Offshore Outsourcing – Can We Have Our Cake and Eat It?
Offshore outsourcing has revolutionized global commerce and has had – and continues to have – a vast impact upon economies and societies worldwide. In an attempt to throw some light upon the scale and consequences of this impact, we convened a roundtable debate featuring representatives from across the world and from a variety of sectors. The debate addressed the following questions:
* What has been the economic and social impact of offshore outsourcing upon sourcing locations and locations from which activities have been offshored?
* Is there a need for greater international legal regulation of offshore outsourcing?
* What will be the consequences for offshore outsourcing of the current financial crisis – and might offshoring be a reversible trend?
Partner & President
TPI is a leading sourcing, organizational transformation and business advisory firm offering services across a wide range of functions and domains.
Managing Director Global Research
EquaTerra is a market-leading business advisory firm offering a range of consulting services to organizations worldwide.
Skyweb-Evans Co Ltd
Based in Kenya, Skyweb-Evans provides both business-to-business and business-to-consumer call center services, global BPO solutions, local services and technology solutions.
Chief Executive Officer,
Business Processing Association of the Philippines
The Business Processing Association of the Philippines (BPAP) is the umbrella organization, and serves as a one-stop information and advocacy gateway, for the Filipino offshoring and outsourcing industry.
Pratt School of Engineering, Duke University
Vivek Wadhwa is a fellow with the Labor and Worklife Program at Harvard Law School and executive in residence/adjunct professor at the Pratt School of Engineering at Duke University. He is also a technology entrepreneur and a columnist for BusinessWeek.com. Wadhwa was named a “Leader of Tomorrow” by Forbes.com.
JL: Oscar, let’s start with you: how would you say the offshore outsourcing movement has contributed to the Philippines’ economic growth and how much of the proceeds of that growth is remaining in the country?
Oscar Sañez: This has been a big contributor to economic growth, particularly in the past three years. This whole industry is really an export industry, and a people industry, so a big chunk of the industry is revenue from export services, and about half of the revenue stream goes into payment of wages – so wage income benefiting today around 350,000 workers in the Philippines, workers who otherwise would have been earning much less in other sectors or even perhaps working overseas (overseas Filipino workers make up a big chunk of the workforce). And then you have to think about the other sectors benefiting from this: maybe about 30-35 percent of P&L going to vendor services, whether it’s telco – local telco of course – power, property, and other hardware and software services that again would be incremental income for the economy.
We estimate that the current contribution of the industry to GDP is about 5 or 6 per cent – and as this is export, this is new revenue that had not existed before. And I think there are other effects in terms of multipliers for jobs we’re creating for allied industries supporting this industry, whether it’s retail, transportation, other consumables that are again benefiting from supporting the BPO companies that proliferate in all the commercial centers in different areas; they’re certainly an additional 1 to 3 multiplier effect for job creation. So there’s a lot of positive impact on the economy.
Duncan Aitchison: Certainly from the consumer side of it there has been quite significant inflation – not just infrastructure inflation but wage inflation in a number of the offshoring territories. There remains a continuous flow of talent into those pools but as demand for these skills increases, which it has across a number of fields – from technology across into the broader business process field – in many of those instances there has been competition for talent, for individuals, and general wage levels are increasing and have done reasonably significantly over the last five or ten years. I don’t think it’s as black and white as to say “every outsourced job is necessarily being done at significantly low wages”; I’m sure we can find examples and areas of the market where that is true, but the rapidly increasing demand from the west has created a certain degree of competition for talent which has reflected itself in wages underpinning those industries.
JL: Gilda, what’s been the impact of outsourcing on the Kenyan economy?
Gilda Odera: We’re still a very young industry in Kenya; we’re still only about four years old and it’s only over the last year or so that things have really taken off to a larger extent, so we don’t have that many BPOs operating in Kenya right now – not as many as we see happening in the next three to four years. But we do realise that there will be that impact – in fact Frost & Sullivan did a survey indicating that there will be 1,600 centers by 2013 in Kenya. So we see it in terms of adding value to clients from the west. There have been instances where it’s been seen as taking away jobs – I prefer not to see it like that, but as complementing what cannot be done at the other end, or can be done in a more cost-effective way in Kenya rather than organizations incurring very high costs and then being unable to sustain themselves.
