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Onshore, Nearshore,
Offshore:
Still Unsure?
The options for global location decision makers are extending. Optimal
decisions require a broader and more considered evaluation reflective
of changing times.
2 Advance • Onshore, Nearshore Offshore: Still Unsure? • September 2012
Introduction
Since the publication of our original white paper ‘Onshore,
Nearshore, Offshore: Unsure?’ in 2008, the operating environment
has changed profoundly for international corporations. Deep global
recession, then partial and uneven recovery has given way to a new
phase of economic uncertainty stemming from the Eurozone debt
crisis. A wave of political and social upheaval has impacted the
Middle East and North Africa toppling regimes previously considered
bastions of stability. ‘Emerging’ nations including the BRICS and
MIST1 countries compete for an ever-increasing share of global
growth potential across a range of industries.
Such a rapidly changing global landscape dramatically impacts
corporate strategy and location decision-making. But there is also
change coming from within international corporations. Evolution has
occurred in both the decision-making framework and the geographic
focus of shoring decisions and locations, with an emphasis on
optimisation in a complex and rapidly changing world.
Drivers of Shoring Activity
Despite the depth of change over the past four years, many of the
original drivers of ‘shoring’ remain as summarised in Figure1 below:
Figure 1: The Drivers of Shoring
Driver Trend
Productivity • The ability to achieve greater productivity and margin
improvement through the (re)location of business
functions is of growing importance
Labour • The potential to access and retain appropriate labour
pools and talent is becoming more challenging
Cost • Cost arbitrage is a usually a key benefit, however
there is growing variation in how the financial benefits
of solutions are measured.
Revenue
growth
• Increasingly shoring decisions are being linked to
revenue growth, as a potential access route into new
markets
Risk
Management
• Managing supply chain and operational risk is
emerging as a key driver of shoring and location
decisions
1 Mexico, Indonesia, South Korea, Turkey
Although there has been some consistency in the drivers of shoring
activity - there are also signs of an evolution and growing
sophistication in the way companies make location decisions. For
one, the operational volatility of the last four years has seen risk
mitigation move up the agenda, and become a core consideration of
both location and real estate strategies. We have also seen changes
in the comparative advantages of competing locations, as labour
costs, currencies and growth rates fluctuate.
Regardless of the economic outlook, the strategic imperatives
driving shoring activity will remain in place, however the decision-
making process continues to evolve and mature. This paper
explores this process of evolution, some of the key global trends
and their impact on location decision-making; and the resultant
’shoring’ of business functions.
Agility back on the agenda
Corporate agility is once again firmly on the agenda after a period of
retrenchment in the wake of the global financial crisis. Although
volatility and uncertainty remain, companies are once again
analysing their global footprint and location options in a more
strategic way to optimise operational efficiency and access to
growth markets.
In addition to this renewed focus on corporate mobility, corporate
balance sheets have grown in strength, as companies have reduced
costs and repaired financial positions. While on the one hand this
reflects continued caution and constraints on investment, it also
highlights the fact that many international companies are now well-
positioned for a managed process of strategic and selective growth.
Figure 2: Well positioned - Corporate balance sheets
Source: Oxford economics
-6.00
-4.00
-2.00
0.00
2.00
4.00
6.00
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
United States United Kingdom Eurozone
Advance • Onshore, Nearshore, Offshore: Still Unsure? • September 2012 3
While the focus on cost and efficiency will remain a crucial driver of
corporate strategy going forward, investment is being made
available for smart location decisions which align with emerging
growth priorities. The economic climate is supporting strategic
decisions with lower cost rationale, improving the likelihood of
obtaining business case approval for shoring decisions. More
ambitious programmes to recast real estate portfolios and supply
chains to align with the geographies of future growth and reduce
operational risk will be authorised as the global recovery begins to
take hold. However with high levels of internal competition for
allocation of corporate capital, a robust business case will remain
critical to securing project funding.
Figure 3: Activity on the rise – No. of FDI projects 2003-2012
Source: fDi Markets (from The Financial Times Ltd)
Organisational experience of undertaking shoring exercises has
made companies more aware of the associated benefits and risks.
The application of this experience and the implications of external
change factors will undoubtedly change the way the next phase of
location decisions are made over the coming years.
