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Offshore Outsourcing – Can we have our cake and eat it?

The outsourcing has revolutionized global commerce and has been – and continues to have – A huge impact on economies and societies worldwide. In an attempt to shed some light on the extent and consequences of this impact, Shared Services and Outsourcing Network convened a roundtable featuring representatives throughout the world and a variety of sectors, chaired by SSON online editor Jamie Liddell.

The discussion focused on the following issues:

What was the economic and social impact of offshoring on the supply of places and locations where activities were relocated?

Is there a need for greater international legal regulation of offshoring?

What will be the consequences for the outsourcing of the current financial crisis – and perhaps a tendency to reverse offshoring?

Attending were:

Duncan Aitchison
Partner and Chairman
TPI EMEA
TPI is a leading supply organizational transformation and business consulting firm offering services in a wide range of functions and areas.

Stan Lepeak
Director of Global Research
EquaTerra
EquaTerra is a market leading consultancy firms offering a range of consulting services to organizations worldwide.

Gilda Odera
CEO
Co-Skyweb Evans Ltd.
Based in Kenya, Skyweb-Evans provides both business-to-business and business-to-consumer service call center, global BPO solutions, local services and technology solutions.

Oscar Sañez
CEO
Business Processing Association Philippines
Companies Processing Association Philippines (BPAP) is the ridge, and serves as one-stop information and advocacy gateway, offshoring and outsourcing industry, Filipino.

Vivek Wadhwa
Executive in Residence
Pratt School of Engineering at Duke University
Vivek Wadhwa is a man with work and Worklife Program Harvard Law School and executive in residence and adjunct professor at the Pratt School of Engineering at Duke University. It is also a technology entrepreneur and a columnist for BusinessWeek.com. Wadhwa was named "Leader of Tomorrow" by Forbes.com.

SSON: Oscar, We'll start with you: how would you say that offshoring has contributed to the Philippines' economic growth and how much of the product This growth has remained in the country?

Oscar Sañez: This has been a great contributor to economic growth, particularly in the last three years. This whole industry is really an export industry, and industry people, so a big chunk of the industry is revenue from export services, and about half of the revenue stream is in the payment of wages – wage income for qualifying Today about 350,000 workers in the Philippines, workers who would otherwise have been earning a lot less in other sectors or even perhaps work abroad (Overseas Filipino workers form a large part of the workforce). And then he must think the other sectors benefiting this: perhaps 30-35 percent of P & L goes to service provider, whether telecom operators – Telco local course – the power, property, and other hardware and software services that would still generate additional income for the economy. We believe that the current contribution of industry to GDP is about 5 or 6 percent – and this is for export, which is new revenue that were before. And I think there are other effects in terms of multiplier for the jobs we create for related industries to support this industry, it Whether retail, transport, other consumables that are again enjoy the support of BPO firms that thrive in all shopping malls in different areas, they are certainly an additional 3 1 multiplier effect in creating jobs. So there are a lot of impact positive on the economy.

Duncan Aitchison: Certainly the consumer side of it was very high inflation – not fair, but inflation infrastructure wage inflation in a number of areas of relocation. There is a continuous flow of talent in these fields, but increases the demand for these skills, which he has in a number of fields – from technology through to the broader range of business processes – in many of these cases has been competition for talent, for individuals, and general level of wages are increasing and have reasonable significantly over five or ten years. I do not think it's in black and white as if to say "all jobs outsourced is necessarily made to pay very low, "I'm sure we can find examples and market sectors where this is true, but the rapidly increasing demand for the West created a certain degree of competition for talent has resulted in wage underlying these industries.

SSON: Gilda, which was the impact of outsourcing on the economy of Kenya?

Gilda Odera: We're still a very young industry in Kenya, we are still only about four years and only during the last year that things really took off in large, so that we not that many BPOs operating in Kenya at this time – not as much as we see happening in the next three to four years. But we realize that there that will impact – in fact, Frost & Sullivan conducted a survey indicating that there will be 1,600 centers by 2013 in Kenya. So we see in terms of added value to customers in the west. There have been cases where it was considered kidnap jobs – I prefer not to see like that, but as a complement to what can be done at the other end, or can be made more profitable in Kenya rather than Organizations incur very high costs and be unable to meet their needs.

