, application modernization, cybersecurity, and artificial intelligence (AI). But these needs have set off a global rush for already-scarce tech skills.
One technology advancement in particular that has hastened more strategic approaches to outsourcing is generative AI and digital agents. These tools can execute tasks that more simplistic robotic process automation cannot, lowering costs by reducing the manual intervention needed to complete repetitive labor-intensive work that is typically outsourced.
The potential of more effective, efficient, and advanced AI-enabled capabilities is driving organizations to reevaluate their historical approach to outsourcing. Given new digital ways of working with embedded AI, strategic decisions can be made regarding how to tap the best talent pools across the world, proximity to and penetration of key markets, and the ability to call upon innovation hubs that promote high-velocity collaboration and specialized expertise.
The impact of global crises on location strategy
Organizations are also reconsidering location strategies to enable new ways of working. Businesses increasingly recognize the payoff of having cross-functional teams working closely together. That has prompted a reevaluation of traditional outsourcing models focused on cost savings, in which functions were compartmentalized and work was handed off between teams without ongoing partnership. Now, businesses seek proximity to key stakeholders, access to a cross-section of diverse specialized talents, and an environment that sparks collaboration.
At the same time, a volatile external landscape shaken by global crises, shifting geopolitics, and other sources of instability is also driving shifts in location strategy. Outsourcing in traditional locations like India, Malaysia, Ukraine, and Poland has become more expensive as political turmoil has forced companies to transfer activities to new geographies. Significant stresses and crises, such as supply chain disruptions and outages, underscore the need for the contingent talent model and facilities to mitigate the variety of risks that can jolt an enterprise and its customers. In response to these concerns, new location strategies have gained favor over the past few years. The questions for organizations will not be around whether to adopt any of the approaches outlined below but which ones, to what end, and to what extent. What is the best mix?
Insourcing offshore production
When organizations insource rather than outsource, they establish a production factory abroad to tap into larger offshore talent pools at lower costs without relying on a third-party provider. In this evolving landscape, vendors have emerged that have expertise in setting up global capability centers on behalf of their clients. One example is the build-operate-transfer (BOT) model, whereby a supplier creates and manages the unit before eventually selling it to the client.
Reshoring critical skills
Enterprises are also bringing back certain roles and functions from offshore locations to the company’s domestic market to achieve better oversight, closer workforce collaboration, and clearer strategic alignment. A firm may still take advantage, though, of lower labor costs in certain locations within its home country (for example, Texas or Utah).
Adopting new outsourcing models
In part because outsourcing firms are offering more sophisticated services like AI-related work, automated code generation, and test case deployment, service models are shifting from time- and resource-based to outcome- and value-based pricing. Contract terms emphasize the delivery of business value and shared accountability between the enterprise and its partner.
Offshoring activities to new locations
New hubs are gaining share in offshoring as their increasingly skilled workforces, quality of life, political stability, and government support combine with longstanding factors like time zones close to those of firms’ domestic markets. Some notable examples are Costa Rica, Bulgaria, Spain, and Portugal.
Why role location and sourcing decisions matter more than ever
None of the approaches above is one-size-fits-all. Leaders need to consider several key elements to guide which roles should be in which locations and whether they should be sourced internally or externally. Consider the guidance below.
Retain strategic roles internally: Roles that are essential for differentiation, maintaining competitiveness, controlling critical aspects of operations, and delivering exceptional customer experiences should be kept in-house. These roles may include strategy and planning, UX/UI, business operations, and product management (see Exhibit).
Consider the fully loaded costs of outsourced/offshored resources: Leaders should take into account the complete costs associated with outsourcing or offshoring. These include hidden costs that may stem from lower full-time employee (FTE) productivity, reduced managerial visibility, increased demands on management’s time, unreliable local infrastructure, cultural differences, time zone variance, and regulatory risks.
Four key strategic actions to formulate a winning location strategy
1. Frame the vision
At the outset of planning, clarify key objectives and expected outcomes for your organization’s new location strategy. The vision, informed by the latest innovations and the expected future demand, must determine a location’s contribution to business goals (such as cost reduction or access to talent), assess technical needs for a location (including data center capabilities, network connectivity, and cybersecurity measures), and establish overall timelines and major milestones.
2. Envision an operating model that consistently uses the best of what’s available
To assess the eligibility of roles for offshoring or outsourcing, consider disqualifying strategic, regulatory, or security factors. Other key dimensions to analyze include the availability of required skills in potential locations, task completion times, your peers’ commonly offshored roles, and compliance, security, and operational risks associated with offshoring.
3. Build an objective business case
Define the gap between your organization’s current geographical distribution of full-time equivalent employees and the desired distribution, outlining the benefits, costs, and risks of the change. In reviewing your current workforce, detail the number of FTEs, roles, locations, and operational performance metrics. When defining the target workforce, include roles to be offshored or outsourced and the anticipated performance improvements. To support successful execution, the case should evaluate operational, financial, and reputational risks, outline corresponding mitigation strategies, and identify key performance indicators (KPIs) to measure success.
4. Pair your vision with tactical planning
This plan should include a framework defining roles and responsibilities for the implementation team, a detailed timeline breaking the implementation activities into six- to 12-month waves, a comprehensive change management plan for communicating changes to affected employees, a risk management plan for each implementation wave, and a way to capture value until bottom-line impact.
As a new geopolitical era and the rapid evolution of AI challenges long-held assumptions about why and how to offshore and outsource technology talent, organizations that proactively embrace the associated opportunities rather than merely react to them will be best positioned to unlock innovation, efficiency, and greater command of existing and new markets.