Stan Lepeak: I would echo that point, and I think that it’s a very fluid situation; as some work leaves the west and goes to India, then eventually wages go up there and that work may go farther afield like Kenya or China. But I think there’s still a huge untapped demand in the west for this type of service, particularly as you look at some of the more advanced analytical work that’s being done: what we call knowledge process outsourcing. In the past there were a lot of things that western firms didn’t do because they couldn’t afford the talent or couldn’t find it. I think as the outsourcing market matures you’ll see a lot of businesses in the west tapping into these capabilities whereas in the past they just wouldn’t have people doing that sort of work. So yes, some jobs are lost, but I think there are resources that the west can tap into which just wouldn’t have been available in the past.
I think another point to note is that if you look at the low-end work, some of it’s going to be automated away anyhow; if you look at some of the call-center work, or some of the transaction processing work, those jobs will eventually go away altogether and the cost of the labor doesn’t matter because that’ll get automated. In some cases it’s not as if those jobs would have been saved if they didn’t go offshore; eventually they’d have been automated away anyhow.
Vivek Wadhwa: I’ve been looking at India from the perspective of how the country is continuing to rise in terms of its ability to continue to do high-level R&D outsourcing despite the educational problems, despite its infrastructure problems, despite everything that’s happening there – how is the country succeeding? And what we figured out was, Indian industry has learnt how to develop its workforce in a way that’s very unique, in a way that they’re able to move people up the ladder very rapidly: that’s how India is succeeding. Now, in this conversation we’re heard the outsourcing side of it; there’s a big backlash building in the USA because it is causing disruption to the professions – to the engineering profession, to scientists and so on. There is a cost to it on the western side that we shouldn’t overlook over here.
Stan Lepeak: I think that’s the case; but if you look at aging workforces, the lack of the ability of certain industries in the west like the public sector to attract young talent, there’s still a significant shortage of talent in either certain skills or certain industries – and in some cases, yes, if you pay enough you can get the talent, but if you look at certain other industries and certain types of businesses in the west, they’re not going to be able to attract the talent they need from local pools simply because there’s not enough talent available, or because their economic model doesn’t allow them to pay western wages. It’s disruptive but I think the reality is much more complex, whether or not if there wasn’t an offshore option those jobs would be filled regardless.
Vivek Wadhwa: This thing about shortages is just corporate propaganda, nothing more than that. There are no shortages of talent: in a free economy you can’t have shortages because what happens is when supply drops prices rise and supply compensates for it. The bottom line is that it’s cheaper for companies to send these jobs offshore and that’s why it’s happening. Rather than trying to come up with excuses they should just be forthright about it: there’s an economic incentive here for companies to send jobs to other places where it’s cheaper.
Stan Lepeak: You look at the US public sector, they don’t send jobs offshore for the most part, and they cannot meet their hiring needs in a broad variety of areas. Maybe the public sector’s a bit of an exception but there’s a huge number of –
Vivek Wadhwa: What do you base that statement on? Where are the hiring difficulties in the public sector? Give me one example. Give me one data point.
Stan Lepeak: We did three studies around aging workforce and related HR issues in the US public sector each of which showed that there’s difficulty in functional areas like HR, F&A, IT in meeting hiring needs, and in meeting the expectations of being able to backfill the retirement levels that are coming up in the next few years.
Vivek Wadhwa: I haven’t seen one credible study like that so far. Most of it has been funded by groups who have a vested interest in saying what they want to be saying. You can’t have shortages.
Duncan Aitchison: You say you can’t have shortages but you absolutely can, and realistically if you look at what actually established the Indian offshore industry it was absolutely to do with labor and skill shortages driven by the dual storm of Y2K and the dotcom bubble simultaneously meaning there was an absolute shortage of capability at the point in time. Yes, the market can react over a period of time; it cannot generate skill at a necessarily sufficient rate, particular when you look at elements of the west – maybe less so America but certainly Western Europe, where you do have a naturally aging, declining population that is just not fuelling the pool that was there before.
