Idaho, not India. Onshoring - the future of rural America?

Reply Mon 22 Oct, 2007 08:31 am
The business news story from the LA Times below actually raises some interesting questions about possible wider future developments.

Increasing numbers of companies are "onshoring" desk/computer jobs from the metropolitan business centers to smalltown, rural America instead of "offshoring" them to India.

Some are actually moving these jobs back from India to places like small town Idaho or Nebraska.

As Kevin Drum at the Washington Monthly says, the thing with "offshoring is that labor rates have to be way lower for it to be cost effective, so if overseas costs go up a bit and domestic costs go down a bit, that's all it takes to change the calculus for a substantial number of firms".

Or, "Welcome to the broadband revolution, rural America."

This practice is also referred to as "rural-shoring", one of his commenters adds. "Moving jobs to low income, low cost rural communities has been picking up steam in call-center operations and IT fields."

It is a part of a broader development that potentially could change the nature of work - and of cities. At least that's what some of Drum's commenters were speculating, and I thought that was interesting.

First, here's the article:

Some firms replace offshoring with onshoring

Small U.S. towns can match India in cost. Northrop Grumman plans up to 50 sites for tech support. Dell opens a center in Idaho.

By Peter Pae, Los Angeles Times Staff Writer
October 21, 2007

CORSICANA, TEXAS -- Gary Richardson left this boomtown-gone-bust in 1996 for a computer job in Dallas, the big city 60 miles north.

"I didn't think I would ever come back," Richardson recalled recently, "because there were no jobs like mine here."

Not until this year, when Northrop Grumman Corp. opened an information technology center in town and began recruiting IT specialists and software engineers.

In a twist on offshoring that Northrop has dubbed onshoring, the global defense and technology corporation has been shipping computer work to small-town America, shunning India's Bangalore and Mumbai.

Century City-based Northrop picked Corsicana and six other small cities, including Lebanon, Va., and Helena, Mont., as locations for employees who develop software and troubleshoot technical problems for clients hundreds or thousands of miles away.

It costs Northrop about 40% less to have the work done in Corsicana than in Los Angeles -- savings similar to what would be achieved by sending jobs overseas.

"We're getting very high quality and a dedicated workforce," said Thomas Shelman, president of Northrop's Information Technology Defense Group and creator of the company's onshoring program.

Onshoring, in fact, is becoming trendy.

Some U.S. companies have recently pulled back from India to set up shop in rural areas where access to high-speed broadband connections isn't the problem it was just a few years ago, and where lower real-estate prices and wages are attractive.

Xpanxion, an Atlanta-based software developer, relocated its test operations to Kearney, Neb., from Pune, India, because the time difference was hampering communications.

Computer maker Dell Inc., once at the forefront of outsourcing to foreign countries, opened a technical support center in Twin Falls, Idaho, after customers complained about overseas workers' English-language skills.

Accenture, the world's largest consulting firm, is building a document-processing center on an Umatilla Indian reservation in Oregon.

"We're responding to the tremendous demand among Accenture clients for outsourcing services performed by professionals within the U.S.," Randy Willis, a senior Accenture executive, said when the project was announced last fall.

A few companies based in India are turning outsourcing on its head too. Wipro Technologies, a software maker based in Bangalore, is establishing a design center in Atlanta that could employ about 500 computer programmers.

"The work we're doing requires more and more knowledge of the customers' businesses -- and you want local people to do that," Wipro President P.R. Chandrasekar said in a recent statement.

It's not that offshoring isn't popular in corporate America anymore.

A survey of more than 500 large U.S. companies last year by consulting firm Booz Allen Hamilton found that 60% had shipped some work to other countries. Another firm, Forrester Research, predicted that about 3 million high-tech jobs would head overseas by 2015.

But Dan Sernett, a partner in Los Angeles with Ernst & Young, a professional advisory firm, said many companies were reassessing offshoring. "It's not a slam dunk as it was several years ago," he said. "They're looking for alternatives closer to home."

Northrop would rather stay home, in part because so many of its government contracts are for national security projects. The company hires 5,000 software engineers every year, and putting some of them in its new small-town centers could save at least $15 million annually in payroll costs. The plan is to have 50 such centers around the country.