Stan Lepeak: I would echo this point, and I think it's a very fluid situation, as a work leaves the west and goes to India, and eventually wages go there and that the work may go away as Kenya or China. But I think there's still a huge untapped demand in the west for this type of service, especially more you look at some of the most advanced work of analysis is: what we call knowledge process outsourcing. In the past there were many things that Western companies did not because they could not afford the talent or could not find it. I think that the outsourcing market maturity, you will see a large number of companies in the west tap into these capabilities while in the past, they are not people do this kind work. So yes, some jobs are lost, but I think there are resources that the West can choose those which simply would not available in the past. I think another point to note is that if you look at the low-end work, some of them will be automated all cases below, if you look at some of the work of call centers, or some of the work of processing transactions, these jobs will eventually disappear completely and labor costs did not matter because get automated. In some cases, it is not as if these jobs could be saved if they did not go abroad, they have finally been automated away anyway.

Vivek Wadhwa: I've been looking at India in terms of how the country continues to grow in terms of its ability to continue making high level of R & D outsourcing despite the problems of education, despite its infrastructure problems, in spite of everything that happens there – how is the country succeed? And what we determined was, the Indian industry has learned to develop its workforce to a way that is very unique in a way that they are able to move people quickly on the scale: that is India succeeds. But in this conversation, we heard the side of the outsourcing of it, there is a large building Thurs in the United States because is causing disruption to the profession – engineering profession, researchers and so on. There is a cost for the side West that we must not forget here.

Stan Lepeak: I think so, but if you look at the aging workforce, lack of the ability of some sectors to the west as the public sector to attract young talent, there is always a significant shortage of talent in both certain skills or certain sectors – and in some cases, yes, if you pay enough you can get the talent, but if you look at some other sectors and certain types of businesses to the west, they will not be able to attract the talent they need from directories premises simply because there is not enough talent available, or because their business model does not allow them to pay the salaries of the West. It is disruptive, but I think the reality is much more complex, whether or not if there was not an option in these jobs offshore be completed independently.

Vivek Wadhwa: The thing about shortage is corporate propaganda, nothing more than that. There is no shortage of talents in a free economy, you can not have a shortage, because this happens is when supply drops rising prices and supply compensates. The bottom line is that it is cheaper for companies to send these jobs offshore and is why it happens. Rather than trying to make excuses, they should just be honest here: there is an economic incentive for companies here send jobs to other places where it is cheaper.

Stan Lepeak: You watch the U.S. public sector, they only send no jobs at sea for most, and they can not meet their hiring needs in a variety of areas. Perhaps the public sector a bit of an exception, but there are many –

Vivek Wadhwa: What do you base this assertion on? Where are the difficulties recruitment in the public sector? Give me an example. Give me a data point.

Stan Lepeak: We have three studies about workforce aging and human resource issues in the U.S. public sector, each of which has shown that there are difficulties in functional areas such as HR, F & A, to meet the recruitment needs, and meet the expectations of ability to backfill pension levels are coming in the next years.

Vivek Wadhwa: I have not seen one credible study like this until now. Most of these were funded by interest groups who say what they mean. You can not have a shortage.

