The global economy is changing, and the way companies distribute their services has changed as well. In today's market, it's getting harder for companies to find skilled workers from within their own borders because they can't compete with the wages or benefits offered by other countries. This is particularly true when it comes to technology talent, which is in high demand due to advancements in artificial intelligence (AI). This has led many businesses towards adopting what we call "friendshoring," where they outsource tasks such as customer service or data analytics overseas rather than risk losing workers due to low salaries or unstable contracts elsewhere in their supply chain networks.
A Brief Overview of Friendshoring
Friendshoring is a term that describes the process of outsourcing to countries that are either geographically closer to your business, or often those with whom your country has friendly ties, or to both types. This can be done by either hiring an employee in the country or bringing an existing employee there.
This strategy has been used successfully for years, but it's only recently become more popular because it's less expensive than other forms of outsourcing, which include nearshoring (working with local companies) and remote working (working from home). Because friendshoring requires little capital expenditure on equipment or infrastructure, it's also more cost-effective than other methods too!
How the Ukrainian War, Along with other Major Geopolitical Turmoils, Is Shaping Friendshoring as a Trend
Ukraine is currently embroiled in a war that has left millions of people displaced and many others dead. The United States has been accused of aiding the Ukrainian government in its fight against rebels, who are seeking to overthrow the current administration.
The war has profoundly impacted friendshoring as a trend, and some top disruption mitigation strategies about the supply chain catastrophe speak volumes about the same.
And as friendshoring becomes more popular, the need for international workforces will continue to grow. Friendshoring allows companies around the world, regardless of their size or industry segmentation, access to each other's expertise and resources through shared services agreements (SSAs). The trend also offers a unique opportunity to leverage western values and sensibilities to drive shared value creation between buyer and provider (which can be a relatively lesser developed economy). However, some experts also argue that friendshoring can only offer marginal economic benefits, especially for the party that's being assigned some friendshored business responsibility from often a more developed parent country.
Along with the Ukrainian war, there are several other major geopolitical turmoils shaping up the advancement of the concept of friendshoring:
1. The Russian invasion of Ukraine has highlighted the geopolitical brittleness of global supply systems, adding to already existing worries about escalating U.S.-China tensions and pandemic lockdowns.
"Friend-shoring," or moving production to friendly nations, has been suggested by European and American officials as a method to reduce the danger of geopolitical supply chains for essential products like semiconductors. Adults in the United States and Europe are mostly in favor of the idea.
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Consumers in numerous important markets also greatly favor imports from friendly and allied nations, giving producers of other consumer goods the chance to label their actions as friendshoring.
The US Secretary of Treasury, Janet Louise Yellen's on the 13th of April 2022, voiced "friend-shoring" as a commitment to work with countries that "have a strong adherence to a set of norms and values about how to operate in the global economy and about how to run the global economic system."
The Russia-Ukraine war is having an outsized impact on the global supply chain, impeding the flow of goods, fueling dramatic cost increases and product shortages, and creating catastrophic food shortages around the world.
Experts at a virtual symposium hosted by the MIT Center for Transportation and Logistics have sounded alarm bells about these developments, saying that they are likely to continue for at least a year or more.
Semiconductors are the poster children for friendshoring, and there is a unanimous opinion in the USA among the government and citizens to reduce their semiconductor dependability on China.
Inputs deemed essential to national security are the focus of US President Joe Biden's administration's strategy for friend-shoring, including vital and high-tech products like pharmaceuticals, rare earth minerals, large-capacity batteries, and particularly semiconductors. The majority of adults in the major economies of the United States and Europe concur that it is crucial for the United States and the European Union to work together to secure these supply chains.
This approach has been formerly stimulated by the Trump administration's repeated assertions that China is a national security threat.
While there is no question that some companies have seen their costs rise dramatically in recent weeks as a result of this conflict, others have been able to minimize their exposure to these costs because they have been able to move some supplies through other routes. The MIT experts point out that another key challenge is ensuring that companies can continue operating while they wait for access to these alternative routes.
The global economy has been disrupted by the Ukraine war, and the context in which it operates can have a profound impact on the way it does business. The analogy behind friendshoring is simple: trust your allies, your confidante, for your critical supply chain and keep your enemies at bay. However, the implications are not so reasonable. Experts argue that such efforts can bereave the developing and under-developed countries of their right to trade freely across the globe. The concept of selective globalization in trade pursuit can be unfair and denial of equal opportunities to traders from more fragile and vulnerable economies.
