Rethink Offshoring: Why Automation Is Your Better Business Strategy

Author: Doug Johnstone, Principal Consultant at Digital Pivot

Date: January 2025

After more than 30 years in the Professional Services sector with companies like EDS, Unisys, and Fujitsu, I’ve seen firsthand the allure and the downside of offshoring as a cost-cutting strategy. While the short-term savings on labour were often compelling, the hidden costs, increased risks, delays, and impacts on customer experience frequently told a different story.

A decade ago, offshoring often felt like the only viable option due to skill shortages and the limited capabilities of automation. But the landscape has shifted dramatically. In this blog, I’ll explore how automation has matured into a far more effective, scalable, and strategically sound alternative—and why it deserves serious consideration in today’s environment.

Can Automation Beat Offshoring in Uncertain Times?

Facing economic uncertainties, many New Zealand organisations are considering offshore outsourcing to reduce operational costs. However, recent research and market trends suggest that automation – not offshoring – might be the more strategically sound approach for sustainable cost reduction and competitive advantage. Automation technologies now provide compelling alternatives to traditional labour arbitrage models, with faster ROI, fewer hidden costs, and greater strategic control. This shift is particularly relevant as global supply chains face ongoing disruption and geopolitical tensions create business uncertainty. Companies embracing automation are discovering they can achieve cost reductions while maintaining quality control and building long-term resilience without the communication challenges and management complexities associated with offshore teams.

The Fading Promise of Labour Arbitrage

For decades, offshoring has been the go-to strategy for organisations seeking cost efficiencies. The fundamental principle behind this approach was simple: labour arbitrage – the practice of searching for and using the lowest-cost workforce to produce products or deliver services. Companies could dramatically reduce operational costs by relocating work to countries with significantly lower wages.

Labour arbitrage took multiple forms, including:

Offshore workers in countries with lower wage expectations
Remote workers in less expensive markets
Less expensive subcontractors
Outsourcing partners and providers

This model flourished in the IT sector particularly, with many New Zealand organisations offshoring software development, customer service, and back-office functions to countries like India, the Philippines, and parts of Eastern Europe. According to some estimates, employers could save up to 80% in salary costs by offshoring to South-East Asia instead of hiring remote workers in Australia – a similar dynamic applicable to New Zealand.

However, the offshoring model has begun showing significant cracks. As Matthew Munson notes, the initial savings are “often offset by hidden costs, including extended project timelines, additional communication costs, and higher project management expenses due to time zone differences”. These challenges are making businesses reconsider their global operating models.

Automation: The New Economics of Work

The emergence of sophisticated automation technologies – from Robotic Process Automation (RPA) to AI-powered solutions – has fundamentally changed the calculus of where work should be performed. Automation reduces reliance on human labour for routine tasks, thereby diminishing the primary advantage of offshoring: lower labour costs.

Recent studies highlight the compelling economics of automation:

Companies implementing automation can reduce operational costs by up to 50%, according to Forrester research
RPA implementations show average returns on investment of 11 times operating costs
Many organisations achieve ROI within just three months after implementation
Effort reductions ranging from 15 hours to 500 hours per week have been documented in organisations implementing automation
Companies implementing advanced automation report 20-30% higher productivity compared to traditional operations

These economic benefits have reshaped the decision matrix for executives considering cost-reduction strategies. As Ed Romaine, VP of Marketing and Business Development at ISD, explains: “The economics of reshoring have fundamentally changed with today’s automation technologies… Labor costs become less critical when automation drives productivity, accuracy reaches near-perfect levels, and operations become more energy-efficient”.

The Hidden Costs of Offshoring That Automation Avoids

While offshoring appears attractive on paper due to lower hourly rates (ranging from $15-$45 for junior specialists in many offshore locations), the total cost of ownership presents a different picture. Offshoring introduces numerous hidden costs that automation largely avoids:

1. Communication Barriers and Quality Issues

Offshoring often involves working across time zones, languages, and cultures, creating communication challenges that can lead to misunderstandings, rework, and project delays. In contrast, automation systems operate 24/7 with consistent quality and no communication barriers.

2. Loss of Control and Knowledge

When processes are offshored, organisations often experience a gradual erosion of institutional knowledge about those processes. Automation keeps this knowledge in-house through explicit process documentation required for implementation.

3. Intellectual Property Risks

Offshoring can expose sensitive intellectual property to jurisdictions with different legal protections. Automation maintains processes within your organisation’s security perimeter.

4. Declining Labour Cost Advantages

Many traditional offshoring destinations are experiencing rising wages, reducing the cost differential that made offshoring attractive. Meanwhile, automation costs continue to decrease as technology advances.

