Global Policy Forum

By Paul Morrison

Large companies are increasingly shifting service functions to developing countries and are insufficiently prepared for the likely political and reputational fall-out, argues Paul Morrison.

The business services industry is undergoing a revolution, as a growing range of back-office activities are being moved to developing countries such as India and China. Public discussion about "offshore" – as the phenomenon is known within industry circles - may be low profile so far, but a growing coalition of critics could make it the next battleground in the globalisation debate.

Echoing the spread in the 1970s and 80s of manufacturing supply chains around the globe, today service companies and the service functions of manufacturing firms are going global. Made possible by enhanced communication links, standardised technology and common management processes, corporations are transferring IT development and back office activities (such as bill processing) to locations in the developing world. This is being done by ‘outsourcing' to third party providers, or simply relocating in-house operations. In both ‘outsourced' and ‘in-house' models, companies can exploit the huge cost advantages of developing countries, reducing wage costs by 50%-80%.

This irrefutable commercial logic is rapidly gaining converts in the boardroom, and the offshore trend is becoming a stampede. However, judging by previous episodes in the debate about globalisation, most companies will be poorly prepared to manage the controversies ahead. In fact, the political backlash this time may turn out to be particularly fierce – for the jobs which are under threat in the west are not those of manual workers, as before, but white-collar employees. This time, in other words, companies will also find themselves up against the more politically-influential middle classes.

The exploitation question

At first glance the offshore phenomenon could be seen as a major ethical success story. The global economy is providing high-value jobs and growth where they are needed most, in developing countries. Although wages may be low by western standards (a typical Indian IT worker might earn US$5000 a year), they are extremely attractive in the local market. Most back office functions require high quality work environments, and employers need to invest in the training and performance of skilled workers.

Offshore service locations are typically air-conditioned and modern, far from the image of sweatshops that has so animated the CSR and anti-global movements in recent years. Infosys, a leading Indian IT firm, has a worker food hall in Bangalore inspired by the Sydney Opera House, invoking visions of paradise rather than the ‘dark satanic mills' of corporate exploitation.

In fact, many offshore IT firms are already adopting high profile positions, investing in philanthropic and socially responsive local initiatives. For example, TCS, India's largest IT service ‘exporter', has a well established CSR programme. Hewlett Packard's ‘Lab India' specialises in research on the impact of IT in emerging economies. Infosys has a large charitable foundation and prides itself on transparent corporate governance, commitment to excellent working conditions, and a strong social vision. In short, the offshore sourcing of services does not appear to share the reputational hazards faced by the outsourcing of cheap manufacturing work.

So why the note of warning? One of the problems is that, even if working conditions in offshore services are relatively benign, it will always be possible for activists in the west to portray these as exploitative in some way, especially by comparison with western standards. Any business using offshore services will thus have to work particularly hard to show that it is tapping into offshore talent with integrity, rather than exploiting lower worker expectations or looser regulation.

Past global labour controversies indicate that positive messages alone may not be sufficient to win the "offshore" debate. Philanthropy and claims of social responsibility have not been enough in the past to guarantee protection from allegations of malpractice. Nike, for example, is battle-hardened in ethical and reputational issues, with armies of CSR professionals, compliance specialists and PR gurus to avoid negative publicity – but it still continues to face criticism.

Corporate values and codes of conduct need to be transformed from mere statements of intent into everyday practice on the ground – an often-challenging management task. And there will be no shortage of unions or NGOs in developing countries to highlight poor standards where the reality of offshore fails to meet expectations.

Even more important, however, are the political forces in the west which will be looking to find evidence of exploitation in the offshore trend. For even more so than with previous debates on globalisation, the impact of offshore will be felt among politically-vocal groups in the developed world. This is the debate, in other words, in which globalisation comes home.

The job exodus

The obvious result of the transfer of service jobs to the developing world is the elimination of millions of service jobs in the west. Unlike the gradual deindustrialisation of the 1960s – 1980s, this ‘deservification' is occurring extremely rapidly. Forrester Research estimates that American employers will transfer about 3.3 million white-collar service jobs and $136 billion in wages to low-cost countries by 2015. This equates to over US 750 jobs a day transferring to offshore locations. Reports like this suggest that if it hasn't happened already, offshore outsourcing is coming to a job near you soon, followed by wage deflation for those who survive.