Evolution and change
One of the more subtle changes in the shoring decision-making
framework seen over the past four years is a shift in emphasis from
a focus on straight cost arbitrage to a more sophisticated analysis of
the operational costs and benefits of location decisions for business
functions. A longer term focus on productivity, operational efficiency
and the future scalability of shoring locations is now driving
decision-making, rather than straight cost-saves in the short term.
The range of functions being considered for offshoring or
nearshoring also shows signs of increasing. While experiences of
locating customer-facing business functions in remote or overseas
locations have varied, with some banks, insurers and financial
services companies now marketing themselves as having all
customer service functions based onshore, companies across a
growing range of sectors are assessing options for the scope and
type of business functions that can be placed either off, near or
onshore.
Homeward bound?
Onshoring in mature markets is one trend that has re-emerged in
recent months with a clear increase in strategic analysis and activity,
particularly in the US. Rebalancing within mature economies, as well
as weakening currencies and growing availability of skilled labour,
have led to a growth in the attractiveness of onshore locations.
Locating business functions and supply chains onshore means
companies can be closer to their customers, reducing supply chain
complexity and risk and potentially allowing greater responsiveness
to changes in demand.
Paradoxically the same logic of being close to the customer is also
driving offshoring activity. For international companies, particularly
those in the pharmaceutical, and FMCG sector, seeking to align
business functions and supply chains to high-growth emerging
markets, an agile offshore location strategy can be a critical point of
entry into a major market.
As well as access to new markets, the potential spectrum of
business functions that can be placed on, near or offshore is
extending. Higher value functions such as research and
development, legal services and HR are increasingly being
considered as part of the process of footprint optimisation.
A new shoring landscape?
The macroeconomic, labour market and currency fluctuations of the
past four years, amongst a host of other factors, have combined to
subtly alter the shoring landscape. Alongside stalwarts such as
India, Poland and the Philippines, other locations have emerged
over the past 4 years. Figure 4 highlights the top shoring
destinations in focus for international companies over the last four
years
Forecast
0
50
100
150
200
250
300
350
400
450
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
4 Advance • Onshore, Nearshore Offshore: Still Unsure? • September 2012
Figure 4: Top 10 Shoring locations 2008-2012
Figure 5: Top 10 locations for FDI in Shared Service Centres - 2003-2011
Rank 2003 2004 2005 2006 2007 2008 2009 2010 2011
1 India India India India India India India India India
2 Malaysia Philippines Philippines Romania China Philippines Philippines Estonia Malaysia
3 Czech Republic Sri Lanka Poland Poland Philippines China Egypt Poland Poland
4 Hungary Spain China Hungary Morocco Poland Poland Romania Argentina
5 China Malaysia Brazil Costa Rica Australia Malaysia Panama Philippines United States
6 Thailand Pakistan Romania Philippines Poland Romania Costa Rica Hungary UK
7 Poland Hungary Spain China Malaysia Singapore Romania Costa Rica Philippines
8 South Africa Mauritius Ireland Singapore Romania United States United States Ireland Slovakia
9 Singapore Ireland Czech
Republic UK UK Indonesia UK United States Ireland
10 Canada Czech
Republic Hungary Slovakia Mexico UK Taiwan Ukraine Costa Rica
Explanatory note: Figure 4 highlights the top destinations for Foreign Direct Investment in shared service centres, customer contact centres and technical support centres from
January 2008 until December 2011. The ranking is based on the number of jobs created in these types of projects, over the time period. Figure 5 highlights the top 10
destinations for FDI in shared service centres on an annual basis from 2003-2011. The ranking is again based on the number of jobs created on an annual basis.
Source: fDi Markets (from The Financial Times Ltd)
Advance • Onshore, Nearshore, Offshore: Still Unsure? • September 2012 5
The cost landscape, in particular, has changed considerably with
rising labour costs, labour retention issues, and currency
fluctuations (figure 6 below) significantly impacting the
attractiveness of some locations. This change is also pushing
companies to view shoring decisions as more than straight cost
arbitrage and assess the longer term viability of shoring locations in
light of demographic and labour profile change.
Quantifying Cost implications
Incentives remain critical to the business case for location selection.
