Monday, April 12, 2004
Sending the economy offshore
Posted by David Smith at 05:44 PM
Category: David Smith' s magazine articles

Times have changed. In the high-employment 1980s, the headlines merely told us about job losses. ITN’s ten o’clock news used to regularly run a map of Britain showing where the axe had fallen.

Now we are in the high-employment early 21st century and the job headlines are different. Now it is about jobs, in call centres and other support activities, that are being “offshored” – transferred abroad, mainly to India. Barely a week goes by without such an announcement, the most recent being from Abbey and Norwich Union. If ITN ran a map today it would show places like Bangalore and Bombay.

In both cases, however, such news remains controversial. Just as people were gloomy about job losses in the 1980s, so they are downbeat about job transfers now. Call centres were once seen by the unions as not worthy of their members, an inadequate replacement for lost industrial jobs. Now union leaders appear every bit as determined to cling onto such jobs as they once were when it came to steel, shipbuilding or coal mines.

Is offshoring a big deal or just media hype? Certainly there is no doubting the trend. Figures from India’s National Association of Software and Service Companies (NASSCOM) show “offshored” employment rising by upwards of 100,000 a year, with the numbers clearly accelerating.

Projections by Deloitte Research suggest that 2 million of the 13 million jobs in financial services in western economies will be transferred to India by 2008, three-quarters of a million of them from Europe. This, in turn, will produce an estimate cost saving of $138 billion (73 billion) for the top 100 financial services firms. Only a small minority of firms will not choose to offshore some jobs over the next few years.

Estimates by Amicus, the trade union, that more than 200,000 British back-office and call-centre jobs will be lost, mainly to India, by 2010, look cautious in this context. And this is not just a UK phenomenon. Forrester Research suggests the number of US jobs “offshored” will increase from under half a million now to 3.3 million by 2015. No wonder it has become a hot political issue in America, with presidential hopeful John Kerry accusing chief executives who transfer jobs overseas of treachery.

Why is offshoring happening? The most obvious reason is cost. Even adjusted for relative prices (purchasing power parity), an IT professional in India is paid a third of typical rates in Britain, and a quarter of what is usually paid in America. In terms of raw salary comparisons the differences are even more dramatic, as they are for lower-skilled staff to work in call centres.
Another reason is quality. Sir Keith Whitson, until last year HSBC’s chief executive, caused controversy when he said, of Indian call-centre staff: “They’re quicker at answering the phone, highly numerate and keen to come to work every day. Staff are hugely enthusiastic about their jobs, they dress well. A lot have degrees.” HSBC is in the process of transferring a further 4,000 jobs overseas.

A third argument relates to the cost and quality of telecommunications links. Until three or four years ago large-scale offshoring was not a viable option for companies because of call charges were high and networks unreliable. That has changed dramatically. Reliability has improved hugely and international call charges are already under a sixth of their level three years ago and still falling.
It is not hard to see why companies, particularly in financial services, seek to take advantage of offshoring, although it is also the case that some have looked at the possibilities and decided it is not for them. But what is the impact of offshoring on the British economy? Is this loss of jobs a worrying comment on our economic future, as some fear?

The fear goes something alone these lines: it was bad enough when manufacturing jobs were being lost to overseas competitors, or firms transferred operations to cheaper locations. It quite another thing, however, when service-sector jobs are going in their tens of thousands. These, after all, are the mainstay of employment in Britain. This fear exists in spite of the fact that the labour market is strong, with employment standing at more than 28m and unemployment, on the claimant count measure, at just 2.9% of the workforce, its lowest for almost 29 years.

There are, though, some pretty clear economic advantages to Britain in transferring jobs overseas. This is why, against what intuitively might be thought to be the case, studies show consistently that the economic gains to the country exporting jobs, Britain, are greater than those accruing to the recipient nation, India.

One source of such gains relates to the tightness of the labour market. Offshoring will help to head off labour shortages in Britain. A study by Evalueserve, a firm of consultants, projects that 275,000 UK jobs will be moved to India between now and 2010. That will help to offset what it says will be a demand-supply gap for workers in Britain of about 700,000. Most of the rest of that gap is expected to be closed by immigration into Britain.

A second set of benefits comes from the fact that consumers, through lower prices, and investors, through higher profits, gain economically when British firms shift some of their operations offshore. Consumers’ real incomes are boosted, increasing their spending power, which in turn generates jobs. For every call-centre job lost, other jobs are gained — in retailing and elsewhere.

A third avenue for gains comes from the fact that offshoring should raise productivity. Just like the shift of basic manufacturing jobs overseas, the transfer of routine service-sector functions should allow workers here to be moved into higher-productivity, higher-value roles.

Studies by the Centre for Economics and Business Research undertaken for Logica-CMG suggest that offshoring/outsourcing could, via this route, boost productivity growth in Britain (output per head) from just under 2% a year to nearly 2.5%. Given that the government’s objective is to close the productivity gap relative to other advanced countries, this could be a significant help.

All that is reassuring, although it cannot disguise the fact that offshoring also poses serious economic challenges. We need to have workers with the skills ready to move into higher-value work. And we have to be aware of the fact that some of these arguments might not look so clever in the event of an economic downturn and a significant rise in unemployment.

From Professional Investor, April 2004