Furthermore all corporations will look at operating on the most efficient basis that they can: if that means moving operations around the globe in various forms, if that means sourcing capability from different parts of the globe – so they shall. Yes, that will have impacts in terms of labor markets at both the receiving and providing ends, and there will be changes in the dynamic; but I think it’s unrealistic to start with a premise that says there are no skill shortages, because that just presumes we have an infinite amount of time for the market to redress itself – and, underneath that, a pool that is naturally growing – when in significant parts of the West you just don’t have that.
The drivers have indeed had some cost element to them, but we’ve also had labor availability drivers – which have actually been more marked in the last three years up to mid-year last year, in terms of the economic cycle – and we’ve also had drivers about organizations’ desire to expand their global footprints to operate in markets where they want to trade, be that in Russia, be that in India, be that in China. So it’s more complex than just a cost equation; and again all the organizations that I’ve dealt with are very aware of the practical implications in terms of what that means to their current employees moving forward and the broader communities they serve, and are concerned about the reputational side. This is not a monodimensional discussion or debate.
Gilda Odera: I fully agree. There are a lot of things in play there, and the western world cannot have its cake and eat it: I have to put it that way. The shortage of skills in some places is a matter of fact, and you’re able to get skills in other areas and make your operations more efficient, your bottom line better. We can see what’s happening out there in the world today: the cost of living and the cost of operation are just really high, and are just going to get higher and higher: that is a fact. I don’t think organizations can sit back and say “let’s not send work offshore because we’re sending away work” – I think you’ve got to look at the bigger picture.
At the end of the day it’s a win-win situation for all: you asked the question “what happens when the lower end work is automated and disappears, and developing countries suddenly will find themselves with no work”. As the years go by, you look at the higher and higher end, and at the end of the day you’re going to find that what’s going to happen is that different markets are developing more and more. Even if automation takes place years down the road, yes there’ll be fewer jobs in BPOs, but I believe that what you’ll find within those markets is the skills will have really developed to a higher level and companies within those countries – for example in Kenya – will be doing business in a very different way, using very high international standards like anywhere else. The world is becoming one flat place.
Oscar Sañez: I agree that we have to look at this from a bigger, wider perspective. The beautiful thing about this whole global sourcing, global offshoring movement is that every market, every geography is in a different place in terms of resonance for offshoring at different points in time. And different markets are receiving services at a different level of readiness. That is why the whole notion about shortage is about a point-in-time shortage. One market may be short of a certain skill at a point in time – but another market with a much more agreeable cost structure may be ready for it. And the thing is, with every domain and every industry, this occurs in waves. So whether it’s in terms of automation or not, each of these domains is also maturing at a different pace – and therefore there’s a niche for markets that are ready at a certain point in time with the supply, and with the necessary capability.
The reason why the offshoring services being done in India are a bit different from what’s being done in China, South Africa or the Philippines is because of these different levels of readiness and skills available, depending on the need and the demand that is being addressed. This is going to happen even with automation – because automation won’t happen overnight; it’ll be occurring at a different pace, at a different level, in different geographies and in different functions.
Vivek Wadhwa: I agree that there are local shortages in certain regions and so on but I’m talking at the macro level: there aren’t any macro-level shortages of engineers or scientists in the USA or Europe. This is all bogus. The fact is that it makes economic sense for companies to go abroad where it’s cheaper, and it’s a win-win – I don’t think we disagree on all this.
JL: OK, let’s move on to our next point: is there a need for greater international legal regulation in the space?
Stan Lepeak: I think there’s a need for both more – and better – regulation, and more consistency across market sectors. I think one of the challenges that buyers have when they’re looking at undertaking global outsourcing is the myriad of regulations that they need to be aware of across the different markets that they’re sourcing from; and similarly from the perspective of the supply side – particularly for larger suppliers that are operating in multiple markets – how can they balance the regulatory needs across those markets. Given the nature of IT and data in that it can be in multiple places and under multiple jurisdictions at once, it creates an environment that is extremely complex to understand – but because of that complexity doesn’t necessarily hold up in terms of meeting the original goals of the regulation which were protecting data, protecting information, ensuring legal obligations are met.
So I think it’s both looking at what is the best regulation that’s required, and also creating a workable environment that can be applied across multiple markets. Just as there’s a movement afoot to standardize on a more global basis different types of accounting and financial standards and regulations, this needs to be done relative to the global sourcing market – or you get something that because it’s so complicated and unworkable it’s very difficult to understand, and doesn’t meet the original goals of the regulation to the extent it could.