Duncan Aitchison You say you can not have shortages, but you absolutely can, and realistically, if you look at what has actually established industry Indian offshore, it was absolutely to do with labor and skills shortages led by double storm Y2K and Internet bubble simultaneously meaning there was an absolute shortage of capacity at the time. Yes, the market may react over time, it can not generate skills at a rate sufficient enough, especially when you look at the elements of the West – perhaps at least in America, but certainly in Western Europe where you have a natural population aging, the decline that is simply not supply the pool that was there before. In addition, all companies will consider operating on the basis that they can most effectively: if that means moving operations across the world in various forms, if it means the ability to supply different regions of the globe – so they are. Yes, that will have impacts in terms of labor markets both receiving and providing ends, and there will be changes in the dynamics, but I think it is realistic to start with a premise who says there is no shortage of skills, because we assume that an infinite time for the market to recover – and, below that, pool that is naturally more and more – when, in large parts of the West you do not do that. The pilots have indeed been some cost components for them, but we also had drivers availability of work – which were actually more significant over the last three years to last year's mid-year in terms of the economic cycle – and we've also had drivers on the willingness of organizations to extend their mark on world markets to operate where they want to trade, whether in Russia, whether in India, whether in China. It is therefore more complex a simple equation of cost and again all the organizations I have dealt with are very aware of the practical implications of what it means their current employees and move forward the wider communities they serve, and are concerned about the side of reputation. This is not a discussion or debate dimensional.

Gilda Odera: I totally agree. There are many things involved there, and the Western world can not have his cake and eat it: I must say so. Skills shortages in some places, is a matter of fact, you are able to acquire skills in other fields and make your operations more efficient, better your results. We can see what is happening there in the world today: the cost of living and operating costs are very high, and just go for even higher: it is a fact. I do not think that organizations can sit down and say: "Let us not send offshore because we refer the work "- I think you have to look at the bigger picture. At the end of the day, it's a win-win for all: that you asked the question: "What happens when the work is automated and lower end disappears, and the developing countries while at suddenly find themselves without work. "As the years pass, you look to end higher and higher, and at the end of the day you're going to see that what will happen is that different markets are developing more and more. Although automation has held for years on the road, yes, there will be fewer jobs in BPO, but I think what you find in these markets are the skills have really developed to a level institutions and enterprises in these countries – for example in Kenya – will be doing business in a very different way, using very high international standards as elsewhere. The world becomes a flat spot.

Oscar Sañez: I agree that we must address this issue from a larger broader perspective. The nice thing about this whole global sourcing, global offshoring movement is that each market, each geography in another place in terms of resonance for the relocation at different points in time. And the different markets are served at a different level preparation. This is why the whole concept of scarcity is about a shortage of point-to-time. A market may be short of a some skill to a point in time – but another market with a cost structure much better may be ready for it. And the thing is, with all domain and all sectors, this happens in waves. So, whether in terms of automation or not, each of these areas is also contracted at different rates – and therefore there is a niche market that are ready at some point in time with the offer, and with the necessary capacity. The reason for the relocation of services is done in India are somewhat different from what happens in China, South Africa or the Philippines because of these different levels of preparedness and skills available, depending on need and demand is addressed. This will happen even with automation – because automation will not happen overnight, it will happen at different rates at different levels in different geographical areas and different functions.

Vivek Wadhwa: I agree that there are local shortages in some areas and so on, but I speak at the macro level: there is no macro-economic shortages of engineers and scientists in the U.S. or Europe. This is all false. The fact is that it is profitable for firms to go abroad where it is cheaper, and it's a win-win – I do not think we disagree on this.

SSON: OK, let's go to our next point: is there a need for greater international legal regulation in space?

Stan Lepeak: I think there is a need for regulation both more – and better – and more consistent in all sectors. I think one of the challenges that buyers have when they seek to launch a global outsourcing is the multitude of regulations they need to be aware of all the different markets that they're sourcing from, and even in terms of supply – particularly for the larger providers that operate in multiple markets – how can we reconcile the need for regulation in these markets. Given the nature of IT and data that it can be in several places and in multiple jurisdictions at once, it creates an environment that is extremely complex to understand – but because of this complexity necessarily hold in terms of meeting the original objectives of the regulations that were protecting data, protecting information and ensuring that legal obligations are met. So I think it's both watch what is better regulation is necessary, and also to create a realistic environment that can be applied to multiple markets. Just as there is a movement standardize on a more comprehensive approach different types of basic accounting standards and financial regulations, which must be made in relation to the global sourcing market – Or if you get something because it's so complicated and unworkable, it is very difficult to understand, and does not meet the original objectives regulations insofar as he could.

