Welcome to the post-offshoring world

By Fiona Czerniawska

Recent months have seen a plethora of articles and reports on the return of manufacturing to North America, but shifting economics will change consulting firms too.

Back in 2011 BCG predicted that rising Chinese wages, higher US productivity and a weaker dollar were just some of the reasons why the gap in costs between the two countries would virtually close within the next five years.  Last month an article by BCG’s Harold Sirkin argued that the US is “steadily becoming one of the lowest-cost countries for manufacturing in the developed world.”

But manufacturing is not the only part of the economy likely to be impacted by these shifts.  Western consulting firms have spent the last decade first fighting, and then responding to, low-cost firms, primarily from India. Accepted wisdom pointed to convergence: over time, the cheaper Indian firms would move up the consulting value chain, providing some services outside their core IT business, while Western consulting firms would move some of their work overseas, to take advantage of lower salary costs in the more commoditised areas of consulting.  Increasingly, the factors which are eroding the differences between costs in North American and China also apply to the services sector.  Indian consulting firms’ costs are rising, not least because they’ve had to recruit expensive Western consultants to ‘front’ their sales and relationships.  New technology, especially around mobility and social media, has put a premium on the high-end consulting skills still concentrated in mature consulting markets.

This leaves the Indian players in a bit of a quandary.  While they never liked to position themselves as winning purely on price, that’s how clients continue to perceive them – and it’s a model that still has plenty of shelf-life in the world’s highest-cost economies (the Nordics, for instance).  Repositioning themselves as more expensive, onshore firms would be confusing at best.  The obvious solution – and we can see plenty of evidence for this already – is for them to buy their way out of trouble: most offshore players have plenty of cash to acquire consulting firms with high-end brands.

But the new order creates problems for established Western consultancies as well.  Shifting some work to lower cost economies has been critical to these firms’ ability to maintain their margins at a time when fee rates have been under unprecedented pressure.  It has allowed them to avoid dealing with the fact that much management consulting has always been craft work, resistant to the processes of industrialisation.  As BCG points out, manufacturing is returning to the US not simply because costs are rising elsewhere but because productivity is increasing at home.  To gain in this new environment, Western consulting firms need to do more than increase efficiency, they need to increase productivity. And they've never been very good at that.