Executive Briefing: Has outsourcing gone too far?

Key points:

• At least six state legislatures in the US are considering bills that would ban state governments from awarding contracts to companies that employ workers in foreign countries
• Favoured outsourcing locations have been reaping big benefits. Chief among them is India, which US-based consultant Gartner says now accounts for 60% of the offshore IT services market
• In addition to IT, another major outsourcing trend has been to move call centres and help desks to locations such as Malaysia and India to save costs
• The move to outsourcing is even starting to reach white-collar jobs in areas other than IT and call centres. For example, US investment bank Morgan Stanley plans to hire around 50 research analysts in Mumbai this year

Outsourcing, the business of moving jobs to cheaper, offshore locations, is fast becoming a political hot potato, says Executive Briefing

While outsourcing has been around for years, increasing numbers of companies are now outsourcing higher-paid jobs as well as back-office functions to offshore locations. This trend has angered politicians and trade unions in the US and Europe, prompting them to seek ways to restrict the flow of jobs offshore. Political action may well slow the trend in the short-term, but serious restrictions against outsourcing look unlikely.

Currently, at least six state legislatures in the US are considering bills that would ban state governments from awarding contracts to companies that employ workers in foreign countries. At the same time, trade unions in Europe, particularly the UK, have been lobbying companies and government officials to stem the flow of jobs out of the region. In the US the matter has also reached Washington, where the General Accounting Office, the investigative arm of the US Congress, recently announced that it will study the impact of offshore outsourcing of technology jobs on the domestic job market. It is expected to produce a comprehensive report on the topic early next year.

In the meantime, favoured outsourcing locations have been reaping big benefits. Chief among them is India, which US-based consultant Gartner says now accounts for 60% of the offshore IT services market. Overall, this market, according to Gartner, is now worth about US$16bn. Other IT outsourcing centres include China, Malaysia, Singapore and the Philippines. Meanwhile, the estimates of jobs likely to be outsourced continue to climb. In a recent survey, Gartner predicted that one out of every ten jobs in companies that provide IT services will move offshore in the next few years, and one out of every 20 jobs within corporate IT departments will move to cheaper locations by the end of 2004.

In addition to IT, another major outsourcing trend has been to move call centres and help desks to locations such as Malaysia and India to save costs. According to a projection by British recruitment firm Adecco, some 100,000 jobs in call centres alone will go from Britain to India by 2008.

The reason for all this, of course, is the tremendous cost-savings offered by shifting employment to cheaper locations. BellSouth, the US telecoms company, recently reported that it could save as much as US$275m in IT costs over five years by moving its software development and maintenance work offshore. In the UK the list of companies that have moved IT, back-office operations and call centres to India includes insurance companies, travel firms such as Thomas Cook, telecoms groups such as BT and retail chains Asda and Tesco, with all saying the moves have resulted in significant cost-savings.

Going up-market
The move to outsourcing is even starting to reach white-collar jobs in areas other than IT and call centres. For example, US investment bank Morgan Stanley plans to hire around 50 research analysts in Mumbai this year. J.P. Morgan, meanwhile, aims to hire about a dozen MBA graduates in India this year. More banks are expected to follow suit as they seek to pare down their research cost base. Deloitte Research recently estimated that banks worldwide aim to cut the US$8bn they spend each year on research by half within two years.

The move by the two investment banks follows the steep increase in outsourcing back-office banking jobs. HSBC has led the pack and estimates that it will have more than 8,000 people in India, China and Malaysia by the end of this year. Deloitte Research reckons that the world's top 100 financial companies will move 1m mainly back-office and technology-related jobs to India by 2008. That's half the 2m positions or about 15% of financial jobs worldwide. From a cost point of view, the moves make a great deal of sense. In the case of equity research, for example, three-quarters of the sector’s expenses are wages. Salaries in India for similar jobs are between a 10th and a quarter of those in New York, London or Hong Kong.

From a political point of view, however, outsourcing can only become more and more controversial. In early August the International Federation of Technical and Professional Engineers (IFPTE) received approval from its membership to lobby the US Congress for laws to protect IT jobs from being moved offshore. Affiliated to the AFT-CIO, the IFPTE represents about 50,000 IT professional in the US and Canada. Specifically, the IFPTE will be pushing legislators to tighten requirements for granting work visas to foreign IT workers and to provide incentives to US companies that do not outsource IT jobs overseas.

Still, the success of these and similar initiatives appears remote and not just because outsourcing helps boost corporate competitiveness. There’s also evidence that those who lose their jobs through outsourcing are usually successful at finding other jobs. According to government figures, the average unemployment rate for college-educated workers over 25 years old in the year ended last July was 3% while the same figure in 1992 was 3.2%. In addition, the number of jobs held by college-educated workers over 25 has risen by 2.2% over the last year, compared with a 0.4% gain for those without a degree. Given these figures and the boost to corporate competitiveness gained through outsourcing, it appears most likely that the political head of steam building up about outsourcing will blow over in due course.

Source: Executive Briefing.