“Supply chain managers need to think carefully about opportunities and risk when looking for new sources while considering how to coordinate the change from one source or mode to another,” said Joachim Arts, a CTL research affiliate and associate professor at the Luxembourg Center for Logistics and Supply Chain Management.
“If it isn’t coordinated carefully, it could lead to all kinds of bullwhip effects throughout global supply chains," he added.
Consequently, the war has stimulated the affinity for friendshoring as a business strategy for companies looking to avoid being caught up in the conflict.
Friendshoring, or working with an employee or team from another ally country, is becoming increasingly common as businesses look for ways to save money and time. This trend is especially true for small businesses that don't have the resources to staff their own offices abroad.
In addition to saving money on travel costs, this trend also allows companies to tap into talent from around the globe without hiring additional employees or paying them high salaries. In fact, an exciting paradigm is that the most effective way for companies to attract top talent is by building relationships with people outside their own organizations and allowing those relationships to blossom into collaborative partnerships that benefit both sides.
What are the key motivations for companies to adopt Friendshoring?
Companies are looking to reduce costs and increase speed to market. They are also looking for flexibility, innovation, and risk mitigation.
The practice of friendshoring allows companies to outsource to other countries in order to reduce costs and improve transparency. Let's explore some of the benefits that come with using a company from another ally country as your outsourcing partner:
Reduced costs
The cost of transportation, communication, and administration are all reduced when you're friendshoring. This is because the team members are already in the same country as your client's offices, so they don't need to spend time traveling back and forth between them.**
The training costs can also be reduced considerably. If your employees are trained by someone who knows how their business works, this makes it easier for them to get up-to-speed quickly on new projects or tasks that come along (and reduces risk).
Improved transparency
One of the main benefits of friendshoring is that it improves transparency. The hiring process can be extremely opaque, which makes it difficult for companies to know what they're getting into when they outsource their jobs. When you hire someone from overseas, they may or may not have been screened and assessed by a parent nation's company—and if they've been hired through an agency, there's no way to know how many steps in between them and your job (or even whether any steps were taken).
Shared values
In a world where the digital economy is growing, it's easy to assume that economies of scale and economies of scope will increase. However, this may not be true for every company.
Companies with shared values can save money by sharing resources. Shared values make up your company’s culture, which influences how you choose to run your business and what kind of employees you hire. A shared value system allows companies from different regions to work together more easily than they would if they were competitors in other industries or countries.
Shorter communication paths
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Communication is faster and easier.
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Less time is spent on communication, which means less money is spent on it.
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Fewer errors are made in communication.
Better working conditions for the employees
Companies can be more selective in choosing their employees.
Companies can offer better salaries and benefits to employees, which is another reason why they are adopting this new trend.
Friendshoring might help to outsource to companies in countries with which your country enjoys economic, cultural, and political affinity. It can be used as an alternative to offshoring when you want to tap into local talent and expertise but don't want to move completely overseas. It also allows you to reduce your costs by leveraging the skillset at hand without having them relocate across international borders.
The process of outsourcing work can be expensive, especially when you have a large number of employees or contractors in one country (such as China). By moving all your manufacturing operations to another location where labor costs are lower, you will save money on labor costs. In addition, if the products being produced overseas have been customized by the customer, then there may be additional expenses associated with re-engineering these products before sending them back home again—but that's another story!
How Friendshoring Induced Polarized Economies May Threaten Global Peace and Trade
When it comes to globalization, the question of "where" is as important as "what." Globalization has helped companies make their operations more efficient by outsourcing their manufacturing overseas. However, this shift has also created new problems for businesses and workers—such as a lack of transparency in how products are made or working conditions that may not be up to par with local standards. In response to these issues, many companies have started looking at friendshoring as another way to improve their business operations without compromising on quality standards or ethics (or both!).
Friendshoring is also becoming more widely accepted by companies that traditionally hire offshore workers or outsource their operations overseas. This shift comes as more and more companies realize there are advantages associated with engaging local talent (not only in cost savings but also cultural insights).
On the downside, however, friendshoring can create polarized economies across the globe.
While friendshoring your business is entirely fine, confining commerce to a limited circle of trusted partners can have catastrophic implications for global trade. The economic disparity will surge, and global economies can most possibly be greatly controlled by the more developed nations, primarily the USA and the European Union. The increase in the prices of essential commodities and oil and gas prices will pave the way for perennial or resolute global inflation.