Whether or not a specific round of job losses can be causally linked to new offshore jobs, the apparent ‘job exodus' is an emerging and unpredictable political issue. Companies with offshore programmes are facing growing concern from trade unions, such as the Communication Workers' Union (CWU) in the UK, the Communication Workers of America (CWA) in the USA, and the Community and Public Sector Union (CPSU) in Australia. And where traditional union representation is weak within companies, alternative activist groups are emerging, such as Alliance@IBM.

The potential scale of offshore sourcing is alarming to critics. The same logic that enables teleworking, enables offshore. For Peter Morris of the CWU ‘the fear is that any job done via a computer can be done via India…or anywhere'. Although in practice many service activities will remain firmly rooted in their home location, hundreds of thousands of workers will naturally feel threatened by the footloose potential of computerised jobs.

Since the era of deindustrialisation, many economies have maintained employment levels through growth in the service sector. In the UK, call centres alone account for over 500,000 jobs. If the services boom of the 1990s mutates into a service exodus, what will happen to those made redundant, particularly in post-industrial cities where unemployment is already a major issue?

Offshore sourcing is not just a question of scale. It is growing in sophistication, enabling increasingly ‘white collar' jobs like accountancy, design and development to be migrated overseas. In addition offshore sourcing is becoming an option for ‘strategic' activities in government and research.

For the first time affluent and influential middle class groups will feel threatened by global competition, whereas in previous waves of globalisation service workers in the have benefited from access to global markets. Many sectors of the population could come to believe that they have a lot to lose from offshore. This could become an unpredictable political situation.

Fighting talk

Workforces are already fighting back against specific offshore plans. The CWU has established a campaign against BT's recent plans to create 2,000 call centre jobs to Bangalore, whilst cutting back on call centres in the UK. The trade union Amicus claims to have forced Prudential to moderate offshore plans announced last year that. In the US, Boeing has faced rising union criticism over the growing role of design facilities in Russia. Bank of America, Aviva and many others have had similar experiences.

In each case unions are arguing, fairly or unfairly, that offshore plans betray loyal workers, and that determined and sustained resistance is essential. Many appear to be digging in for a protracted struggle. For example, Jeannie Drake says the CWU is ‘ determined to exploit every avenue to stop work moving to India…. we are committed to fight as long as it takes to stop this dangerous development.'

WashTech, a local affiliate of the CWA is concerned about the prospects for IT in the Seattle area and is directing publicity against market leaders such as Microsoft. As Marcus Courtney, WashTech's president, was recently quoted as saying: "Sending family-wage technology jobs overseas means fewer jobs are created in our region, and we have greater job insecurity, fewer benefits and lower wages for all workers…We need to stand up and keep technology jobs in our area for the future."

In this highly emotive debate, a key concern for business is inevitably the impact on reputation. The organisations with most to lose are those with highly visible brands, and those with active stakeholders. This applies as much to contractors in the public sector, where ‘cost effective outsourcing' is enjoying a boom in many countries, as to private sector operations. Anti-offshore activists are well aware of this brand sensitivity, and are campaigning accordingly.

As with previous globalisation controversies, the media will be a key player in broadening the debate and its reputational impact. In Australia, plans by Telstra and Hewlett Packard to move IT support work to India have caused a media storm, as did a report by the Department of Foreign Affairs and Trade encouraging businesses to use offshore facilities.

And as organisations such as Nike or Shell have learned through experience, media criticism of offshore services could lead to consumer activism, boycotts, reduced sales and damaging brand associations. No company wants to alienate its customer base with stories of the global exploitation of labour markets, a game of ‘brain arbitrage' in which there are clear losers, or be seen to contribute to the problems of chronic unemployment at home.

Consumers may already be starting to form opinions on the offshore issue. For whereas global manufacturing is conducted discretely in overseas locations, a call centre conversation involves an immediate and direct link with offshore workers. There are already anecdotal examples of customer dissatisfaction where service has been sloppy. In a recent advertising campaign, Natwest aimed to capitalise on these views by lampooning the offshore call centres increasingly used by rivals.

