Reshoring: do you have the home advantage?

Date: 18-05-2015

Tagged as: Article

 

The trend for offshoring is reversing, with businesses increasingly perceiving the UK as a sustainable, cost-efficient place to operate. Tom Carroll, Director of EMEA Corporate Research at JLL (formerly Jones Lang LaSalle) outlines the opportunity.

Tom Carroll is Director of JLL’s EMEA & UK Corporate Research team. Specialising in the provision of research and strategy support to Corporate Clients.

 Tom Carroll

Economic conditions have been improving steadily in recent years and this return to economic growth has painted the UK in a stable, favourable light for businesses that have typically offshored parts of their business. A high level of transparency, an increasingly favourable corporate tax regime and an overall environment that's open for business have prompted businesses to return operations to the UK.

Changes in the global market

UK businesses that serve UK customers are at a clear geographical advantage by being in the same country, but the strengths go far beyond simple proximity.

For any business, the quality and availability of talent is critical and the UK has this in abundance. Set in context with what's happening in the global market, this becomes highly attractive: in offshore locations such as China, we're seeing an escalation in labour costs1 and therefore the gap is closing between the UK and some of these markets. In terms of human resources, staff turnover and attrition are also causes for concern.

In the wider context, the complex supply chains inherent with using offshore locations come with various risks and challenges, and the political instability seen in some traditional offshore countries has further prompted businesses to rethink their offshoring strategies. Cost and operational efficiency are at stake, and reshoring can provide stability.

Growth in all sectors

Typically, we hear about manufacturers reshoring production back to the UK, but what we've found is that a number of sectors are looking at alternatives, such as nearshoring in regional UK locations, to supplement a larger presence in London. Financial services and professional services are two examples of sectors we see to be keenly exploring investment in nearshore hubs, driven by the opportunities of lower-cost UK locations, and the operational advantages of physical proximity.

Evolving offshore and nearshore functions

What's also notable about the trend towards reshoring and nearshoring is that the types of functions being placed there are evolving. Traditionally it's been call centres or contact centres and other back office functions. Now we're finding increasing sophistication.

Some banks, for example, use nearshore locations for their middle office and trading operations. Overall, businesses are really exploring new areas that have not previously been offshore – they're extending and expanding various functions in regional centres.

Interestingly, while the US and UK have seen the greatest levels of reshoring activity, we're beginning to see evidence that parts of Europe are experiencing a similar trend. A recent study of Eurozone companies1 found that 60% had reshored some of their operations in the last year, while 55% have done the opposite. Italy, Ireland, Germany and Spain all appear to have reshoring on the agenda.

Who really benefits?

It's not just the larger multinational companies that are assessing the balance of offshore and onshore locations – our own research has shown that up to 36% of UK mid-market firms expect to bring some or all of their offshore operations back onshore in the next three years.2 And the rewards are significant. Balfour Beatty reportedly estimated that their recent creation of a nearshore shared service centre in Newcastle saved them around £15million over an initial 12 month period.3 In addition to reducing complexity and being closer to customers, the cost savings make the case for reshoring and nearshoring compelling.

The wider UK economy stands to benefit from this trend too. As well as increasing economic output, analysis by PwC suggests that up to 200,000 jobs could be created in the UK as a result.4 Other benefits would include a strengthened manufacturing sector and a greater regional balance in terms of economic activity.

Sustainable support

Whilst the reshoring trend has gathered some momentum, the UK has a big role to play in sustaining it. Productivity efficiency is key – if the UK can continue to offer a competitive environment in terms of tax, infrastructure, skilled labour and grants and incentives for investment, these will all encourage and sustain this trend. The Government has a pivotal role – to encourage clustering and to keep investing in infrastructure and to create a genuine business-friendly environment.

Furthermore, the business community has a very important role to play as global ambassadors for the UK. By ensuring that the news of growth and investment in Britain are heard outside of our borders, we can encourage business back in.

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