However with constraints on government spending now widespread,
the incentives landscape has shifted. Greater emphasis is being
placed on instruments such as tax abatements and holidays, in lieu
of cash grants. This is having a growing influence on the
attractiveness of shoring locations and decisions.
The financial evaluation criteria and metrics used for assessing the
costs and benefits of location decisions are also evolving. Payback
periods have shortened, discount rates have changed and more
rigour is being imposed throughout the financial evaluation process
than was originally the case in first generation shoring decisions. An
objective analysis of the financial implications which includes an
assessment of incentives is now integral to a best in class location
decision-making framework, due to the substantial material benefits
such analysis can yield.
Figure 6: Financial Risk - FX Fluctuations 2007-2012
Source:Oanda.com
PLN= Polish Zloty; PHP= Philippine Peso; RON=Romanian Leu; INR=Indian Rupee
Such changes in the financial evaluation criteria are reinforced by
the increased focus on risk mitigation and assessment. Quantifying
and managing risk are critical concerns in the evolving evaluation
framework for shoring and location decisions. The resilience of
individual locations is often analysed in more depth, incorporating
specialist analysis of a growing array of political, economic,
operational, legal and tax risks.
New models and the rise of the mid-tier
The growing maturity of emerging market companies and labour
market pressures in mature markets are also leading to some
interesting shoring trends. As the US sees growing evidence of
greater ‘insourcing’, with manufacturing processes and jobs being
repatriated to the US2, Indian firms are also adapting, increasing
their hiring plans and operations in the US.3 Job creation and
offshoring have the potential to be big political issues. How far
policymakers in mature markets will legislate to discourage
offshoring, will be a theme to watch over the coming years and
particularly in the run-up to elections.
Evolution has also been evident in the range and type of companies
assessing shoring options. It’s not just large multinational
corporations that are benefitting from optimising their location
footprint. Increasingly mid-tier companies are seeking the cost and
productivity benefits associated with offshoring or nearshoring. One
example of this activity has been seen in the legal sector, with some
mid-size lawyers in the UK placing legal services and administration
functions offshore in markets such as South Africa or onshore in
markets such as Belfast, in order to benefit from language and skills
synergies.
Mid-size or smaller companies looking to place functions on, near or
offshore are likely to use a modified evaluation framework for their
shoring decisions. Such companies may require smaller pools of
specialised labour skills, with specific educational or language
requirements. The size and specification of such requirements is
likely to bring in to play new locations, perhaps previously
overlooked by first generation multi-national shoring decisions.
Figure 7: Mid-size Shoring? Average size of SSC’s 2003-2011
Source: fDi Markets (from The Financial Times Ltd)
2 http://articles.economictimes.indiatimes.com/2012-01-12/news/30616823_1_assembly-plant-galaxe-solutions-new-jobs 3 http://online.wsj.com/article/SB10000872396390443517104577572930208453186. html
-35%
-5%
25%
55%
Jan 2007 Jan 2008 Jan 2009 Jan 2010 Jan 2011 Jan 2012
USD/PLN USD/PHP USD/INR
USD/RON USD/EUR
300
350
400
450
500
550
600
2003 2004 2005 2006 2007 2008 2009 2010 2011
Average Jobs per new centre
6 Advance • Onshore, Nearshore Offshore: Still Unsure? • September 2012
Emerging real estate trends
It is not just the demand for offshoring that has undergone change
over the past 4 years. The supply conditions and real estate
challenges posed to those companies seeking an offshore solution
have also evolved. Sourcing appropriate real estate in often remote
offshore locations has always been one of the challenges of the
offshoring process. These challenges remain in many locations,
however in some of the more mature offshoring markets such as
Central and Eastern Europe the market is evolving to better meet
the needs of international demand.
Turnkey solutions for shared service centres are emerging in some
locations, which increase speed to market and eradicate out some
of the additional difficulties and risks encountered in fitting out a
service centre to a suitable standard. Fit-out and specification
standards are increasingly varying between locations with on the
ground real estate expertise and due diligence an essential
requirement for those seeking to fully mitigate risk.
Broader tightening of lending conditions and financing have forced
many developers in mature and emerging locations to be more
conservative with speculative projects. Many now require pre-let
agreements in order to begin construction, with a notable reduction
in the availability of speculative solutions. On the one hand, this can
provide the corporate occupier with stronger leverage in the
marketplace and a more tailored product, however it also has the
potential to extend lead in times and compromise speed to market.
