The Proxima Supply Chain Barometer surveyed 2000 Chief Executive Officers and found that 89.9% identified problems with the resiliency of supply chains. It also found that the organizations that they led were deploying a mix of strategies to deliver greater resiliency of supply, including adding additional oversight (45%), moving some supply arrangements in their entirety (45%), and setting up new supply arrangements to run alongside existing (44%).
Post pandemic/ Suez Canal/ Ukraine, resilience is the word on everyone’s lips, including within the IT community, where supply and demand aftershocks are still being felt in 2023. In the early days of the pandemic, there were notable demand spikes and shortages that affected the supply of technology hardware and componentry in particular. These incidents have shone a light on the fragility of global technology supply chains and, at the same time, further evidenced that some supply chains are viewed by governments as key to national security and future economic growth.
Disruption in the early 2020’s bred plenty of dissenting voices. Now they seem to have turned into a harmonious roar, with a clear diktat: resilience is crucial – supply chains must be diversified and production localized.
But is it that simple?
Of course, the answer is that it is not that simple. Whereas some supply chains or parts thereof can be “lifted and shifted” with low impact, others may have closer and longer-term ties into specific locations. An example of this would be Apple, having invested two decades of know-how into Apple City in China and building up an extended supply chain of over 1 million workers; it is implausible that Apple could lift and or shift quickly or without consequence. Furthermore, China represents a key market.
Another example of supply chain complexity would be raw materials availability. China’s recent decision to control exports of gallium and germanium, metals used in chips, electric vehicles, and a range of telecoms products, adds complexity to those wishing to diversify into new locations, be they on, near, or offshore.
Supply constraints, be those raw materials, skilled or low-cost workforces, or something else, are just one example of “beyond price” considerations in the risk and resilience debate, and in particular, location strategies. Proxima’s research further summarized that of those who had set up new supply routes or moved the entire operation, 36.5% utilized offshore locations compared with 79% utilizing nearshoring or friendshoring and 43.5% using onshore locations.
The key reasons cited for the moves were;
- Improved visibility of supply chain for decision-making – 45.9%
- Sustainability – 38.7%
- Additional cost savings – 37.4%
Technology in focus
In the technology hardware and components market, we have seen localization come to the fore in the past three years, with significant government support to drastically improve resilience in both the United Kingdom with the National Semiconductor Strategy and the United States with the Chips and Science Act. We have also seen key players in the market, such as TSMC (Taiwan Semiconductor Manufacturing Company), seek to diversify production locations moving closer to (incentivizing) key markets and customers in the US and Europe.
However, within the IT Professional Services market, the silence on localization and supply chain resilience has been deafening. Services are so well established offshore that many see the cost of re-patriating requirements as a significant addition to the ever-increasing cost challenge, therefore making it an undesirable and largely unworkable option. In such circumstances, automation can appear to be less attractive as the potential savings are significantly lower than for automating onshore roles or processes, particularly from first principles.
In stark contrast to hardware and components, we are still seeing organizations push hard on offshoring in services, maximize offshore blends and, in some cases, move onshore roles to landed or nearshore locations. This helps to further ease budgeting concerns and provide access to skilled resources that have become more scarce and, therefore more expensive locally.
There may be good reason for this contrast – services do not suffer from many of the same location constraints as some raw materials and manufacturing supply chains. In theory, at least, skillsets and experience can be utilized from numerous established centers of excellence across the globe, offering follow-the-sun development options.
With such diversity of location, capability, and capacity available, building strong resilience across IT Professional Services is eminently achievable without the need for localization. Yet for many, the terms nearshore and offshore will immediately trigger a thought of single locations and often a single provider.
The pandemic, coupled with the subsequent great resignation, had severe repercussions for organizations in key offshore hubs such as India. We witnessed a high number of positive Covid cases and increasing attrition rates as workers moved between the large outsourcers for enhanced remuneration packages (as organizations scrambled to fulfill customer demand). The disruption caused was felt across all industries as customer-specific knowledge was lost at short notice with minimal opportunity for knowledge transfer.
This highlighted that single source and rigid location solutions, no matter how attractive, can always carry risk and gave weight to the argument that many IT Professional Services supply chains are not optimized for resilience.
How a multi-vendor, flexible location strategy could work for you
Single source solutions are the common conclusion of supplier consolidation exercises, with location consolidation a common but unintended byproduct. This tried and tested method has been used countless times and has often been a lever that delivers significant financial benefit upfront, however, this cookie-cutter approach is normally at the detriment of the bespoke needs of the organization in question and further reduces resilience in the supply chain through creation of a single point of failure.
In contrast, multi-vendor strategies implemented appropriately ensure that single points of failure are mitigated effectively. These strategies provide the ability to maintain services should unforeseen circumstances impact the ability of one strategic vendor to deliver required services. In addition, multi-vendor models coupled with outcome-based requirements drive continuous competition, innovation and automation as vendors compete via mini-competitions for individual statements of work.
Multi-vendor strategies also provide a greater ability to implement flexible multi-location strategies to enable supply to be moved location at short notice to skilled resources with knowledge of organization specific products and systems. Such strategies also provide a fantastic opportunity to implement market leading approaches, e.g. global workflow methodologies such as follow-the-sun – with teams located in various countries around the world enabling 18-24 hour delivery each day for key enhancements, driving products to market at an accelerated pace. The cost associated with such strategies is also very manageable and offers great flexibility throughout the year to meet strategic objectives during peak trading periods. Locations can be specified based on organization requirements and may be linked to language requirements, business locations or access to required skills and experience.
For a combined multi-vendor, flexible location strategy to be effective, load balancing and monitoring provisions must be implemented and tracked effectively to ensure that requirements are appropriately split between strategic vendors, and there is no over-reliance on a single location. The idea that nearshore or offshore means a lower capability of resources is a misconception. With clear requirements and strong contract management provisions, it is possible to improve standards whilst reducing costs by widening the net to utilize alternative locations. Whilst issues persist in the UK and US, capability and capacity is increasing exponentially across multiple regions throughout the world. We are seeing locations emerge from North Africa to Central & South America, Eastern & Western Europe to South Asia.
One Size Limits All
The traditional binary debates surrounding onshore versus offshore have long since ran their course. This includes but is certainly not limited to the assumption that there is industry-wide best practice to be followed with regards to percentage targets for the onshore/ offshore split, that all offshoring must be to one location, or even that the terms onshore/offshore and nearshore mean the same thing to all organizations.
Trying to apply the same methodology and organizational design across multiple companies is destined to fail. It’s a case of one size limits all. Any initiative should consider bespoke requirements, risk appetite and value drivers before thinking about potential solutions.
The range of available options is extensive, and the geographic locations varied. Capability alongside capacity is rapidly increasing all over the world. It is no longer accurate to cite increased cost or lack of alternative options as factors hampering the ability to build resilience in IT Professional Service supply chains, to do so indicates a lack of appetite for change.
It’s time to discard the traditional playbook dictating your shoring decisions. Throw off the bowlines, sail away from the safe harbor and embrace the era of right-shoring.
If you want to discuss your options with regards IT Professional Services and right-shoring, contact the market-leading team at Proxima.