Offshoring remains, it is just less visible

February 22, 2011

Today we are all used to an international trade in services. When you call up the bank, a contact centre agent in India probably answers the call. When you crash your car and file a claim, the claim form you painstakingly complete is scanned and sent thousands of kilometres away for processing. When you call to find out the next train to Cardiff, it’s not someone in Wales giving you the information you need.

This change in how services are delivered has become a part of everyday life. For many companies – such as banks – it went too far in the past decade. Many banks found that their customers were uncomfortable dealing with an agent in a far-flung location and it soon became a source of competitive advantage to answer calls locally. But those same banks advertising that ‘we answer your calls in the UK’ are all sending their IT systems offshore. The ‘offshoring’ continues, it is just less visible.

The man on the street would say that by sending skilled service-sector jobs to lower-cost economies we are hollowing out our own skills. People don’t start their careers in skilled roles — they graduate up to those jobs through experience. If the lower level clerk roles have all been outsourced offshore then we are storing up big trouble for the future.

That’s the theory of the heart, and perhaps it is what most people would call common sense too. But economists argue the exact opposite; that a country can build wealth in many ways and a UK-based company that is successful because it manufactures products at a low cost in China and customer calls are answered in India, can bring wealth to the wider economy.

But what happens when the risk profile of the countries these major international companies have been working with suddenly changes?

Companies such as Vodafone, Hewlett-Packard, Oracle, and Microsoft all have major facilities in Egypt. When the government there recently pulled out the Internet plug where did all those British Vodafone customer service calls go? Or the Xbox gamers calling for help with their console? Where indeed…

All these major firms will have considered the need for some backup facilities, in case of a technical breakdown in their remote facility, but how many have considered the chances that a government would just turn off the Internet, and even the telephone system?

In the early days of offshore outsourcing of services, political risk was very high on the agenda of corporate decision-makers. If you were going to send your customer service centre thousands of kilometres away then you needed a lot of confidence in the local political and commercial environment.

But it seems we have become used to services being delivered remotely, and political risk – though still a consideration – has been weighted as less important. These days it’s the local cost, expertise, and labour supply that most companies are looking at, because they have just got used to spreading their internal functions all over the world. University of Strathclyde academic, Professor Philip Taylor, believes that companies have become habituated to certain environments that used to be seen as challenging or dangerous places to do business.

Just last month several industry analysts were suggesting that Egypt is one of the most attractive locations to send your company back office and IT function. One even ranked Egypt as the fourth best place in the world for this.

They were all wrong. Though Egypt has many underlying benefits, such as a young and well-educated labour pool, many corporate decision-makers will feel wary of sending new functions there too soon.

And this applies not only to Egypt, but every nation that has jumped onto the outsourcing bandwagon in an attempt to secure high-value international services in the same way that India has been so successful. Many of those countries are spread across North Africa and the Middle East, areas now experiencing a wave of political unrest. But it’s less than a decade since foreign nationals were being advised to leave India because of tensions along the border with Pakistan, so even the giants of the international services industry are not immune to doubts over stability.

It is not possible to predict where the next wave of political instability will spring – it could even be in the western developed nations. All eyes are on the Middle East, but Belgium has had no recognised government for almost a year. How long will the people tolerate that situation? The next political crisis may be on our own doorstep.

For the companies that now operate globally with manufacturing plants in China and customer service centres in Africa or South Asia, a challenging time lies ahead – how best to balance the right of citizens to claim their right to representative democracy with the need to operate a stable multinational business.

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