U.S. firms headquartered in metropolitan areas have operated unskilled and semi-skilled manufacturing facilities in rural America for decades to capitalize on lower labor costs. Recently, the practice has been receiving more attention because of a political backlash against companies moving American jobs overseas. Many companies are now taking a new look at “homeshoring” and are joining a slow-growing trend toward outsourcing more advanced information technology capabilities, service jobs and business processes to providers in rural areas.
Professor Sirkka Jarvenpaa
McCombs School of Business
Sirkka Jarvenpaa, professor of information systems at the McCombs School of Business, served as adviser to a team of MBA students who last year took a close look at the industry. The students (Greg Buxkemper, MBA ’05; Jack Cheng, MBA ’05; and Hassan Mahmood, MBA ’06) analyzed a particularly successful outsourcing firm, Rural Sourcing, Inc., to gain insight into the trend and develop recommendations for the effective use of homeshoring as a business solution.
Rural Sourcing, Inc., located in Jonesboro, Ark. and led by Dr. Kathy Brittain White, bases its model on the idea that the same combination of factors that made offshoring an attractive option can work in more rural sections of the United States.
In the students’ report on the subject, “Rural Sourcing: The Migration of Knowledge-Based Jobs to Rural America,” the researchers say:
A company created in this vein can set up business in these rural locations by gaining access to inexpensive office space, often property formerly used for manufacturing or call center operations. Through a partnership with a university in these locations, homeshoring companies can gain access to top students in the Management Information Systems (MIS) and Computer Science (CS) programs offered. These companies can partner with the local community to get funding for building up infrastructure and facilities, and incentives such as tax breaks and low-cost rent, in exchange for the promise to hire and keep local citizens employed. Rural sourcing companies have the added appeal of providing companies a “politically correct” option of providing business to U.S. firms while still receiving the discount they would associate with foreign engagement. The value added features of cultural fit and business process understanding make this rural sourcing business model, in theory, more attractive than offshoring would be.
In their research, the students found that not only do companies move certain service functions to small and mid-sized cities to take advantage of the lower wage rates and facility costs, but they do it to avoid the hidden costs associated with offshoring, including travel, communication, security, time schedules and cultural misunderstandings.
“As many companies initially explored efforts to send offshoring work away to places such as India and China, the initial focus was on the cost savings that could be achieved by leveraging high-technology talent in low-cost regions of the world,” say the study’s authors. “Invariably, many unexpected costs began to surface: companies often did not focus on how to set up proper management and governance of projects under this arrangement. Time zone challenges, communication breakdowns and cultural barriers were more evident than when the initiatives began. Furthermore, proper business metrics were rarely set up to measure the proper success of these initiatives.”
|Map shows U.S. communities that have what it takes to homeshore.
The student researchers discovered that American and European firms often found their expectations of offshoring operations to be unrealistic.
“Perhaps the most damaging to their engagements is the inflexibility of the offshore providers to adapt to changing business needs of the client, which threatens the investment made by the client.” The students cite results from a 2004 Mercury poll as evidence of this disillusionment: 40 percent of polled executives in UK companies were dissatisfied with outsourcing projects; and only 28 percent planned to outsource more projects to Asia or Eastern Europe.
To make matters worse, the costs of offshoring are increasing. Since the late 1990s, India’s surging economy has raised the standard of living in that country. This is making it more difficult for outsourcing companies in India to find the right talent for a low price.
Professor Jarvenpaa explains that offshoring is still a new phenomenon, and businesses are still early in the learning curve. “Companies have had some difficulties with remote managing, but I think those problems will be addressed as offshoring evolves,” she says. “Companies will become smarter, they will be more strategic about how and when and where they offshore.”
Greg Buxkemper, now with Deloitte Consulting in Dallas, agrees. “I see a lot of companies offshoring, but not strategically,” he observes. “They might have a goal of, say, reaching 15 percent to 20 percent offshoring of the operations, but that’s too general. There needs to be a strategy.”
As companies become more savvy about how and when they should move operations overseas, they will also come to know when it’s best to keep certain operations closer to home.
Offshoring typically presents a 50 to 60 percent cost savings on the price for domestic services; however, the hidden and transaction costs, such as the lack of business acumen and cultural knowledge and increased communication costs, actually increase the cost of offshoring by approximately 10 percent, say the report’s authors. For rural sourcing to deliver a cost-competitive alternative to offshoring, then, human capital and infrastructure must also be available at 40 to 50 percent less than their cost in a metropolitan area.
Despite these issues, Professor Jarvenpaa doesn’t believe rural sourcing will ever completely replace offshoring.
“I think what is happening is that rural areas of America will be able to be brought into the promise of globalization,” she says. “Up until now, rural America has been largely untouched by globalization, but going forward, it can be a part of it.”
Buxkemper adds that for rural outsourcing to be successful, the right ingredients must be present. “The right mix of community, university and business, and the right cost of living are all essential,” he says. A region must have a solid tier-three university, it must enjoy a healthy involvement of the business community and it must comprise a population interested in sticking around, which requires a combination of strong provincial affiliation and family need that keeps citizens tied to the area near their hometown.
Often, successful homeshoring occurs because there is a combination of push and pull—the communities are out there looking to bring jobs in, and a homeshoring company like Rural Sourcing, Inc. is trolling for good opportunities. “Right now, it’s fairly extraordinary when it happens, and it needs to happen systematically,” Jarvenpaa says.
What Rural Sourcing has found is that they have very little trouble locating communities full of people who can fill entry-level positions. Nor is the highest level of leadership difficult to fill—there are very few of those top-tier jobs, and one can often find an executive who is ready to scale back or return to his or her roots.
“The harder positions to fill are in middle-management,” Buxkemper points out. “There just aren’t enough people at this level who can be drawn back to rural areas.”
Having grown up in relatively rural Lubbock, Texas, Buxkemper’s interest in this topic was naturally piqued—but not so for his peers. “Right now, there are probably not a lot of MBA students who would admit to having an interest in moving to a rural area,” he says. “But there may be a time in their careers when that is a real option and very viable.”
Buxkemper and his colleagues conclude that the rural sourcing model will endure despite the challenges. The number of opportunities for firms to build relationships with rural communities and universities is overwhelming. There are more than 1,000 major universities in the United States located in non-urban areas, and today, people from a very broad section of society—not just those in urban areas—have technology skills.
Companies like Rural Sourcing must continually leverage university and community support, maintain their low cost structure and continue to attract fresh IT talent.
“Not only are there cost advantages to moving operations to rural places, it improves communities,” says Buxkemper. When the goals of the firm, the university and the community are all aligned toward economic development, the relationships engendered by homeshoring and the associated benefits can work very successfully.