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C. Warren Axelrod

Outsourcing and Offshoring – Now Insourcing and Reshoring

There have been hints about the recent movement towards “insourcing” and “reshoring,” along with the usual confusion regarding terms used. In the December 2012 issue of The Atlantic magazine (pages 45-52), there was a noteworthy article by Charles Fishman called “The Insourcing Boom,” about the repatriation of a major General Electric appliance manufacturing facility to a previously-abandoned facility in Kentucky. To my mind, this article confused insourcing and reshoring (or onshoring,” which is the term I have typically used), using the former when they really meant the latter. In fact, I wrote a letter to the editor to The Atlantic magazine (which they did not publish) as follows:

“While it is commendable that GE is repatriating some of its appliance manufacturing to the U.S., it is unconscionable that they offshored such manufacturing in the first place. Businesses jumped on the offshoring bandwagon since there was a general, though misplaced, conviction that costs would be reduced overall. It is true that many corporations and consumers did reap benefits from lower direct costs, as well as savings from misguided tax laws that favored moving production abroad. It is now “politically correct” to announce when products are going to be manufactured stateside, as in the recent case of Apple Inc.’s recent decision to manufacture a line of computers in the U.S., as documented in the article, “A Mac That’s ‘Made in U.S.A.,” by Jessica E. Lessin and James R. Hagerty in The Wall Street Journal of December 7, 2012. The economics of the decision have changed in such a way, with lower relative employee and energy costs, so as to facilitate justification of the return of manufacturing to the U.S. However, had the full economic analysis been done in the first place, such production would have been retained domestically all along.

While my book, Outsourcing Information Security (Artech House, 2004), focused on IT (information technology) outsourcing, and was nonjudgmental with respect to offshoring, I did raise concerns that many indirect and less tangible costs were not being included in analyses leading to outsourcing/offshoring decisions. Among the risk categories that I highlighted were the loss of control, internal expertise and intellectual property and the expense and effort of retraining, which Fishman pointed out as problems now being encountered by GE in their reestablishment of manufacturing at Appliance Park in Kentucky.

Onshore outsourcing has many valid reasons relating to increased efficiency and the need for scarce, specialized expertise, and often has minimal impact on overall U.S. employment and spending. However, for offshoring you must add social costs, such as supporting huge numbers of displaced unemployed workers, and deduct the benefits of their consumer spending. The equation will then quickly switch in favor of onshoring. In part, this is also because global trading partners have not lived up to age-old economists’ expectations that foreign consumers and corporations would purchase more U.S. products and services as their standard of living improved.

The fact that business executives, such as GE CEOs Jack Welch and Jeffrey Immelt, were handsomely compensated for decisions that ultimately cost the country hundreds of billions of dollars, is but another example of “moral hazard,” which was exemplified by the lack of responsibility of banking and finance executives for the 2008 financial meltdown. Perhaps clawback of spoils emanating from these decisions is unrealistic, but it would certainly be reasonable.

One last point … There is a big difference between insourcing and onshoring, which is not apparent from the title of Fishman’s article. Onshoring, which is the crux of the article, is making increasing sense as relative direct human and energy costs are falling in the U.S. Insourcing is quite another matter. If the outsourcer is based in the U.S., the benefits of insourcing may be minimal from the corporate perspective and neutral with respect to the U.S. economy. It is important to account for this difference, since outsourcing is frequently the right decision, whereas offshoring often is not.”

More recently, in its January 19, 2012 Special Report on Outsourcing and Offshoring, with the title “Here, there and everywhere,” The Economist magazine elaborates on this phenomenon.

I find it particularly interesting that many companies, which are embarking on reshoring (or onshoring) and insourcing, are confronting many of the consequences from risks that I had warned about in my book Outsourcing Information Security, referenced in the letter, and these companies are about take on a whole new series of risks of which no one appears aware, or which they are not mentioning, if they are indeed aware of them.

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