24 May 2004
Does it matter that the person you talk to when checking your local train times is sitting at the end of a phone line in Bangalore or Bolton? Amid the furore over the decision to move half of the 50,000 calls made to National Rail Enquiries to India, it came to light that the Welsh language version of the services was not delivered by native Welsh speakers, but by call centre staff based in Derby who had learnt their Cymraeg at college.
According to Roger Lyons, joint general secretary of practice management software company Amicus and president of the Trades Union Congress, it does matter. Offshore outsourcing is “sucking the entire economy inside out”, he says. “We could end up a nation of hairdressers and fat cats, with nothing in between.” He adds that there are 40,000 employees in India already servicing UK industry, and that 15,000 UK jobs have disappeared since last October alone.
The contentious issue of offshore outsourcing was up for discussion at last week’s Employment Lawyers Association (ELA) Annual Conference.
“Outsourcing is here to stay, and it’s something that has grown as a sector of interest for both commercial and employment lawyers over the last few years,” says Julian Hemming, chair of the ELA and partner at Osborne Clarke. The Bristol-based firm has a niche in this relatively new practice area and its lawyers have acted on more than 100 deals over the past few years. The firm advised a bank on the provision of its banking service in the outsourcing of the Government’s benefit payments programme, in the largest public-private financial outsourcing job last year.
“There are more providers in the market now that offer the ability to outsource functions to India and the Far East, and a lot of companies are taking advantage of that,” says Hemming. “Some customers that have outsourced aspects of their work have saved 40 per cent of their costs, and that isn’t necessarily at the expense of quality.”
Lyons believes the perceived cost savings and enhanced quality are two assumptions that need to be challenged. As Amicus sees it, the problem – and, no doubt, the reason why Lyons was keen to address a bunch of lawyers – is that corporate UK has been seduced by the business case put forward by the mini industry of consultants that has grown up around outsourcing. Amicus flags up literature coming out of Deloitte Research, which last month called on business to join in the “offshore bonanza”. Deloitte predicted that two million jobs will move offshore from the world’s 100 largest financial services companies over the next five years. Amicus says we can expect 200,000 call centre and back office processing jobs to leave UK soil by the end of the decade.
According to Deloitte, moving activities to lower-cost locations would “ignite” the possibility of transforming the structure of the financial services industry, and allow for a “once-in-a-generation opportunity” to reduce costs.
“If you look at the high street and the banks, you’ll see the likes of Abbey, Norwich Union, Barclays and HSBC, which are lined up down one side of the street and have all offshored,” says Lyons. “Then you have Royal Bank of Scotland, HBOS and Nationwide, Royal & SunAlliance and Legal & General, which have decided not to. The business case can’t have been made if half the high street names have rejected it. In terms of the longer term, it’s completely uncharted territory.”
The problem is that, once a company makes the transition, it is unlikely that the jobs will ever come back to UK shores. “Our concern is that outsourcing is being driven by the middlemen, who stand to make fantastical amounts of money,” says Lyons. “And at the end of the day, the cost savings are negligible.”
The speed at which jobs have been heading overseas suggests that businesses are going to need a lot of convincing that they are having the wool pulled over their eyes. “The driver for offshore outsourcing has been that it’s essentially a fast boost to the balance sheet,” says Bobby Gill, head of Osborne Clarke’s outsourcing practice in London. “The two biggest costs for any company are personnel and IT, and what quicker way to show a massive cut to your costs?”
Having said that, research published last year by the technology research company Gartner found that only half of board-level European executives were happy with the business benefits of their outsourcing deals. Two years ago, the figure was closer to 90 per cent.
Many companies are ceasing to view outsourcing as “a quick-fix solution”, says Gill. He points to recent deals struck between HSBC and the union Unifi, under which the bank will give Unifi two years’ notice of any global resourcing plans and will seek other positions for UK staff whose jobs are moved. Barclays made a similar move earlier in the year.
Sitting alongside Lyons last week was Randolph Altschuler, co-founder of integrated global sourcing company Office Tiger. His New York-based operation has pioneered the provision of specialist professional backup services from India for the financial, legal and professional sectors. Office Tiger works with eight of the 12 largest investment banks as well as a number of the biggest law firms on Wall Street and in the magic circle.
Altschuler gives short shrift to the notion that the economics of offshoring do not stack up. “It sounds like fuzzy math, as we’d say in the US,” he says. “The cost of moving the business will typically save our customers anywhere between 35 per cent and 50 per cent – that’s ‘all in all’ costs, not direct labour costs.”
He argues that his clients operate in a world market that cannot afford to resist the change. “The reality of offshoring is that it’s going to happen, and US and UK companies need to adopt it to be competitive in an international market,” he says. “They need to take some of the savings they earn from outsourcing and reinvest them in their own workforce, to provide higher-value added services with their staff on the ground in London and New York.
“You can’t just ignore it. It’s like saying you aren’t going to have a computer or the latest version of Microsoft.”
In the past 12 months, Office Tiger has interviewed a staggering 32,000 prospective employees in India, taken on about 2 per cent of them and now employs around 1,600 staff.
