By Jon Tonti
Of the 8.2 million business services jobs held domestically at the beginning of 2002 in some 4,700 companies based in North America and Europe only 4.5 million will remain in their domestic markets by 2016 according to a study by The Hackett Group, a management consulting firm. The same study finds that the amount of business services work moving offshore will “level off significantly” during the next few years due to changes in the conditions of offshore drivers.
The Hackett study concentrates on the business services jobs related to finance, procurement, human resources, and IT that have been moving out of developed economies for well over a decade. Historical and predictive data shows that the number of jobs created in those four categories between 2002 and 2016 is offset by productivity improvements resulting in no net gain; the net loss of business services jobs appears to be the amount of work moved offshore.
Loss of IT Jobs to Increase
Of business services jobs IT will see the highest job loss rate of 54% between 2002 and 2016 compared to that of 42%, 36%, and 33% for Finance, Procurement, and HR respectively. Despite what may seem to be a tough hit to domestic IT business services jobs provided by companies with over US$ 1 billion in revenue in North America and Europe, the IT sector continues to grow and small and medium sized technology companies often do not offshore with similar intensity.
The creative destruction of productivity improvements and movement of commodity processes from domestic business units to Global Business Services centers (Captive or Outsourced) reduce the costs of business processing services that are not only transactional in nature but also knowledge-centric. This trend permits Hackett Advisors to state that “the likelihood that the HR, IT, finance and procurement organizations of corporate America and Europe will become contributors to job creation is extremely low.”
Economies of scale allowing companies based in North America and Europe to take advantage of high skilled offshore resources are evolving naturally
Service Centers Diversify
Driving this continued migration of business services jobs is the transformation of one dimensional service centers for routine business services into multifunction Global Business Services centers capable of delivering knowledge-centric services. The FTE (full-time equivalent) job base that is now based out of Global Business Services centers, instead of domestically in North America or Europe, is staggering in both transactional and knowledge-centric realms. Captive GBS far outstrips Outsourced GBS with an average 42% of the knowledge-centric FTE job base residing in Captive GBS organizations while only 10% of knowledge-centric FTE is concentrated in Outsourced GBS. Captive GBS again trumps Outsourced GBS with regard to transactional FTE job base; an average of 50% of transactional FTE job base for business services resides in Captive GBS while a mere 15% on average for Outsourced GBS.
Another reason companies are continuing to displace business services jobs from traditional domestic markets is that the increased use of the GBS model complements the predictable globalization of any large company’s operations. As supply chains, target consumer markets, strategy, etc. have to be reoriented in a global context that redefines the value chain, business services to serve that value chain must also adapt. Business services are adapting and transforming what were once shared services operations only taking advantage of economies of scale into GBS organizations enabling economies of scope and economies of skill as well.
Business Services to Level Off
Expanding the scope of a GBS’s portfolio of services to include other commodity like services is a natural progression of the GBS model. Likewise, economies of scale allowing companies based in North America and Europe to take advantage of high skilled offshore resources are evolving naturally. Service offerings of offshore BPO/IT providers and Captive GBS organizations are more mature than ever. This truth presents itself in the context of the standardization and digitization of work and workflow making work less origin dependent. Now that intellectual talent is not constrained by its geography, why is it that the Hackett Group posits business services offshoring will “level off significantly during the next few years?”
First Hackett asserts that the number of business services jobs going offshore is rapidly declining because the majority of tradable jobs that can be offshored already have been moved offshore. Also mentioned is that economic growth in North America and Europe is creating less suitable jobs for offshoring while productivity improvements continue to eliminate jobs of the offshorable variety. Not mentioned were the obvious rising wages in traditionally low cost countries which is diminishing opportunities for labor-arbitrage and making the close-shore model in second-tier US and European cities more viable. Hackett goes on to comment that in ten years’ time “demand by Western companies for traditional offshore capacity will have largely dried up.”
If the Hackett Group is talking about the most basic business services jobs which have already been outsourced or are set to be eliminated by productivity improvements, then the assessment that business services offshoring will continue to slow and indeed level off is correct. However, traditional offshore capacity has already matured to the point where basic knowledge-centric services are commonplace and foreign R&D operations have become necessary to support any large company’s global operations. What were once simple shared services centers are now GBS organizations poised to evolve into headquarters for important knowledge-centric activities.
The mass offshoring of low level business services jobs is reaching a saturation point, but the steady trickle of knowledge-centric jobs moving offshore continues. Despite that, it is not a zero sum game in which developed economies lose jobs to lower cost countries never to be seen again. Global companies born in what are considered low cost countries are increasing their presence in developed countries and may be the new forces generating the offshore jobs of the future. This trend will be accompanied by a shift in BPO says Mark Hillary author of “Who Moved My Job?” and CEO of IT Decisions, a Brazilian tech research firm based in São Paulo. “Large companies not of Western origin doing business in the US and Europe will need local staff in those markets for their customer sensitive BPO operations.”