The world bank has already warned of an impending recession in 2023 owing to the continuous increase in the interest rates imposed by the central banks across the globe. In that case, resolute inflation will only worsen the economy.
Besides, the concept of friendshoring is contentious to the fundamental nature of globalization.
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It will jeopardize fair and open international trade.
According to World Trade Organization research, the global economy would lose 5% of yearly output (about $4 trillion) if it were to become divided into Western and Eastern blocks or friends and enemies.
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Friendshoring will hurt underdeveloped nations, especially if they are pressured to choose a side, and this will keep them out of international trade. These nations' economies are vulnerable; this burden would be too significant for them to bear.
Dividing the world into camps that have economic resentments against one another, in turn, can be a threat to global peace, which already is witnessing the catastrophe of vicious war and is insanely vulnerable.
- Friendshoring under controlled and polarized conditions might increase the cost of essential commodities for economically vulnerable countries.
How can companies leverage a friendshoring strategy?
In order to set up a successful friendshoring strategy, one can follow the steps below:
- Start by identifying which countries you want to work with in terms of cost and quality.
- Assemble a team of experts who can help guide your decision-making process along its way from beginning to end (and beyond).
- Work closely with your outsourced counterparts during each stage of the project—from development through implementation—to ensure that everything goes smoothly.
- If possible, request feedback from employees at both ends so they can provide valuable insights into their experiences working together on these projects; this will help establish trust between coworkers in the future when working together again on new projects!
Friendshoring can have two common facets:
Near Shoring - This means that the company has its headquarters in one country and it hires employees from another country for specific roles such as sales or engineering. However, this does not mean that people from other countries are doing all their jobs; some jobs will be done by local citizens as well.
Far Shoring - In this case, companies have their primary operations located in one country. Still, they also outsource some tasks to a foreign partner who provides them with services such as software development or IT support, etc., while keeping their own staff busy elsewhere (like at home). The key here is that these tasks are performed remotely rather than locally, so there's no chance of losing your job because someone else needs it more urgently at home.
Is friendshoring a concern for the global economy and supply chain or a new opportunity?
Friendshoring is a trend that's growing in popularity. Companies are increasingly seeking to reduce costs and improve quality while also improving their supply chain management.
Friendshoring allows companies to realize these benefits by moving work closer to their customers or suppliers. The critical advantage of friendshoring is that it allows businesses to optimize their supply chains by outsourcing tasks such as data processing and customer service calls back home rather than placing them overseas where wages can be lower than in developed countries like the United States or Europe.
Is the trend toward friendshoring part of a larger move toward protectionism?
While friendshoring is a trend, it's not the result of a policy. In fact, it's more like an emotional response to globalization and the rise of China. Neither is there any evidence of profound economic impact yet for the friendshored countries yet. Though there still seems to be huge potential, it's important to understand that willingness to purchase for a friendly nation is one thing but the willingness to pay more to your allies is something that customers seem reluctant to do.
Friendshoring of consumer goods is unlikely to be economically advantageous in the majority of circumstances. However, the reputational and sentimental reasons are both valuable and profound to go with - at least for now, until the concept gains some more practical traction.
Friendshoring has been around for decades, but only recently has it become more common in certain industries where companies are looking for cheaper labor costs than they would find at home.
Friendshoring is a relevant trend that presents both opportunities and concerns for companies.
Companies need to be aware of the implications of friendshoring for their global supply chain, as it can have a direct impact on their business.
Conclusion
It's clear that friendshoring can help companies to reduce costs, improve efficiency and productivity and meet customer expectations. However, it can also create difficulty for global economies and supply chains. For example, companies moving manufacturing tasks outside their borders can pose an array of challenges. In some cases, this may mean higher prices or reduced product quality. However, ultimately the philosophy and the entire concept of friendshoring aims to help consumers by lowering the costs of goods produced in other countries.
While it's true that friendshoring has already begun to take hold in some industries and will likely continue to grow, the current trends show that it is most likely to flourish alongside traditional outsourcing and IT services and wouldn't replace or supersede them. However, with the surge of friendshoring, companies will rethink their business models, from hiring contractors to outsourcing. We're already seeing signs of this in the form of increased demand for offshore workers and companies hiring them on short-term contracts.