Duncan Aitchison: I concur that there are certainly challenges in the course for both buyers / sellers, users and suppliers due to large differences in regulatory standards. I must say that large areas still seem down to issues around data and information: how it can be moved, how it can be maintained, how it can be kept safe. There are also some pretty deep issues around intellectual property and treatment: often it is not regulation itself but how the regulation is administered and enforced. Again we must believe that the nations and regions seeking to succeed as a global service delivery points, it goes with the obligation to harmonize regulations both a usable and robust standard. I wondered if yes or no question was about the rules on how much outsourcing would occur because obviously there was lot of rhetoric – as expected – during the election cycle in the United States on the protection of domestic jobs. I wondered if this was that your question was here rather than necessarily look at the data protection at global and consistent quality.

SSON: Oscar, I know you have worked very closely with the Filipino government on things like data protection, privacy and so on, to respect of certain international decisions which have been transmitted and treaties that were signed. To what extent do you think they are sufficient to allow each country and different organizations like yours to regulate?

Oscar Sañez: I think the way we approach this, essentially, is that we have identified – on the basis of our own interviews with the locators that are here, the operators in captivity – A list of what are the minimum standards of regulations that you need to feel confident in the maintenance and growth of overseas operations. We have reduced to three or four articles. It is robust with data privacy within the legal framework, which complies with EU or one or other of the principles of the APEC privacy – which is quite acceptable to be able to have this kind of responsibility and accountability, and that kind of confidence to be able to make offshoring work. Another point would be something that deals with intellectual property protection, in compliance with global standards to be able to work in either a legal or a framework self-regulation. A third element would strengthen cybercrime laws in order to have the ability to prosecute crime against which is based on the operations of the website. The latter is one who deals to ensure that the standard of working conditions are maintained and that companies is consistent with what should be the right level of support for the employee to grow and develop within our industry. I think that if all markets can work at what are their minimum standards for these three or four items, we will have a more robust and better environment for the offshoring industry continue to grow. That's where we come.

Stan Lepeak: I like to add to Duncan's point that if you look at the legislation United States to restrict the use of relocation significantly in the end I think it will be extremely difficult to enforce, and I think that basically protectionism would only delay the day of reckoning in terms of competitiveness of some of those it seeks to protect. I think we have seen in other industries it's just to push the next election to address some of these issues. I think is much more productive – like Oscar has been said – looking at how to address these issues rather than trying to ban or prohibit a business such as outsourcing.

Gilda Odera: Just add to that, I think in terms of all contracts look at the legal regulation is something that will simply have to take root. Initially there were a few offshore destinations, but the trend we are seeing right now is that there are so many countries to come and say "me too, me too." But at the end of the day they will have international legal regulations in their markets if they will be competitive enough to attract someone sending work or the establishment in these countries. I think there will be a natural evolution where if you want to be recognized in the world, you do not choice but to observe international regulations. That's what we do now: we spend what we call our ICT Bill in the four months. What Oscar has just said is exactly what is happening in Kenya today: the bill has passed the first reading, through its second reading, and will become law.

SSON: But those who are particularly – in the case of both Kenya and the Philippines – rather than national regulations international consequences of what you are both saying is that we do not need more international regulation, and it very well to allow each country to regulate themselves and then the market will sort of country that is successfully done.

Gilda Odera: I would say yes because like the gentleman who spoke before me said, anything else would only delay the inevitable.

Vivek Wadhwa: I do not think the United States agree to a settlement that hit its rights or how it applies the IP … The bottom line is this: let markets do their work.

Duncan Aitchison: I'm with you. The required level is quite visible. Question is the combination of regulatory and legislative framework and the will to enforce them – having a bunch of laws is one thing while in fact a duty to their execution is something very different.

SSON: Finally, then: Given the current financial uncertainty, could be outsourced a reversible process? The crisis will have a permanent impact on the outsourcing industry, and if so how could this happen?

