Finance:Farmshoring

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Farmshoring is the shifting of employment from abroad into rural communities across the United States . It is conceptually similar to onshoring (also referred to as domestic outsourcing) which can be defined as "the act of transferring some of a company's recurring interval activities and decision rights to outside providers, as set in a contract".[1] Farmshoring refers to a specific variety of outsourcing where, as well as services being sourced outside of the contracting company, they are outsourced from urban to rural locations.

Details

Recent studies show that the trend to offshore jobs internationally has increased significantly over the last decade. Many factors have contributed to this rising trend, none more significant than the rising cost of doing business in the United States. In 2002, when the United States was trying to recover from recession, a number of reports emerged, highlighting the potential for substantial cost savings for firms which could source (outsource) some of their in-house supplies, particularly information technology services, to low-cost locations. In these reports, experts noted that given the advances in information technology and the low cost of communications, a large number of information technology (IT) services could now be provided from low income countries to firms and consumers in high income countries.

The objective behind farmshoring is to motivate U.S. firms to send those jobs that would otherwise be destined for places like China and India where labor costs are a fraction of what they are in the U.S., to the "American farm". The prime motivator behind offshoring is reduced labor costs and there is a significant gap between labor costs in developing countries vs. the US. For example, a U.S.-based software developer earning $60 an hour can be replaced by an Indian developer with the same skills for $6 an hour. Or, a factory worker making $21 an hour in the U.S. can be replaced by a Chinese factory worker making $.64 an hour. Though rural America cannot compete with such wages, experts believe that the "farm" presents a viable alternative, based on factors other than wages.

Domestic outsourcing can deliver cost savings of 50 percent on installing and managing software, compared to 15 to 30 percent cost savings from overseas offshoring. Additionally, offshoring takes longer to capture cost savings, given the higher start-up costs and other issues associated with offshore arrangements. Security is a major issue with offshoring. In this sense, farmshoring offers a greater sense of control and security with the outsourced firm within U.S. borders. Onshore outsourcing also bypasses the language barrier associated with many offshoring arrangements. Workers in call centers in India for example, have to learn to speak English the "American" way to enter into outsourcing contracts with U.S. firms.

With farmshoring, there are fewer cultural or language barriers, foreign laws and regulations or multiple time zones to deal with. Farmshoring also offers a low-cost, high quality living alternative to metro areas. Housing in metro suburbs is 70 percent more expensive than in rural areas, and land costs are even higher. In the same context, the traffic and congestion is significantly higher in metro areas (40 percent slower in metro areas), requiring metro residents to spend more time traveling to work as well as recreational activities. Farmshoring offers a lower-cost, lower-risk, and quality living alternative to outsourcing, enabling firms to obtain the cost benefits associated with outsourcing jobs to low-cost areas, without the risks associated with hiring foreign workers.

As more of the economy processes information digitally, more firms are able to locate practically anywhere they can find skilled labor and advanced telecommunications infrastructure. For example, the U.S. Postal Service uses telecommunications technology that allows its workers in Greensboro, North Carolina to "view" mail in Washington, D.C. Likewise, Northwest Airlines has shifted some of its booking operations to Minot, North Dakota.

Example: Farmshoring in Lebanon, Virginia

In Lebanon, Virginia, two major IT firms, CGI-AMS and Northrop-Grumman, announced their plans to bring 700 jobs paying an average of $40,000 a year to the southwestern Virginia town.

Beyond incentives provided by the state, for CGI-AMS and Northrop-Grumman, the decision to open divisions in Lebanon, VA was driven by high labor costs in Fairfax and neighboring Reston in the northern part of the State. For other firms, proximity to economic or academic resources is a key motivator. Building on these rationales Virginia Economic Development Partnership (VEDP)[2] Director Jeffrey Anderson is developing a "distributive services initiative" which aims to market the rural Virginia communities of Blacksburg, Danville, Harrisonburg and Lynchburg, to businesses in the northern part of the State looking to shift some of their back-office operations to lower-cost areas. All four communities house 4-year colleges; Virginia Tech in Blacksburg, Averett University in Danville, James Madison University in Harrisonburg, and Liberty University in Lynchburg. According to VEDP, the presence of a large academic institution is attractive because it generates employment, creates a positive academic environment and provides a steady stream of potential new hires. Blacksburg has already been successful in luring some companies out of the northern Virginia region, including UXB and EvolvePoint.

International trends

A similar trend is occurring internationally as well. In India, the software service industry is focusing on domestic outsourcing opportunities as banks and government departments step up spending on technology to cut costs and improve their efficiency. A similar situation is also developing in England. With the growth in the IT market, more firms are looking to get out of London and into places like Manchester and Scotland. Karen Price, Chief Executive of Sector Skills Council, E-Skills UK, points out that "lots of public sector functions are going out of London because of the (poor) government's efficiency review." For example, the British Broadcasting Corporation is relocating lots of jobs to Manchester. Price adds that the same is happening in the private sector, as software development companies are opting for "onshoring" to low-cost areas with high-skilled labor, over the offshoring alternative.

Other large companies such as Daimler-Chrysler and Dell Computers have experienced the global trend of industry consolidation. Firms are realizing the need to "bring back" some of the functions that were previously offshored internationally, either because they mistakenly offshored a function that is core to the business, or because of the risk and complexity of managing and measuring offshoring projects and relationships. In spite of this however, the balance still favors offshoring considerably with as many as 3 million IT jobs expected to go overseas in the next few years.

See also

Notes

  1. ↑ World Trade Organisation, (2005), p266.
  2. ↑ Virginia Economic Development Partnership (VEDP)

References




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