Sure about Offshoring

Trends in Recruitment. A personal view by Zach Miles

As business seeks to benefit from the lower costs and greater efficiencies afforded by offshoring, many people are understandably concerned about the loss of jobs and the detrimental impact this may have on local economies. The offshoring debate is therefore not only commercial in nature, but emotive and highly political. Ironically, demands for protectionism are heard not only from unions but, in certain instances, by the very same people who propound the benefits of free trade.

Outsourcing skills to foreign countries to take advantage of labour arbitrage is not exactly a new trend. In the US, moving jobs abroad began in the 1970s and continued throughout the eighties. Offshoring received a boost when the North American Free Trade Agreement was expanded in 1994 and made it easier to shift production abroad. While the manufacturing sector led the way, service sector offshoring really took off in the late nineties facilitated by the development of reliable and affordable communications together with digitisation which meant that certain support services could be provided from lower-cost locations in a manner theoretically undetectable to end-users.

As is the way in many such business innovations, where the US led, Europe soon followed. A 2004 report by Forrester estimates that 1.2 million jobs in Europe will move offshore by 2015 with the UK taking the lead followed by Germany, France, the Netherlands and Italy.

For businesses operating in continental Europe and constrained by more rigid labour markets than either the US or UK, offshoring has added allure. However, language differences can put these countries at a disadvantage. English–speaking businesses clearly have more options when considering overseas locations.

Research by Frost & Sullivan estimate that, in 2004, a total of 826,540 IT jobs were exported by France, Germany, Hong Kong, Japan, the UK and the US to lower cost countries, amounting to a combined value of $51.6 billion.

Two way traffic

But it is a mistake to think of offshoring as a simple transfer of jobs from higher waged economies to lower waged economies.

Business seeks to locate manufacturing and services abroad for a number of important reasons and while cost is clearly an important consideration, other key factors are improved service quality, faster process cycles, ‘24/7’ availability, skills shortages, access to better technology and closer proximity to overseas customers.

According to the UN Conference on Trade and Development (UNCTAD), more than half of all European offshoring projects actually end up in other European markets. Only 37% of European offshoring projects go to Asia.

While it is generally stereotyped as a ‘North to South’ trend in the media, offshoring is actually much more of a ‘North to North’ phenomenon than most people recognise. According to the World Investment Report published in September 2004, most offshoring takes place among developed countries with outsourced work often being relocated to privileged locations such as Ireland, Spain, Portugal and Canada. Surprisingly, the worlds two most vociferous offshorers of labour, the US and UK were also ranked the two most preferred offshore destinations for the second year in a row in AT Kearney’s 2004 Foreign Direct Investment Survey.

The true picture of offshoring today is one of a more fluid and multi-directional transfer of jobs between one country and another. A mechanism which provides employers with more choice and more opportunity. For business, competitive advantage depends as much on having a flexible, low-cost infrastructure as it does on the quality of your product or service.

While workers increasingly compete for jobs not only against local but also foreign candidates, neither is this a negative trend from the point of view of the employee.

Offshoring - the 'creative destroyer' of jobs

If offshoring led directly to higher unemployment in developed economies and wage deflation, then its critics would have a reasonable point.

In fact, there is strong evidence to support the case that offshoring leads to economic and employment benefits in home markets. The Information Technology Association of America believes that offshoring will actually lead to the creation of 317,000 new jobs in the US by 2008. An analysis by the McKinsey Global Institute concluded that every dollar of corporate spend US companies outsource to India generates $1.14 in new wealth for the US economy.

In short, increased corporate profits result in increased investment and greater job creation at home.

While some blamed offshoring for the sluggish recovery in unemployment as the US pulled out of recession in 2001, the US Bureau of Labor Statistics estimated that 13 times as many jobs were created in the service sector as were moved overseas in manufacturing over the past 20 years. And this healthy pattern is set to continue. Between 2000 and 2010, they also estimate that 2 million US service sector jobs will be offshored and 22 million new jobs will be created. New jobs anticipated in the nanotechnology sector alone will offset the jobs lost to offshoring.

Likewise, the UK Department of Trade & Industry estimates that the number of call centres in the country is likely to increase from 5,500 to 6,000 over the next three years despite the fact that many UK firms are currently offshoring call centres to India.