Offshoring and protectionism
As a follow-up and extension to an interview Guy Kirkwood did for the ICFAI, BPO Notes this month focuses on the issues around offshoring and the tendency to pass protectionist laws by ignorant western governments running scared.
Moving organisations' back offices to "offshore" locations has often brought a host of challenges ranging from poor quality of work, emergence of new competitors and a rising backlash against outsourcing in the West. The US Senate recently imposed a ban on Federal contractors from outsourcing overseas. This has led to a question mark on the industry. But is offshore or nearshore BPO here to stay?
I believe that the main barrier to rapid uptake of BPO services is not political interference, but inertia. The BPO market is still immature and in certain areas (i.e. payroll) is becoming commoditised. These seemingly contradictory elements makes BPO difficult to sell. Strong growth is inevitable when the first-movers (both suppliers and customers) can demonstrate real bottom-line advantage over competitors. We are not there yet, but we are reaching the time of re-signature in some of the most highly visible BPO deals signed four or five years ago. If the market is to make a step-change in activity, these deals cannot go back in-house.
So why are these jobs leaving the country? Labour arbitrage in a global economy is not only desirable, but necessary for the good of the "home" economy as much as for the offshore locations.
In an excellent opinion piece, Bob Evans, the editor of Information Week, talked about the politicisation of outsourcing in the US: "If protectionism would solve the problem and lead to things like "full employment," I'd be all for it. If government-mandated limits on what level of profit businesses can make would make those companies more competitive and successful and lead to higher employment, I'd bang the drum loudly. No matter how painful it is to see the impact on some American workers as the global economy unfolds, we cannot attempt to create a future that's a frozen image of a past that's just not compatible with today's round-the-clock, round-the-world economy."
I'm with Bob in hoping that this is one American import that Europe will not be wanting. But, I have a horrible suspicion that the politicians sitting in Brussels will not be able to help themselves.
Protectionist law is defended by two major arguments. The first is that these laws save jobs in domestic industries. If the "home" industry is forced to compete against a foreign country that provides services more cheaply, then that domestic industry will have to lay off hundreds or thousands of workers in order to stay competitive. Entire communities whose livelihoods depend on the service or industry will be damaged.
The second argument, a corollary to this one, is that eventually, left to compete for too long against the offshore location, a domestic industry might collapse completely, leaving the country dependant on foreign operations. This, the argument goes, could be devastating as it would find itself unable to provide a badly needed resource.
So the question, when times are tough for a particular industry, should not be, "should we save these jobs?" but, "should we save these jobs at the expense of other jobs, or should we let economic efficiency decide where people and resources are best employed?"
Domestic protectionism always has a domestic cost. Most of the time, however, these costs go unnoticed, because jobs protected in one industry are easy to count, while the costs throughout the economy are widely dispersed. In the case of the steel tariffs George W Bush introduced in March of 2002, the cost was an estimated USD732,000 in higher prices for each steel job saved, according to the Cato Institute.
If offshoring becomes the next industry that the US and Europe seek to repress, it's my opinion that this protectionism will cost the domestic economies much and achieve little.
I see that the main issue is one of perception. Economies change, jobs change; appear and disappear. It does not matter if those jobs are in the US or Europe, or in Russia, China or India, the work will ultimately move to where it is most efficiently carried out.
I'll leave you with the unintended wisdom of the CEO of Sears who got himself into all sorts of trouble for "speaking the truth" about offshoring.
Not only did Alan Lacy talk all too honestly about the financial attractions of going offshore, but he also compounded this by unfavourably comparing the intellect and drive of US workers with their overseas counterparts by saying, "there are four or five times as many smart, driven people in China than there are in the US." What Lacy learned is that honest, open discussion about offshore outsourcing in the US is the new corporate taboo. Nothing will be more politically incorrect this year than expressing interest in offshoring.
But be assured, this taboo won't stop it happening.