Stan Lepeak: I think there will be a permanent impact. There is obviously an important business event – a life event – occurring in services Financial and I think it will cause companies in that market to fundamentally revamp the way they offer many of their back-office services, not only there is an immediate and short and medium term need to reduce costs, they really need to relook at how much they of back-office work – and that will involve a lot of rationalization and consolidation that you could argue could have been done years ago but was not because times were good. It will involve research in a more creative use of technology, more automation, and it will involve research to do more work in offshore locations. But I think another thing to watch is that in some of these institutions – and this is not just financial services, there are other industries as well – a lot of business is done outside their national markets in the West. There is therefore no reason why the back-office work can not or should not happen again – especially since they are actively seeking to entry markets such as India or China, and parts of Africa and other parts of Asia-Pacific, where some these back-office work is done: they want to sell their services, too. I think that this life event will accelerate a change in the way the back-office services are delivered – but again, is something of an efficiency and cost point of view you could argue should have been addressed before, but when times are good, this is not the focus.

Duncan Aitchison: Our view is not massively dissimilar. I must say that if you take as a backdrop that for a long time, we have witnessed a constant evolution organizations using different forms of a global delivery model of their operational services I do not see why that should change in terms of dynamics. Yes, different things can be done in different places and the workplace continue to shift and change, but because this has now been activated – and do continue to be increasingly accepted – by technology, then the comparative economic advantages are clear enough. Interest in terms of organizations serving global markets is already there, so I think we will play its role. I tend to take the financial crisis as present – even if it is big news – a series of economic events that we have seen over the past 80 years and will continue to see over the next 80 years. This is part of the natural cycle in terms of ups and downturns – and yet, logically, the more difficult things are more people consider the costs and they are looking for initiatives that are likely to provide rapid delivery and high costs, so I expect outsourcing and offshoring to be high on the agenda. I think if you look specifically at financial services – And within the industry as well-depleted Investment Banking – these are the sectors that were the biggest users offshore services (whether by their captive or whether through contracts with third parties), strongly sub-contracting and, in fact more interested in some fairly esoteric areas, not only integrate call centers or IT-type work areas but very sophisticated management products and services, equity research, analysis, this kind of thing. Do I see this continuing? Yes. Do I think the current financial crisis is an important event for the market for offshore outsourcing? No, other than that it alters the flow of demand over the coming period. If everything I think there is a certain risk that in the very immediate term we have inaction rather than action. Normally, organizations are good to make decisions when they have clarity, ie, things will get better or things will get worse, they are not very good when they know not what will happen next. And we're still in that phase, I think, when we are in this high degree of uncertainty that tends to paralyze the company decision-making. So we can see a short hiatus – and certainly if I look at the behavior, particularly again, the investment banking community, they've been in uncertain territory and do less in terms of relocation for the last, perhaps 12 months or so as they were trying to understand what are the implications on the markets have been and are likely to be.

Vivek Wadhwa: In fact, I believe that what began as a trickle of outsourcing of financial services to countries like India will now become a flood, because of pressures on costs and because of all the changes that have occurred recently, so I agree with what we have seen – and I think India and the Philippines will be the two main beneficiaries of this trend.

Oscar Sañez: We see the same trend and our projection is that Vivek said, especially the working standard back-office processes in the financial services, HR outsourcing, publishing … When we see a possible halt or slowdown in the projects is development of new types of products – including computers, game development, engineering – In the short term, although it may return to normal rhythm after the dust settled after the financial crisis.

Odera Gilda: What I said about the question of whether outsourcing can be reversible: no, it is not reversible. It is here to stay, from running, step back – if something stronger economies there, while there are ups and downs over the inverter when things are good, there is a lot more work and there will need to send work abroad. It is not a reversible trend, is here to stay. Regarding the impact of financial crisis, I think we will see some aspects of the work still going out, but people will be more cautious in terms of what they do.

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About the Author

Jamie Liddell has worked in journalism since he was a 17-year-old cub reporter for The Tico Times, Costa Rica’s highly regarded English-language weekly newspaper. Holding an MA in English from Clare College, Cambridge University, Jamie came to SSON from the world of overseas property publishing where he worked on the industry’s best-selling publications for the UK and Ireland, and gave seminars at consumer and b2b exhibitions and conferences internationally.

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