There is also a growing sophistication in the range of entry options
available to those seeking offshore solutions. The spectrum of
market-entry strategies is increasing, with different options, such as
contract manufacturing, leading to very different potential real estate
needs. Supply is slowly but surely aligning to the nature of demand.
Figure 8: Real Estate market conditions in typical offshoring destinations
Location Cost (USD sqm pa) Choice (%) Market Outlook 2012-14
Krakow 228 6.8
Bucharest 297 17
Casablanca 288 15
Belfast 207 15
Manila 222 3.6
Bangalore 187 7.7
Kuala Lumpur 189 18
Mexico City 300 13
Sao Paulo 606 11.9
Buenos Aires 372 4.2
= Tenant-favourable market conditions Cost = prime rent, except Manila (net effective on NLA),
Bangalore, Kuala Lumpur (net on NLA)
= Neutral market conditions Choice = overall vacancy rate, except Kuala Lumpur (average city centrevacancy rate)
= Landlord-favourable market conditions
Advance • Onshore, Nearshore, Offshore: Still Unsure? • September 2012 7
Where next?
Will we reach saturation point with demand for offshoring? – Are we
seeing diminishing returns? – The answer in some locations is
clearly yes. However, ’Shoring’ increasingly needs to be seen as
part of the broader process of location optimisation for an ever-
growing range of business functions. This process will remain under
review as long as business strategy remains dynamic, and
companies seek to adapt to changing geographies of growth. De-
risking the supply chain will also remain a key priority for corporates
who are mindful of the operational risks posed by sub-optimal
location decisions.
The last four years have witnessed an increasing sophistication of
the shoring process – on both the demand and supply side. This
process will continue. We are likely to see greater demand for
incubation space and increasing developer sophistication as a
response. International competition to attract corporate investment
is set to remain fierce. Technology will also be a significant agent for
change, permitting seamless communication between remote
locations and driving companies to select a smaller number of
operational hubs, orbited by a range of local satellites.
But alongside evolution and advances in offshoring models and
solutions, challenges will remain. Identifying appropriate and
sustainable labour pools and at a low cost will continue to challenge
companies looking to offshore or nearshore business functions.
Real estate will also continue to challenge corporates in the short
term. With limited speculative investment, and developers reluctant
to build anything beyond generic space solutions without firm
commitment from occupiers, the range of appropriate and
immediately available product will remain scarce in the short term.
All these complexities will drive one certain outcome – those
companies who undertake comprehensive and early initial business
case and option analysis are more likely to make the right long-term
location decisions - and outperform their competitors.
Figure 9: Optimising the decision-making process
8 Advance • Onshore, Nearshore, Offshore: Still Unsure? • September 2012
Authors
Tim Carnegie, Director, Location Consulting & Business Incentives, EMEA
+44 (0)207 399 5828
Tim Carnegie heads Jones Lang LaSalle's Corporate Consulting practice based in London. Tim has 12
years experience assisting corporations with global business and real estate footprint configuration strategy,
cross border direct investment strategy, global location strategy, occupancy optimisation, portfolio strategy,
site selection and economic development incentives negotiations. Tim helps companies understand how
location decisions affect their businesses and how locational advantages can be maximised to both enhance
margins and increase revenues.
Alex Ash, Director, Location Consulting & Business Incentives, EMEA
+44 (0)207 852 4848
Alex Ash is EMEA practice leader for Location Consulting & Business Incentives. Alex specializes is cross-
border business consulting engagements, including direct investment facilitation, market access and location
strategy, structural cost management, footprint optimization, functional redeployment, site selection and
economic development incentives. Alex has assisted corporate executives from leading international
companies across a wide variety of industries with making strategic location decisions and optimizing
footprint of major operations including manufacturing plants, distribution centres, headquarters, R&D
operations, and shared services centres. Recent clients include GM, Novartis, Alcon, Pfizer, Altisource,
Stanley Black & Decker, Brown-Foreman, P&G, Smiths Group.
