From Rigid to Flexible: Lessons Learned from Spain’s Shift to a Services Economy

Spain’s government launched initiatives in 2012 aimed at re-adjusting labor compensation scales nationally to ultimately re-position the country as a low-cost hub for global services delivery in the European Union (EU). It’s a simple goal, but far easier attempted than achieved, particularly for a sovereign nation constrained by a common regional currency over which it has little control.

For IT industry executives trying to understand accelerating changes in the marketplace – where third generation consumption and delivery patterns built around analytics enabled automation are triggering labor cost take out and enabling more agile global workforce rebalancing approaches – what policy lessons can be learned from Spain?

To start, Spain’s government set a guiding principle: Promote flexibility as an alternative to labor laws destroying jobs. Framed around that principle, the government looked at flexibility in hiring, retaining and firing workers.

Specifically, Spain:

1. Refashioned labor contract laws, allowing for easier “opt outs” of labor contracts and shortening the expiration period for union agreements (down to one year from in perpetuity).
2. Applied means testing to unemployment benefits, cutting the net benefit to 50% from 60% after the seventh month of unemployment, making the desire to wait for a better salary offer less attractive to long-term displaced workers.
3. Benefitted from a 37% drop (from 2011 to 2012) of negotiated wage increases.This triggered a 2.1% drop in unit labor rates while there was also a 1% labor productivity gain for the corresponding period. Since 1Q08, Spain claims labor productivity increased 13%.
4. Addressed the looming debt challenges that drove down home prices by as much as 30% or more in coastal areas since a peak in 2004. The year-to-year change in 2012 was 10%.

With housing expenses consuming the largest share of most employees’ disposable incomes, a 10% drop in housing costs more than offsets a 2.1% drop in wage rates. Not coincidentally, bringing wages back to more competitive 2007 levels following the labor rate peak in 2009 triggered a 41.6% jump in the country’s exports from 1Q09 to 4Q12.

Tactical measures stemmed the bleeding and prepared Spain to launch long-term initiatives around:

1. Reforming and reorganizing the labor market, based on a desire to foster “labor market intermediation”
2. Supporting firms to encourage business creation and internalization
3. Re-examining government education policy and intellectual property

What lessons-learned can be drawn from the Spanish government?

1. Spain went on the offensive to address a painful reality — mature economies face lower standards of living if they fail to challenge growth coming from emerging economies. Absent current manipulation to reset economic transactions outside its sovereign borders, Spain took matters into its own hands to depress wages and protect its economy’s overall competitiveness.
2. Nimble global services firms competing in a rapidly evolving IT environment require flexible hiring policies, placing the burden on governments to manage labor union expectations and acceptance.
3. Governments can make the most of clarity: By understanding business’ labor skills needs and communicating predictable tax burdens, the government can boost companies’ confidence around risking capital to invest in services center build-outs. Successfully reaching that kind of clarity requires a working, advise-and-educate relationship between governments and business, with the burden on both groups to nurture and develop.

On the third point, TBR believes the public/private partnership to be an emerging, mission-critical challenge facing the IT 3.0 industry. In the United States, business and government partnerships are viewed with suspicion, challenged as being collusion. But the speed of innovation-driven change requires, and indeed mandates, these partnerships. Barriers to workforce re-balancing on the private side continue eroding. Soon knowledge workers on sub-$500 devices will be able to connect virtually anywhere via “skynet.” Governments that fear this and seek to protect jobs with restrictive labor policies rather than embrace it and learn how to leverage IT 3.0-provided workforce deployment flexibility in the more competitive global economy will only accelerate their country’s economic decline.

Spain quickly managed to erase its legacy as the “S” of the PIGS acronym (Portugal, Ireland, Greece, and Spain) and turned its economy around through tough labor policy shifts and austere fiscal measures to rein in its housing market. Although Spain had to work around the Euro to restore economic health to its country and, ultimately, to its citizens, the nation now sits poised to benefit from this central currency as a low-cost delivery hub to the EU.

Patrick Heffernan analyzes the competitive landscape for management consulting firms, tracks global delivery issues, and applies the lessons from a career in diplomacy and competitive intelligence to a wide range of TBR’s research activities. Geoff Woollacott oversees a number of the large-scale custom consulting projects that TBR’s Professional Services Practice executes. Woollacott also content reviews pieces of the syndicated research stream,with a particular focus on IBM and EMC.