ME and Ophelia

Wednesday, October 08, 2003

'Offshoring' is the new redundancy - millions are likely to be hit

For such a bland name, offshoring is making a big noise, write Dominic Rushe and David Robertson in The Sunday Times, October 5, 2003:

British executives privately fear the trend is about to become political dynamite.

Glaxo Smith Kline's chief executive, Jean-Pierre Garnier says: "This emerging structural change in employment patterns represents a significant public-policy challenge for governments and societies, especially in the US and Europe."

According to Roger Lyons, joint general secretary of white-collar union Amicus, and president of the TUC, "unless something is done, Britain could end up a nation of fat cats and hairdressers, with nothing in between". He says offshoring will hit the British workforce from call-centre staff to senior management.

Forrester, a research firm reckons 750,000 British jobs will go offshore, including about 50,000 from senior management, over the next decade.

Offshoring, this decade's recession problem solver involves shipping jobs permanently overseas to countries where labour is cheaper. A cursory glance at Britain's steel or textile industry shows the effect offshoring has had on manufacturing.

Now the trend is moving steadily up the management ladder, as globalisation and technology make it possible for companies to move white-collar work wherever the costs are lowest.

In America 3m jobs have been lost since 2001. The vast majority of jobs lost were the result of permanent changes in the US economy and are not coming back, according to a study by the Federal Reserve Bank of New York.

Middle managers - especially those who do not meet clients face to face - are now competing for jobs in a global market with skilled, educated workers from India and China who, thanks to a far lower cost of living, can do the work at a fraction of the price.

Forrester predicts that 3.3m American jobs will go overseas by 2015.

In Britain, Amicus, the largest private-sector union believes 200,000 finance-sector jobs will be lost in the next five years to India alone.

A recent report from Deloitte Consulting, ominously titled The Cusp of a Revolution, estimates that 2m jobs in the financial-services sector could migrate to lower-cost countries in the next few years, including 730,000 from Europe. The attraction for businesses is obvious. Deloitte estimates that moving those jobs overseas will save companies $356 billion (£214 billion).

Chris Gentle, director of research at Deloitte, says: "This could be the start of the flight of service-industry jobs in the same way that we saw a flight of manufacturing jobs in the 1980s. Financial services have been the focus so far because they are at the leading edge of this trend due to the collapse in stock markets and competitive pressures forcing companies to drive down costs.

There are private and public-sector opportunities to lower costs by going offshore but there are logistical challenges, and also the question of how people will react to this. It is quite an emotive issue."

Professor John Quelch of Harvard Business School, who is also a former dean of London Business School, says people, especially in Britain have so far taken a "myopic" view of the job migration.

"It is not about some call centre being shipped off to India, it's so much bigger than that," he says. "If you look at the speed with which the Chinese economy is developing, in 10 years' time white-collar jobs we once thought of as invulnerable will move overseas."

He says that jobs not only in financial services but in the pharmaceutical sector and other areas of research and development will be up for grabs. "If you are going to pay some bright graduate to search the internet for research, why would they need to be in London? They could just as well be in Bangalore," he says.

It is all part of a long-term trend for goods and services to move where the costs are lowest, says Quelch. The difference this time is that it is grey matter not muscle that has been commoditised.

Garnier says there are clear reasons why India is emerging as such a force in the offshore market: "India took an enlightened decision some years ago to focus resources on ensuring that its vast population of young people are as highly educated as possible.

"This decision is now reaping dividends for India and resulting in it attracting large numbers of skilled jobs, which until now have mainly gone to the West or the Far East."

Change is painful but inevitable, says Philip Middleton, head of retail banking at Ernst & Young. And Britain should look to India not as a threat but as an example of what can be achieved.

"It's part of the creative destruction of capitalism. I do not think we will see Britain hollowed out by it. We will adjust and find new things, and skills.

"When the UK economy was moving out of shipbuilding, coal, steel and textiles, people were arguing that Leeds was going to be an economic desert. "Look at it now - it's a thriving centre for financial services, fashion, PR. Or Newcastle - shipbuilding and coalmines closed and now it's a tourist attraction with better entertainment and nightlife than London."

Britain has to raise its game in terms of education and the services it offers, he says. There is little to be gained, he believes, in attempting to turn back the tide.

Offshoring can even be good for countries. A study by the McKinsey Global Institute recently suggested the American economy receives at least two-thirds of the benefit from offshore outsourcing, with reduced costs and larger profits that can be reinvested in more innovative businesses at home.

New and expanding sub-contractors abroad create new markets for US products. And, theoretically, sacked workers will find new jobs in more dynamic industries in the long term.

India too may soon feel the heat of offshoring. Cheaper, more efficient companies in China and elsewhere are eyeing India's success and hoping to steal its jobs. Some time soon a richer, more complacent sub-continent may wake to find that its jobs are also rapidly drifting offshore.

But for those now caught in the riptide of this phenomenon, the economics of offshoring are a cold comfort.

# posted by Ingrid J. Jones @ 10/08/2003
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