The starting salary for a software engineer with one year's experience is about $42,000 a year in Corsicana and $56,000 in Los Angeles or McLean, Va., the Washington suburb where Northrop's IT operations are based.


One reason: A three-bedroom home in Corsicana sells for about $125,000, compared with about $700,000 for a similar place in L.A.

For communities such as Corsicana, white-collar jobs are seen as a way to elevate and diversify a local economy that has long been dominated by low-wage, blue-collar work.

"It's not something people are used to seeing around here," said Kevin Culpepper, a systems engineer and native of nearby Ennis, Texas, who returned to the area to manage the new center after having worked in Dallas.

Corsicana's heyday came in 1894 when drillers digging for water accidentally hit black gold and transformed the once-sleepy trading post into the first oil boomtown in Texas, with more millionaires than anywhere else in the state.

Most of the wells have dried up, fast-food restaurants have replaced oil derricks, and the city has struggled to survive with a quarter of its population living in poverty. Its claim to fame these days is fruitcake maker Collin Street Bakery and the Pearce Civil War Museum, which has one of the largest collections of letters written during the conflict.

"We've basically been stagnant," said Lee McCleary, the town's economic development director.

In recent months, locals have begun talking about the possibility of another boom bubbling to the surface -- this time from the nearly empty shopping mall where Northrop has set up its work site.

Enticed by the potential for a new pool of middle-class buyers, developers are talking about building 200 homes -- the kind of large-scale construction that hasn't happened in Corsicana since the oil boom.

"That's significant for us," McCleary said, noting that the presence of Northrop has prompted other high-tech companies to consider opening offices in town. "It's taken us to another level in types of industry we can recruit."

Richardson, who left Corsicana for a job in Dallas, returned in March when he was hired at the center as a software developer.

"I jumped at the chance to come back," he said. In Dallas, his workday commute was 90 minutes each way. In Corsicana, his drive takes about 10 minutes -- through two traffic lights and two stop signs.

Nancy Boone, 58, a homemaker who has raised four children and wants to get back into the workforce, has been taking computer courses online in a special program at a local community college.

The 10-month crash course was created to retrain local residents to work at the Northrop center.

"It's ideal for my situation," Boone said as she logged off her computer on a makeshift desk in her kitchen. "It's what I've always dreamed of."

And here's some interesting thoughts from Drum's commenters:

  • If it works with rural America, could it not also work for the Rust Belt?

    "I wonder if it would be practical to onshore some of those jobs to depressed urban areas like Cleveland, OH and Gary, IN, where jobs in the steel and auto industries were moved overseas. Surely the costs of doing business (real estate, etc.) would be substantially lower now than they were when big steel & big auto were riding high in the US."

  • The practice is also called "nearshoring": "other countries are nearshoring as well: Japan to China and Germany to Belarus and Bulgaria (as well as the U.S. to the Caribbean). Blue America to Red America?"

    Blue America outsourcing its job to Red America - now there's an image about the nature of relations..

  • It's high time: "I lived in rural America (northeastern Nebraska ---- 5,000 person town) and the lack of opportunity was astounding. I taught at a little state college and the graduates who wanted to stay in the area literally had no where to go ---- no jobs for people with any level of skill.

    So this development, if it expands (and I'm inclined to think that the value of the dollar and the cost of living in cities will make that happen) could be a really good thing. And then - maybe - we could actually pay attention to the land in rural America and stop giving corporations zillions of farm subsidy dollars to pollute the hell out of the place."
But it's another point I thought was most interesting: does this story illustrate how the nature of work itself is changing -- and with that, eventually, the place and nature of cities?

The advantages for companies sending work to Red State America are obvious, better language skills, common culture, timezones are compatible etc. What some companies have discovered is that there are also lower real estate costs. Sometimes zero. Since America has a pretty good communications infrastructure, a lot of work, especially call center work, can be done by employees setting in the comfort of their own home offices. All the employer has to do is provide a computer, some software and an occasional visit from headquarters. If memory serves at least one airline that is running all of its ticketing out of home offices in a small Utah town. The Utah families love it. The moms can stay home and work while their kids are at school. Transportation and related costs are dramatically reduced.

