Outsourcing, Off Shore, The new challenges of world economy
Definitions
| Outsourcing | Relocation |
|---|---|
| It is also called subcontracting or Business Process Outsourcing (BPO) or in shore: It is the transfer of a production or service activity outside the company to a site located within the same country. | It is also called Business Process Outsourcing (BPO) or off-shore: It is the transfer of a production or service activity abroad to countries where labor costs are low. |
Objectives
For corporate business, the option of BPO is justified by the following :
- to adapt to and be in line with international mutations
- to ensure survival thanks to lower production costs
- to maintain competitive power
- to penetrate new markets
While Business Process Outsourcing and Off-Shore account for the loss of underskilled jobs or those that are less costly abroad, they generate new jobs with higher added value, and they also contribute to economic growth through the development of production, goods and service diversity and quality and price cuts.
Evolution and current trend
The use of these new economic tools date back to the 1970s when mass industries such as automobile, textile and electronics started outsourcing then transferring at a later stage their production abroad.
The big American groups started to shift their computer services to India twenty years ago.
In France, financial firms have made recourse to the creation of subsidiary companies for investment management since the 1970s. Half the French banks have outsourced the whole or part of their computer operations.
In the insurance sector, the company's tasks transferred abroad regard mainly automated and industrialized procedures such as run off management.
Technological breakthroughs reported in the field of communication and software services, as well as the cuts made in communication fees during the last decade, have allowed the transfer of entire services abroad and their consumption in the countries.
After simple tasks pertaining to accountancy, invoicing, software development, marketing, advertising and cheque processing, higher added value activities such as accounts creation, financial analyses and purchases are likely to follow.
The share of subcontractors established abroad is rising as services are getting more and more subjected to international exchange.
Some examples in figures
Computer outsourcing is likely to yield 24 billion USD in 2007 against 1.3 billion USD in 2003- At the international level, it is estimated that outsourcing will generate a market of 3 billion USD in 2004, that is a 65% growth compared to 2003. This figure includes big service companies specializing in software engineering.
- Four out of the 10 European leading firms have started the relocation of their service activities abroad.
- Companies with headquarters located in United Kingdom, Benelux, and Germany reported a total of 90% of jobs already relocated.
- With over 60% of these jobs, British companies are heading the list as regards overall volume.
- The British insurer Aviva's program of job relocation, namely to Asia, will enable it to save 446 million euros starting from next year. After the transfer of 950 office posts within its Norwich Union subsidiary, Aviva intends to expatriate a total of 7000 jobs for the 2007 period.
- Prudential, , which transferred 850 jobs to Mumbai (India) in 2001, is hoping to achieve 50% in saving.
- Royal & Sun Alliance (RSA) has announced last October the transfer of 1200 jobs to Bangalore (India) on a period of two years.
- In 2004, AXA U.K has opened three sites of call centres and back office in Bangalore (India) employing 500 people. A similar site has just been set up in Morocco.
- In the USA, the number of service jobs projected to migrate towards low-salary countries for the year 2015 is estimated to generate 3.4 million USD.
De-industrialization or technological mutation ?
At the macroeconomic level, experts are playing down the real impact of relocation and outsourcing on the economy of western countries.
In France, for instance, the phenomenon would regard only 1% of job cuts in the industry and only 5% of the investments achieved abroad can be attributed to the funding of an effective relocation.
Thus, there is rather less de-industrialization than industrial mutation and internationalization of activities since de-industrialization or reduction in industrial jobs from a country's total job market would be the sign of an advanced development: the expansion of the service sector.
In the light of the fears expressed about relocations in rich countries, the United Nations Commission for Commerce and Development claimed that the phenomenon remains marginal since the market for the exportation of relocated services amounted in 2001 to 32 billion USD over a total of 720 billion USD in cross-border investments, that is 12% of the flow total.
In the American industry, relocation has destroyed 2.7 million jobs since 1999, but the major cause is related to technological evolutions, because, according to a survey conducted by the Institute for International Economics (IIE), only 350 000 lost jobs are directly accounted for by the transfer of production abroad.
The destination of relocation
Relocation : First and foremost a North-North affair
Contrarily to the «myth» stipulating that developing countries would be the big beneficiaries of relocation, this phenomenon remains essentially a North-North business.
At the start of the decade, the main destinations of activity transfers are Ireland, Spain, Portugal, Canada and Israel which grabbed, in 2001, 70% of the relocated services.
Likewise, 54% of the relocations of phone call centers achieved over the period 2002 and 2003 have been made towards developed countries.
The Central and Eastern European deposit comprises the following countries: Hungary, Czech republic, Slovakia, Poland, and Rumania. Central and South America (Mexico, Brazil) are also counted among the attractive destinations to follow.
New destinations: India and China
Thanks to their economic growth, their cheap, abundant and skilled labor, China and India have an undeniable advantage.
About four out of ten relocation projects regard Asia. In terms of employment volume, Asia's share is the biggest, because the projects, there, are bigger.
Africa, at last, is now setting in on the market: Morocco (4500 jobs), Tunisia (1000), Mauritius (1000), Senegal (1000). These countries are particularly targeted by phone operators, French correspondence sales companies as they have many assets to their credit: the language, the quality of French degrees, the weekly working time (40 to 44 hours), which accounts for lower costs by 50% compared to France.