Tom Carroll, Director, EMEA Research
+44 (0)203 147 1207
Tom Carroll is a Director in Jones Lang LaSalle’s EMEA Research team. Specialising in the provision of
research and strategy support to Corporate Clients, Tom has international experience working with
Corporate Clients including Deutsche Bank, Microsoft, AstraZeneca, UBS and Credit Suisse. In addition to
research advisory and strategy support for clients, he has also developed a number of white papers on
issues ranging from surplus asset disposal to emerging market strategy.
Advance • Onshore, Nearshore, Offshore: Still Unsure? • September 2012 9
Further suggested readings from Jones Lang LaSalle can be accessed via our website at joneslanglasalle.com
• Global Real Estate Transparency Index (GRETI) - 2012
• A New Dawn For Workplace - 2012
• Change: Emerging Trends That Are Transforming Corporate Real Estate
• EMEA Corporate Occupier Conditions - Biannual Market Publication
• United States Office Occupier Outlook - Quarterly Market Publication
• Asia Property Market Digest - Quarterly Market Publication
• Real Estate Standards Global Index
• Better by Design – CRE Structures, 2011
• Best Laid Plans: Key considerations for portfolio planning, 2010
About Jones Lang LaSalle EMEA Location Consulting Services
Our leading edge Location Consulting team helps direct corporate decision-makers to informed and accurate decisions relating to location and business
configuration, helping achieve revenue, margin and efficiency targets. Utilising unique management consulting methods to drive solutions from a business
perspective, we offer comprehensive advice on the “why”, “where” and “how” of business rationalisation, expansion, and new market access. Our
multilingual and multidisciplinary consultants bring to clients a wealth of skills, global field experience and expertise in the fields of economics, politics, supply
chain, management consulting, real estate, business process configuration, demographics, GIS, international relations, engineering and infrastructure.
Location Strategy / Site Selection - Screening and validation of candidate geographies to assess potential for deployment of operations (headquarters,
back office, shared and business support services, sales and marketing, R&D, manufacturing, distribution) - balancing cost, operating environment and risk
considerations, and aligning location with business strategy.
Business Incentives Advisory - Our team of Incentives specialists provides detailed technical advice and guidance on availability of and eligibility to
government incentives across EMEA. Our one-stop Incentives service spans facilitation and negotiation through to completion and administration of
incentives applications to government authorities to secure promised awards.
About Jones Lang LaSalle Corporate Solutions
As a pioneer of the corporate real estate offering, our platform provides unmatched services across a single project, country or global portfolio. Our
commitment to shaping our business around helping our clients improve their productivity and by delivering on our promises keeps us at the forefront of our
industry. Our global platform of transactions, lease administration, project and facility management services is backed by our expertise in strategic
consulting, workplace and portfolio strategy to provide an end-to-end service offering. With over 30,000 employees focused on serving business globally,
we manage over 600 million sq ft of facilities and 52,000 leases, and complete more than 4,450 projects and 13,000 transactions every year. We have the
experience and scale to drive productivity, risk management and sustainability for our clients across the globe.
About Jones Lang LaSalle
Jones Lang LaSalle (NYSE:JLL) is a financial and professional services firm specializing in real estate. The firm offers integrated services delivered by
expert teams worldwide to clients seeking increased value by owning, occupying or investing in real estate. With 2010 global revenue of more than $2.9
billion, Jones Lang LaSalle serves clients in 60 countries from more than 1,000 locations worldwide, including 185 corporate offices. The firm is an industry
leader in property and corporate facility management services, with a portfolio of approximately 1.8 billion square feet worldwide. LaSalle Investment
Management, the company’s investment management business, is one of the world’s largest and most diverse in real estate with more than $41billion of
assets under management. For further information, please visit our website, www.joneslanglasalle.com
Business Contacts
Alex Ash
Director Corporate Solutions Jones Lang LaSalle London +44 (0)207 852 4848 [email protected]
Tim Carnegie
Director Corporate Solutions Jones Lang LaSalle London +44 (0)207 399 5828 [email protected]
Report Contact
Tom Carroll
Director EMEA Research Jones Lang LaSalle London +44 (0)203 147 1207 [email protected]
September 2012 Advance publications are topic-driven white papers from Jones Lang LaSalle that focus on key real estate and business issues.
www.joneslanglasalle.eu
COPYRIGHT © JONES LANG LASALLE IP, INC. 2012. All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means without prior written consent of
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