Salocin

Outsourcing IT to India - Banks shed more workers

Goldman Sachs is outsourcing a number of back-office and administrative functions to India in a move designed to reduce costs and increase the efficiency of the organization. Much of it's UK IT staff are expected to go - although apparently not all 250 of them. The full article is available from the BBC.

Outsourcing IT work to India is a strong trend among large organizations at the moment, and a number of organisations have found profit in providing "outsourcing services", where they facilitate the oursourcing process and manage it on an ongoing basis for a fee. The largest companies have not gone through such intermediaries, preferring to set up and manage their own offices in India, maintaining control over the staff and the intellectual property and systems that they create and maintain.

Britain's largest professional union, Amicus, has voiced alarm over the plans, warning the decision could spark a "wave of copy cat actions" that would see tens of thousands of jobs lost in the UK.

 

Joint General Secretary Roger Lyons said: "Britain's major companies are teetering on the brink of outsourcing hundreds of thousands of jobs.

 

"Once one major company goes they all will but no one wants to go first."

 

The union added that a survey of industry experts and consultants - including Accenture, Adecco and Deloitte & Touche - suggests that up to 200,000 jobs are likely to be lost across the UK under the trend.

 

It added that analysts predicted an estimated 2m jobs could migrate from Western Europe by 2008.

 

Unions such as Unifi and Amicus are so alarmed at the growing trend that they have already persuaded some companies to sign agreements designed to protect UK jobs.

It's interesting to compare the shedding of thousands of jobs in investment banking to the shedding of hundreds of jobs in back-office services.

As literally thousands of bankers lost their jobs through downsizing over the last two years, they regrouped, looked for new work, made sad noises about the state of the economy, but generally accepted that the structure of the business was incapable of supporting their employment in such numbers, that they had drawn the short straw, and that it was therefore time to move on. While several of these individuals were quite wealthy, some still had significant levels of student debt to pay off (MBA debt can run as high as $100,000). Nevertheless, they listed their options, assessed their own skills, and started applying for jobs.

Perhaps it's the understanding of the underlying economics faced by the firms that makes individuals more accepting of the situation. Whatever the reason, their frictionless departure allows sectors like investment banking to scale down dramatically when their business dries up, and this variablization of their labour cost allows the companies to survive. Come the recovery, these organisations see a resurgence in their business, and are able to scale up again dramatically, hiring thousands to fill the seats vacated only a couple of years ago.

Another branch of economics, popularised by Michael Porter in his book, "The Competitive Advantage of Nations", introduced the concepts of competitive and competitive advantage, which are the forces at work behind the outsourcing of IT functions to India. With it's large population of highly trained IT specialists, and the lower salary rates present in the market, India has a competitive advantage over the UK (and most of the rest of the world) in general IT functions, including application development and maintenance, software testing, IT systems administration and software design. In a world increasingly without borders, it is not surprising that multinationals seek to relocate functions to maximise returns and efficiency. It is possible to resist these forces through protectionist measures, but only by ignoring the lessons of the past can we do so in the belief that it will somehow work out in the long run.

To resist the forces that drive the allocation of resources, we must resort to distortions in the economic model that governs those allocations. Those distortions take the form of union power, government subsidisation or protection, regional (EU) legislation or political decisions at board level. Regardless of the source of the power that distorts the decision, the effect is to either isolate the organisation from the forces of the outside world, or to deliberately ignore those forces. This cuts the companies off from competitive pressure and removes the constant need to drive costs down and increase efficiency.

This, at first, seems like a good thing, because where companies that are still in the maelstrom of competition are shedding jobs and going through painful restructurings, the employees of the protected company are safe with their guaranteed jobs, pensions, and health insurance. But the transformations undertaken by the competition result in a lower cost base, which in turn allows them to charge lower prices. To compete, the protected company must also lower its prices, but in their case, since the cost base didn't take the cut, profits do. As profits drop below the zero line, the companies turn to the original source of protection to ask for more of it, in order to allow them to stay afloat. This generally takes the form of subsidies or protection of the home market through a tariff on imports. We've seen this in coal mining, agriculture, textiles, steel and shipbuilding to name but a few. The very existence of the protection removes the imperative to become externally competitive, thus making the domestic industry dependent on the protection for its own survival.

So to return to the original point - the unions are fighting a losing battle. At best they will postpone the inevitable, but unless they can find a way to provide the same level of service at the same cost or lower, they cannot compete with the Indian IT labour force. Any attempt to do this through distortions such as forcing companies into long-term contracts will merely make the transition more violent and painful at a later date, or will damage the competitive standing of the companies they are a part of.

What to do, then? Employees should seek retraining within their firms so as to be able to transfer to parts of the employee pool where the competitive advantage has yet to drive the jobs abroad. There will always be a need for local IT specialists, and companies are unlikely to outsource parts of their business that are critical to success, such as the development and ownership of IT systems developed in-house. In the long run, they have to accept that companies are now global, and that the performance of certain parts of the IT function in the West, such as administration and software maintenance and testing, are no longer sufficiently value-added to justify the kinds of salaries one has to pay to employees in cities in Western Europe. As salaries rise, the skill-level required to justify them also rises, and jobs which can be performed elsewhere at lower cost, but just as effectively as they can domestically will go. The sociological implications may be disturbing, but isolation or protection from the underlying economics will not solve the problem.