Many western credit card holders might be surprised to hear that many of their queries are fielded by Indian call centre workers. Companies are not keen to emphasise their offshore credentials, often providing workers with western names and accent training to reduce the risk of ‘culture clash'. According to Peter Morris, companies are aiming to make offshore as seamless as possible, since ‘they don't want customers to know what is going on.'

Further complications for business could arise as labour and media concerns spill into the legislative arena. Pressure is already building for restrictions on the offshore exodus. In New Jersey a bill is being promoted to ban the offshore relocation of business process activities. The governments of Australia, the UK and the US have been urged to tighten immigration rules that enable immigrant workers to compete ‘on-shore' with local IT staff. Additionally, a range of legal questions also are yet to be unresolved, such as issues of data protection and security. If business loses the offshore debate, new regulation could become a serious barrier to offshore opportunities.

Making the case for offshore

Admittedly, various factors might reduce the risk of offshore developing into a major reputational hazard. The clearest would be a growth in employment prospects in developed countries that would offset any offshore leakage. New service sector jobs have masked the initial growth of offshore, and some groups such as Incomes Data Services believe this offsetting will continue. But many analysts would disagree. And even if jobs are offset in other areas, redundancies inevitably will cause resentment among those affected.

A common response of companies to the controversies so far has been to try to play down the significance of offshore activities and also to deny any links with retrenchment at home. Such techniques appear to rest on the hope that criticism over offshore will eventually go away, resembling in many ways the first reluctant responses taken by multinationals to manufacturing controversies. When pressed, companies have also publicly defended their actions in terms of the need to reduce costs and to enhance shareholder value.

These arguments may have merit, of course, particularly in the current economic downturn. But companies considering the offshore option should reflect on the realpolitik of controversies past. What has often happened is that the most vocal voices swamp technical arguments and drive the terms of debate. Emotive issues got the better of Nike a decade ago, and it is still a company partly on the defensive.

It is unlikely that companies will win the offshore debate with denials or appeals to shareholder value. In the calm before the storm, companies wanting to safeguard their reputation will need to focus management attention today. They will need to show sensitivity to the grievances of pressure groups, whilst ensuring they take firm intellectual leadership of the offshore agenda.

So the scene is set for a protracted public debate. Offshore holds great commercial promise, but also great reputational risk. Companies may not need to justify to themselves the commercial logic of tapping into cheap talent. But they are going to have to be smart or lucky to avoid controversy in the wider world.

India: A case study

India, with its massive well-educated and Anglophone population, is the leading offshore destination. With an IT workforce of 280,000 today, the consultancy McKinsey predicts a possible 2.2 million IT workers in India by 2008. Home-grown outsourcing giants such as TCS, Wipro and Infosys are rapidly expanding from the Indian IT epicentre, Bangalore.

Global IT leaders such as IBM, EDS and Accenture are generating an increasingly important proportion of their revenues from their own offshore operations focused in India. Dozens of names such as British Airways, American Express and Cisco have extensive in-house operations in India. And in addition to relocating work offshore, Western clients can draft in Indian workers with work visas to provide IT skills ‘on-shore'. It is not surprising that industry experts are reclassifying the Chief Information Officer's role as ‘Calling India Over'.

Although India is leading the way, China, the Philippines, Indonesia and Russia are also rapidly growing as offshore service locations (although early ‘nearshore' leaders, such as Ireland and Canada face uncertain futures with relatively high costs or small labour pools).

In addition the range of offshore activities is ever expanding, from basic IT development to operating entire business processes such as call centre support, bill processing, technical help desks, design and research. So both Boeing and Airbus have advanced design centres in Russia. Ernst and Young number-crunches tax data in the Philippines. In China, BearingPoint and Infosys are establishing new facilities to exploit the Chinese and global sourcing markets.

This is reinforced by the maturing quality of offshore service providers. In many cases, offshore facilities have higher quality controls than those in Western locations. Offshore workers are not only cheap, but skilled and motivated.

The Chief Executive of HSBC Sir Keith Whitson startled many last year when he claimed that Indian staff were better than those in the UK, "They're quicker at answering the phone, highly numerate and keen to come to work every day."

2003 is widely seen by analysts as the year in which offshore services becomes mainstream business strategy. In the words of Sid Khanna of Accenture, "so far we have only scratched the surface". Offshore is not going away, and it appears to be gathering momentum as the economic uncertainty and pressures for cost reduction pervade.

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