Duncan Aitchison: I concur certainly that there are obviously challenges for both buyers/sellers, users/providers, because of the wide disparities in regulatory standards. I have to say the big areas always seem to come down to the issues around data and information: how that can be moved, how that can be maintained, how that can be kept safe. Also there are some fairly profound issues around IP and treatment: often it’s not about the regulation itself but how the regulation is being administered and enforced. So again one has to believe that for nations and regions looking to be successful as global service delivery locations, there goes with that a requirement to bring regulations to both a usable and a robust standard.
I did wonder whether or not the question was about bringing in regulation over how much outsourcing should occur because obviously there’s been quite a lot of rhetoric – as one would expect – during the election cycle in the US about domestic job protection. I did wonder whether that was where your question was aimed here rather than necessarily looking at data protection at a global level and a consistent level.
JL: Oscar, I know you have been working very closely with the Filipino government on things like data protection, privacy et cetera, with regard to certain international judgments that have been passed down and treaties that have been signed. To what extent do you think those are sufficient to allow individual countries and individual organizations such as yours to regulate?
Oscar Sañez: I think the way we are approaching this, basically, is that we have identified – based on our own interviews with the locators that are here, the captive operators – a shortlist of what are the minimum regulatory standards that you would need in order to feel confident about maintaining and growing operations overseas. We narrowed it down to three or four items. One is having robust data privacy as part of the legal framework, and which that complies with either EU standards or the APEC data privacy principles – something that is quite acceptable to be able to have that sort of accountability and reliability and that sort of confidence to be able to do offshoring work. Another item would be something that deals with intellectual property protection, complying with global standards to be able to work that within either a legal framework or a self-regulatory framework.
A third item would be strengthening cybercrime laws in order to have the ability to prosecute against criminality that is based on website operations. The last item is one that deals with ensuring that standard working conditions are maintained and that business complies with what should be the right level of support for the employee to be able to grow and develop within our industry. I think if every market can work out what are their minimum standards for those three or four items, we will have a more robust and better environment for the offshoring industry to grow further. That’s where we’re coming from.
Stan Lepeak: I’d just like to add to Duncan’s point that if you do look at the legislation in the US to restrict the use of offshoring in any significant way I think ultimately that’s going to be extremely difficult to enforce, and I think inherently protectionism is only going to delay the day of reckoning in terms of the competitiveness of some of the people it’s trying to protect. I think as we’ve seen in other industries it’s just pushing out to the next election to address some of these issues. I think it’s much more productive – as Oscar’s just been saying – looking at how to address these issues rather than trying to outlaw or ban a business activity like outsourcing.
Gilda Odera: Just to add to that, I think in terms of every market looking at legal regulation, it is something that is just going to have to take root. Initially there were few offshore destinations but the trend we’re seeing right now is that there are very many countries coming up and saying “me too, me too”. But at the end of the day they’re going to have to have international legal regulations within their markets if they’re going to be competitive enough and attract anybody sending work or setting up in those countries. I think it’s going to be a natural evolution where if you want to be able to be recognised globally you’ll have no choice but to observe international regulations. That’s what we’re doing now: we’re passing what we’re calling our ICT Bill in the next four months. What Oscar has just said is exactly what is happening in Kenya now: the bill has passed through its first reading, is going through its second reading, and is going to become law.
JL: But those are particularly – in the cases of both Kenya and the Philippines – national rather than international regulations; the implication of what you’re both saying is that we don’t need any more international regulation, and it’s fine to allow individual countries to regulate themselves and then the market will sort out which countries are doing that successfully.
Gilda Odera: I would say so because just as the gentleman who spoke before me said, anything else would just be delaying the inevitable.
Vivek Wadhwa: I don’t think the United States would agree to any regulation that impacted its rights or the way it enforces intellectual property… The bottom line is: let the markets do their thing.
Duncan Aitchison: I’m with you. The required standard is fairly visible. The issue is the combination of both the regulatory and legislative framework and the willingness to enforce – having a pile of statutes is one thing while actually being diligent about their enforcement is a very different thing.
JL: Finally, then: considering the current financial uncertainty, might outsourcing be a reversible process? Is the crisis going to have a permanent impact upon the outsourcing sector, and if so how might that pan out?