5. Reshoring Enabled by Automation

The combination of declining offshoring advantages and improving automation economics has led to a significant “reshoring” trend – bringing previously offshored work back to domestic locations. This trend has accelerated dramatically in recent years:

Reshoring and foreign direct investment have grown from generating 11,000 new U.S.-based jobs per year in 2010 to more than 300,000 in 2022
Job announcements tied to reshoring reached over 287,000 in 2023 – a 26-fold increase since 2010
Mentions of “re-shoring” in S&P 500 earnings transcripts increased by 128% in Q1 2023 compared to the same period in 2022

Research demonstrates a direct relationship between automation and reshoring. Krenz-Prettner-Strulik (2018) found that an increase of one robot per 1000 workers is associated with a 3.5% increase in reshoring activities within manufacturing industries. This correlation highlights how automation makes domestic production competitive despite higher labour costs.

Uncertainty as an Accelerator

The global business environment has become increasingly unpredictable, with supply chain disruptions, geopolitical tensions, and trade uncertainties creating new risks for offshore operations. Recent research from the Federal Reserve Bank of San Francisco indicates that “rising trade uncertainty creates incentives for firms to reduce exposures to foreign suppliers by moving production and distribution processes to domestic producers”.

This uncertainty, coupled with access to automation technologies, accelerates the reshoring trend. Empirical evidence shows that increased trade uncertainty correlates with larger increases in automation and steeper declines in offshoring, particularly in industries already exposed to offshoring.

The New Zealand Context

For New Zealand organisations, these global trends have particular relevance. The New Zealand Treasury identifies low productivity growth as a “long-term problem” and the “biggest economic challenge facing New Zealand”.

Automation offers a practical solution. Afor (www.afor.co.nz), a local test automation specialist, has demonstrated how New Zealand businesses can successfully deploy automation to improve productivity, quality, and customer outcomes.

In the agriculture sector, Afor helped New Zealand’s largest dairy exporter implement a scalable test automation framework across digital platforms like Salesforce, ServiceNow, and SAP. This enabled over 10,000 automated test scenarios, dramatically reducing manual testing time and supporting agile feature delivery at scale.

In the energy sector, Afor supported a leading electricity and gas supplier by integrating automation across Mulesoft, Salesforce, and web platforms. Their framework allowed fortnightly feature releases without compromising stability, accelerating innovation while maintaining exceptional software quality.

In the healthcare technology field, Afor enabled the world’s first 3D joint replacement planning software to meet international regulatory standards. Through risk-based automation, they helped the client secure FDA 510k approval and expand globally into markets like the US, Canada, and Japan.

Across industries—retail, finance, infrastructure—Afor’s projects consistently return hundreds to thousands of hours annually to their clients’ operations through streamlined, high-quality automation practices. These are not future ambitions; they are real-world results, demonstrating that New Zealand companies can leverage automation to leap forward in productivity and global competitiveness.

Strategic Implementation Path

For organisations considering automation as an alternative to offshoring, a strategic implementation approach is essential. Remember this is an opportunity to transform processes into powerful strategic assets that give your business the competitive edge:

Automation Strategy: Ensure you tackle automation from a Business Perspective. This means aligning automation efforts with strategic business objectives such as improving productivity, reducing costs, enhancing customer experience, or meeting compliance requirements and maintaining strong business alignment and executive buy in. Invest in developing an automation strategy which often avoids problems like the “Automation Paradox“.
Process assessment: Identify which processes are candidates for automation versus those that might still benefit from human expertise.
ROI analysis: Calculate comprehensive return on investment, including both direct cost savings and indirect benefits
Phased implementation: Start with high-impact, lower-complexity processes to build momentum. It’s also can be an opportunity to brutally simplify process so working with Process Optimisation specialists like Touchstone who specialise in Value Stream Mapping to “simplify the process jungle” where they identified significant gains in complex programme productivity through process optimisation.
Workforce planning: Develop strategies to redirect staff toward higher-value work as routine tasks become automated
Continuous improvement: Establish governance structures to identify new automation opportunities and optimise existing solutions

Conclusion

The economic case for choosing automation over offshoring has never been stronger. While offshoring offered cost advantages in an era of significant global labour price disparities, automation provides a more sustainable approach to operational efficiency. Beyond mere cost savings, automation delivers strategic advantages through improved quality, greater control, enhanced customer experience, and business resilience.

For New Zealand organisations feeling recessionary pressures, the temptation to offshore for immediate cost savings is understandable. However, the evidence strongly suggests that investing in automation provides better returns, both financially and strategically. As global uncertainties persist and technological capabilities advance, the automation advantage will only strengthen.

Particularly today with the technological narrative shifting to product-led growth, platform engineering, and AI transformation. Technological change is creating significant opportunity for organisations to leverage these technologies to build differentiated solutions on-shore. Examples of this can be seen with Securecoms DataPROTECT solution built locally.

Rather than exporting jobs and expertise in pursuit of short-term savings, forward-thinking New Zealand organisations are investing in automation to build resilient, efficient, and competitive operations for the long term. The choice isn’t just about cost – it’s about your organisation’s future capability and competitive position in an increasingly unpredictable global economy.

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