I know of several companies here in Missouri doing something similar. I recently talked to a woman who manages a bunch of home office employees. She says the employees find that it is a great way to work, but also said management is tricky. You have to make sure you hire self motivated employees.

For you high end types, did you know it is actually cheaper to run a high end computer software shop in any number of attractive locations from Utah to Florida than it is to do the same work in Silicon Valley, and it isn't hard to find top level software engineers willing to move to nice but less expensive locations for less money?

I guess what I am trying to say is that the very definition of work is changing. Since the rise of cities workers have been tied to buildings. With the new communications infrastructure a lot jobs are no longer tied to cities.

That last sentence piqued my interest. As another poster chimed in, "if all you need is a broadband terminal, then why do you need a skyscraper in Chicago?"
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Reply Mon 22 Oct, 2007 08:58 am
This all seems like good news to me, and I get the implications re cities, etc.

I wonder though, if prices in, say, Corsicana, will immediately start to rise..
and then, I guess, by how much. Well, certainly not to 700,000. houses.
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Robert Gentel
Reply Mon 18 Aug, 2008 02:13 pm
There's a lot of cost to offshore operations that people just don't often take into consideration. In one company I worked at we started a "nearshore" operation in Costa Rica and I moved our development department there.

Thing is, without hitting a certain scale, the overhead and cost (not just monetary) doesn't always make a lot of sense. The difference in work ethics or culture were a lot to navigate for what ended up being slim benefits.

At some point we were doing "how much more would it really be to have someone Stateside" calculations, and often for 20% or so more we could have had someone stateside and not had the additional overhead of the offshore communication. I found that in that case it made more sense to eliminate the transnational feedback loop because the scale of the savings didn't add up enough.

So this makes a lot of sense to me, places like Omaha have great tech talent who live in places that cost a lot less than places like California. Our company might have been better served by having an office in rural America instead of trying to navigate a foreign culture.

The different culture, different language, and different laws add up to a cost of doing business that is only recouped when you reach a certain scale. If you can find some savings within your country in rural areas you won't necessarily need a new HR guy, a new accounting team and so on and so forth.

I recommend this kind of thinking, the money is not the only cost of doing business and navigating a foreign culture comes at a cost. There are a lot of things people outsource where cost should not be the be-all-end-all. It might make sense to only care about cost for things like data entry but for things like customer service (e.g. foreign call centers) and programming it doesn't always make sense. You may have a harder time maintaining the quality you need and the savings you did it for without significant scale.
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Reply Mon 18 Aug, 2008 09:21 pm
I work for a company and the group I work for does a few thousand hours of offshore telemarketing work. Many of these people speak better english than many Americans (which unfortunately sounds strange to Americans).

We are also looking at abandoning the mega-call centers and doing some of the small town rural 40-60 agent office building type centers. VoIP has made a lot of things possible.
Robert Gentel
Reply Mon 18 Aug, 2008 09:24 pm
Many of these people speak better english than many Americans (which unfortunately sounds strange to Americans).

I ran into this as well. We had phone people who spoke perfect English but people complained that they didn't sound American. Even if the language isn't the barrier it seems the accent can be.

And interestingly enough, places like Iowa are great for that purpose, with their very neutral American accent.
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Reply Mon 18 Aug, 2008 09:36 pm
To the extent that the "on-shoring" happens in manufacturing, it seems like a logical response to rising transportation costs. But services? Rural America is empty -- how many jobs can you find workers for there?
Robert Gentel
Reply Mon 18 Aug, 2008 10:44 pm
Labor for services is a growing cost as well. I've been outsourcing services overseas for a while, and I'm finding that the cost of highly skilled folk abroad are approaching the cost of the same folk Stateside when the total cost of doing business if factored in.

Places like Omaha are big "onshore" centers for tech talent for example. Omaha is rural America's silicone valley and there is a lot of talent there (like Nick).
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Reply Mon 22 Dec, 2008 10:44 am
I have a lot to say about this topic but no time. Let's just say that I'm mostly on board with Robert except that I see even less value in offshoring in general. I think it's great that some companies are looking to rural or small city America as I know there are a lot of smart people sprinkled all over lower cost-of-living regions. But I also think that place is still important and that the idea of a distributed work force needs a more rigorous look.
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