“There’s a huge number of candidates. They have a great education and a great attitude, and that’s the determining factor,” says Altschuler. “They’re always going the extra mile to improve themselves.”
But where does the offshore revolution end? Few jobs seem to be off-limits. Office Tiger specialises in what Altschuler describes as “providing high-end, judgement-driven corporate information services”, as opposed to call centre services. His business is increasingly providing litigation support, legal research and trademark support. There are already reports of Wall Street brokerage firms that have transferred $80,000 (£45,000)-a-year jobs to Indian financial analysts for their number-crunching work.
Barry Clarke, a partner at Russell Jones & Walker and another panel member at last week’s conference, has mixed feelings about this global shift in the labour market (see box). “Insofar as jobs going abroad, I don’t have a problem,” he says. “I welcome the growth of a knowledge economy in countries such as India.” However, he thinks outsourcing is a “cost-driven imperative”.
“As soon as wages inflation makes a country like India a less desirable place, the company ups sticks and moves to China, Thailand, South Africa or Argentina,” says Clarke. “It’s basically forum shopping for the place where they can get away with the weakest employment law practice.”
Unsurprisingly, Altschuler denies the suggestion that his relationship with Indian workers is one-sided and exploitative. They are salaried employees, with more holiday entitlement than their US peers and they have health insurance and benefits. He does not disclose how much they are paid, but says it compares very well with other similar jobs in India. An average starting annual salary in a UK call centre is £11,000, compared with £2,500 in India.
“Our employees have to feel that they are an extension of the business they’re working for,” he says. “We try to blur that distinction because we are, for example, supporting an advocate in the US on a real-time basis. Our Indian employess have to be working with them, and they can’t if they’re crammed into a room or working in some sweatshop without air-conditioning.”
While Clarke represents foreign workers with actions against UK companies, he has yet to be instructed over outsourcing arrangements. Most of the problems he deals with arise because, once a decision is made, it is acted upon quickly as the result of fear that any lingering dispute could damage the brand.
If a UK company decides to outsource, Clarke reckons it is seen as a commercial decision to be dealt with by commercial lawyers.
“This is where the claims tend to arise at the moment, because most lawyers who advise on offshore outsourcing are corporate lawyers.
Employment lawyers simply haven’t been high enough up the food chain to advise on the human resources implications of shedding staff,” he says.
|Offshore outsourcing: a race to the bottom|
The following is an excerpt from a paper delivered by Barry Clarke, head of employment at Russell Jones & Walker’s Cardiff office, to the Employment Lawyers Association Annual Conference last week:
Over the past 12 months, it seems that rarely a day has gone by without a news report of yet another company outsourcing staff and business processes to India and China. Yet this huge global shift in the labour market seems to have crept up on us. One politician has said: “We were sleeping on the shore when the big wave came.”
Behind the rhetoric of a globally integrated knowledge-based economy is a more sobering reality. Many corporations will ‘shop around’ different jurisdictions to identify those where workers are cheapest and unions are weakest. In the US, which is predicted to lose millions of jobs to India and China in the next few years, surveys have suggested that this issue ranks in the minds of voters even above the handling of the war in Iraq. The issue is equally high profile in Europe, where French jobs are being offshored to Francophone Africa and from Spain to South America.
US economists have referred to this global search for cheap labour as the “race to the bottom”. When criticising the export of jobs to Mexico that followed the North American Free Trade Agreement, Ross Perot memorably likened the loss to a “giant sucking sound”; offshore outsourcing to India and China has now been described, somewhat inevitably, as the “new giant sucking sound”.
UK lawyers, by tradition, shun such headline-friendly terms. As a result, possibly the most significant geopolitical change to our working lives to have emerged over the past 50 years is disguised in two words that would be impenetrable to our friend on the Clapham omnibus: ‘offshore outsourcing’.
The offshoring process is not, in fact, new at all. Faced with demands from customers for cheaper products and from shareholders for greater profit, corporations began sending labour-intensive manufacturing processes overseas in the 1960s. The previous generation debated the merits of UK customers buying products from UK companies that were manufactured abroad. Many were persuaded that the global relocation of manufacturing work was a price worth paying, so long as those who were made redundant could retrain in the brave new world of IT and feed the booming service sector.
For India and countries like it, the rise of a globally integrated knowledge economy is a blessing. India’s trade association Nasscom has predicted that its outsourcing sector could turn over $85bn (£48.1bn) by 2008. Wage inflation in India is predicted to lead to the next outsourcing phase targeting China. As one magazine has put it: “Think India 10 years ago – low-cost workers and lots of them.”
Some senior executives worry about the effect offshore outsourcing will have on public perception of their brand. Some fear a swing in public opinion against offshore outsourcing and the globalisation trend that underpins it. One commented: “We don’t want a situation where the public sees us as a malevolent force and takes it out on our products.”
Efforts are being made to reduce the risks of such public perception. The most striking example arises in telephone call-handling, where workers are trained to adopt the accent of the client country to disguise their location. Some even use names from US sitcoms such as Friends. For others, it is a disciplinary offence to reveal their location.
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