In order to keep up with inflation and the rising cost of living, an increasing number of U.S. states are raising the minimum wage above the minimum level of $7.25 per hour set by the federal government. While this trend is likely to impact outsourcers, the industry analysts surveyed by Nearshore Americas believe it will not lead to a significant rise in the number of BPO jobs being sent offshore.
Periodic wage inflation is something outsourcers account for in their business plans. It is by no means unique to the United States and is also an issue in prominent offshore locations like India and the Philippines. Moreover, most successful outsourcers tend to pay onshore agents more than minimum wage. And if the increases do cut into their margins they are more likely to offset it through automation or by deploying work-at-home agents rather than taking jobs offshore, four leading analysts told Nearshore Americas.
According to the U.S. Department of Labor, 23 states and the District of Columbia have minimum wage rates above the federal level. The state of Washington currently boasts the nation’s highest minimum wage at $9.32 per hour, followed by Oregon ($9.10) and California ($9).
In recent months the states of Delaware, Hawaii, Maryland, Massachusetts, Michigan, Minnesota, Rhode Island, Vermont and West Virginia – plus the city of Seattle and the U.S. territory of Guam – have all passed laws to the raise the minimum wage in their respective jurisdictions. Further raises will take place in California, Connecticut, Delaware, Minnesota, New York, Rhode Island and Vermont within the next six months, while the minimum wage will also rise again in Hawaii and West Virginia in 2016.
However, Peter Ryan, Principal Analyst in IT Services at Ovum, believes rising minimum wages will have a limited impact on the outsourcing industry. “I think in developed countries this is something that outsourcers will generally take into account,” when establishing their business plans, he said. The only aspect of the hikes that may prove challenging for outsourcers is in the regional differences across the United States. “This is something that a lot of outsourcers have difficulty taking into account,” Ryan stated.
No Job Exodus
But even in the states where the increases are biggest, Ryan doubts this will seriously impact outsourcing jobs. “I’m not of the impression that contact center jobs are really minimum wage jobs, they tend not to be the highest paying jobs but at the same time they tend to be higher than what you’d associate with a minimum wage job like working at a fast food restaurant,” he explained.
“In my mind there will be some impact in terms of how the outsourcing community views a particular labor market or how they view what the minimum wage increase actually means to that labor market, but I don’t really believe that this is going to be something that would actually chase an outsourcer – whether it’s a contact center, back-office BPO or IT services – out of a particular jurisdiction,” Ryan continued. “I just don’t think these are the types of jobs that are associated with minimum wage, especially when you go beyond the contact center space into something like applications development, infrastructure management, finance and accounting functions, and legal process outsourcing – these are certainly not roles where the people performing them would be working at the minimum wage level.”
Stephen Loynd, Global Program Manager of Customer Contact at Frost & Sullivan, concurred with Ryan. “If you’re a provider worth your salt it seems to me that it makes sense to pay your agents well,” Loynd said. “The really good providers that I’ve visited and worked with, in customer care BPO specifically, for example, they’re always thinking and talking about their people, and they want to pay their people a good wage so that they’re not jumping ship at every opportunity. They want to respect their agents and they want to treat them well.”
Katrina Menzigian, Vice President of Research Relations at Everest Group, said she has not seen any evidence of outsourcers taking jobs offshore because of rises in the minimum wage in the United States. On the contrary, according to Everest’s latest studies, she said, “the pattern we’ve continued to see for a few years now is that there’s an increase in the amount of onshore work happening in the United States.”
Menzigian explained, “The driver for bringing people onshore is obviously not traditional labor arbitrage, but it’s more the fact that some of the talent onshore allows the service providers to achieve certain kinds of service delivery objectives that they weren’t able to from other geographies. So it’s that ability to deliver that incremental value to the client that is attracting the attention of companies and their clients.”
Offsetting Labor Costs
Although “labor does make up a significant portion of the expenses at contact centers,” Menzigian said the “overall cost of service delivery is what’s important, not just the labor costs.” An increase in automation and more productive use of technology is one way of offsetting changes in labor costs, she noted. Another would be to relocate operations to states with lower labor costs or to deploy work-at-home agents: “Work-at-home agents reduce costs in a different way, they don’t require the infrastructure, and there’s higher retention and lower attrition, so there’s a lot of profitability associated with the aspect of deploying them. And there’s a lot of flexibility and that again has cost management implications.”
Loynd added: “The good BPO firms have a pretty broad portfolio geographically already so they’re always reacting in this industry to this type of dynamic and keeping their eyes peeled whether it’s in the United States or outside for new locations, we see that all the time.”
Melissa O’Brien, Customer Care and Contact Center Services Analyst at IDC, broadly agreed with their comments, citing the existing trend “of outsourcers taking advantage of geographies where the minimum wage and the cost of living is lower.” She also pointed to the increasing use of work-at-home agents in the United States as “another step that we’ve seen in response to things like minimum wage increases and general cost pressures.”
While she believes minimum wage hikes are “a concern for outsourcers on the whole,” O’Brien said, “I don’t think it’s going to change the industry tremendously. I think it’s something that’s been happening incrementally over the course of the evolution of the industry.” She added, “It’s just another one of those pressures on this traditional, voice-based, labor-equity type of business, where they’re just constantly under pressure to find ways to provide cost savings.” Furthermore, O’Brien noted, “it’s not just happening in the U.S.; we’re seeing rising wages in other parts of the world and in emerging markets like the Philippines which has sustained some really good offshore delivery growth. Their economic growth has caused rising wages too.”
Balanced Shore Approach
Of course, onshore and offshore operations are not mutually exclusive and the fact that rising minimum wages are not driving offshore job growth does not mean offshoring is no longer appealing to BPO firms. “I do think that offshore is still strong. It’s still a value proposition,” O’Brien said. “Now it’s not even as much about costs and the labor arbitrage, but it’s also about tapping into the talent pools in many of these markets that are really well developed and have great education and talented workers who can do voice-based contact center work.”
O’Brien added, “The goal for the outsourcers is really to have scale and the availability at many locations, rather than saying ‘this location is the silver bullet.’ It’s more about having a scope and a scale that their customers can choose from. The majority of contact center outsourcers that I’ve spoken to say ‘we’re utilizing a balanced shore approach’ which is really taking advantage of many different locations.”
Loynd agreed with O’Brien. “Any excellent BPO provider is going to have a diversified global delivery portfolio and I would think that a rise in wages in the United States would have to be more than a slight uptick to start to have real effects on dramatic decisions,” he said. “In other words, if company A is working with their BPO provider in customer care for example, and they’re using delivery sites or agents from the United States as well as some nearshore and offshore locations, they probably want to stick with that for some time without making any rash decisions.”
Loynd continued: “If there’s a trend upwards (in labor costs) that’s persistent and meaningful then there may be some movement there, but the big providers tend to have a broad geographic scope and tend to be able to react in the short term with what they already have in place.”