Stan Lepeak: I think there will be a permanent impact. There is obviously a major business event – a life event – occurring in financial services and I think it’s going to cause the firms in that market to fundamentally relook at how they deliver a lot of their back-office services; not only is there an immediate, short-to-medium-term need to reduce costs, they really need to relook at how they do a lot of the back office work – and that’s going to involve doing a lot of rationalisation and consolidation that you could argue might have been done several years ago but wasn’t because times were good. It’s going to involve looking at a more creative use of technology, more automation; and it’s going to involve looking at doing more work in offshore locations.
But I think another thing to look at is that in some of these institutions – and it’s not just financial services, it’s other industries as well – a lot of business is done outside of their western home markets. So there’s no reason why the back office work can’t or shouldn’t be done there as well – particularly as they’re looking at actively entering markets like India or China, and parts of Africa ,and other parts of Asia-Pacific where some of this back-office work is done: they want to be selling their services there as well. I think that this life event is going to accelerate a shift in how back-office services are delivered – but again it’s something that from an efficiency and a cost standpoint you could argue should have been addressed previously but when times are good that’s not the focus.
Duncan Aitchison: Our standpoint’s not massively dissimilar. I have to say though that if you take as a backdrop the fact that over a sustained period we’ve seen a continued move to organizations using various forms of a global delivery model for their operational services I see no reason why that would change in terms of the dynamic. Yes, different things can be done in different places and the location of work will continue to move, and change; but given that this has now been enabled – and will only continue to be progressively more enabled – by technology, then the comparative economic advantages are reasonably clear. The interest in terms of organizations serving global markets is already there, so I think we’ll see is playing its part.
I tend to take the current financial crisis as being – even though it’s big news – one of a series of economic events that we’ve seen over the last 80 years and will continue to see over the next 80 years. It’s part of the natural cycle in terms of ups and downswings – and again, logically, the harder things are the more people look at costs and they look for initiatives that are likely to deliver fast and significant cost benefits; therefore I expect outsourcing and offshoring to be high on the agenda. I think if you look specifically at financial services – and within that at the much-depleted investment banking industry – these were sectors that were already the heaviest users of offshore services (be it through their captive operations or be it through third-party contracts), very heavily outsourced and indeed increasingly interested in some fairly esoteric areas, not just mainstream call-center or IT-type work but quite sophisticated areas of product and service management, equities research, analytics, that sort of thing.
Do I see this continuing? Yes. Do I think the current financial turmoil is a significant event for the offshore outsourcing market? No, other than that it alters the flow pattern of demand over the coming period. If anything I think there’s a certain risk that in the very immediate term we’ll have inaction rather than action. Normally organizations are good at making decisions when they have clarity, ie, things are going to get better or things are going to get worse; they’re not very good when they don’t know what’s going to happen next. And we’re still in that phase, I think, when we’re in that high degree of uncertainty that tends to paralyse corporate decision-making. So we may see a short hiatus – and certainly if I look at the behaviour of, particularly again, the investment banking community, they’ve really been in uncertain territory and doing less in terms of offshore outsourcing for the last, maybe, 12 months or so as they’ve been trying to figure out what the implications in the markets have been, and are likely to be.
Vivek Wadhwa: In fact I think what started off as a trickle of outsourcing of financial services to countries like India is going to become a flood now, because of cost pressures and because of all the changes that have happened recently, so I agree with what we’ve just discussed – and I think that India and the Philippines are going to be the two major beneficiaries of this trend.
Oscar Sañez: We’re seeing the same trend and our projection is what Vivek pointed out; particularly of standard back-office work processes in financial services, HR outsourcing, publishing… Where we’re seeing a possible halt or slowdown would be in new product-development-type projects – particularly in IT, game development, engineering – in the short term, although this could come back at the usual pace after the dust has settled after this financial crisis.
Gilda Odera: What I say about the question of whether outsourcing might be reversible is: no, it is not reversible. It is here to stay, flowing onwards, not backwards – if anything as economies grow stronger out there, while there are ups and downs during the ups when things are good there is much more work and there will be the need to send work offshore. So it’s not a reversible trend; it’s here to stay. In terms of the impact of the financial crisis, I do believe that we will see certain aspects of work still going out but people will be more careful in terms of what they’re doing.