It is getting more expensive to do, harder to manage, can damage staff morale, and may bring fewer benefits than anticipated, yet the love affair that UK businesses have with offshoring shows little sign of diminishing.
Just a few weeks ago, three of India’s biggest outsourcing companies – Bangalore-based Wipro, Tata Consultancy Services in Mumbai and Infosys Technologies, also in Bangalore – all reported significant financial growth on the back of the country’s booming offshoring industry.
Their clients are big names. One recent announcement revealed Lloyds TSB’s plans to move its finance and accounting operations to India, under a five-year, multimillion-pound deal. Meanwhile, Deutsche Bank aims to move almost half its sales and trading operation’s back-room jobs to India by the end of 2007. And investment bank Credit Suisse is also poised to outsource up to 5,000 back-office jobs to Singapore, India and eastern Europe.
About 30,000 jobs have been offshored by UK companies each year since 2000, according to a recent report, Offshoring and the Role of HR, by the Chartered Institute of Personnel and Development (CIPD), and almost one-third of organisations now feel under pressure to offshore at least some element of their business activity.
But while cost used to be the sole driver behind the decision to offshore, other factors are now coming into play. The CIPD survey found that although cost continues to be the primary factor, other considerations, such as skills shortages and the desire to focus on the organisation’s core business, were climbing up the agenda.
Now that UK companies have more experience of offshoring, the downsides are becoming much clearer. The CIPD’s study found that 17% of employers found offshoring brought fewer benefits than they anticipated. In addition, more than half believed it could cause low staff morale, and just under half complained that offshoring made managerial control more difficult.
Organisations are also beginning to question the attractiveness of the popular offshoring destinations, in particular India. As the country’s recruitment market hots up, so do salaries, making the cost argument of offshoring to India less compelling.
Insurance company Norwich Union is one of a host of UK firms to make the move offshore. It oversees 7,000 roles with three partners in India, plus some posts in Sri Lanka.
“It is a much more complex cocktail than just cost,” explains HR director Russell Martin. “There is a drive to build higher value-added activity. There are large pools, for instance, of maths graduates in India who have excellent analytical skills. There are centres of excellence for process improvements; there is a high degree of expertise and professionalism that we can tap into.”
This means that, even against a backdrop of increasing labour costs, the figures still add up, he argues.
“The labour costs associated with offshoring still make it a compelling proposition. The technology is also becoming much better in terms of processing data. Labour and salary inflation is a concern, but there are other things that go some way towards mitigating that,” Martin says.
Cost issues aside, a number of organisations have shied away from offshoring aspects of their business because they fear it will create negative publicity. NatWest bank, for example, has based a large chunk of its marketing on the fact it only operates domestic call centres.
Get it wrong, says Ben Willmott, employee relations adviser at the CIPD, and offshoring can seriously backfire. “If you provide a service or product from overseas that is not up-to-scratch, you are going to alienate customers,” he says.
HR can play a major role in getting it right, however. HR is the least likely part of a business to be sent offshore, according to the CIPD, so the department is frequently involved in managing processes and strategies back at base for other functions that have been offshored.
There should be very little difference between managing an offshore versus a domestic operation, according to Martin.
“The differences that we contend with are actually the cultural differences that you get in any international operation. We have local HR teams that are part of the UK team, and are linked to our management, development, training and coaching programmes. It is part of and run as one team,” he stresses.
Martin adds that offshoring has forced Norwich Union staff to be more culturally aware and empathetic; to understand the nuances and have a wider international outlook. But it has not changed the role of management or individuals within HR.
“It is more difficult than managing a team at the other end of the UK because there is a cultural dimension. You have to raise your head and look at the wider picture,” he says.
However, HR still has to battle with other stakeholders to get involved with offshoring decisions at an early stage.
HR can, and should, be involved in manpower planning, risk identification, timeframes, employment regulations (in both countries), internal and external communications and consultations with the unions, argues Willmott.
The CIPD’s survey found that less than 60% of HR departments were involved in strategic discussions from the point where offshoring was raised as an option.
Without HR’s input, the whole process can quickly end up lacking transparency and become bogged down in rumour, confrontation and suspicion, which in turn can lead to damaged morale and productivity, warns Willmott.
Yet the trend continues to escalate. With a lot of manufacturing and services already offshored, businesses are now starting to look at what can go next – and research and development is likely to be one function topping that list, according to Bryan Cyress, senior adviser on corporate social responsibility and globalisation at the CBI. HR professionals in technology and engineering companies should take note.
“India is currently producing a huge number of engineering and technology graduates,” he says. “So companies are going to be looking not just at where it is cheaper to go but which country offers the biggest pool of talent,” he says.
And HR departments may yet find themselves the subjects, rather than the facilitators, of a move offshore.
Martin, for one, hasn’t ruled it out. “We would have to look at what our customer experiences would be like and what are the drivers for doing it,” he says.
As decisions to move offshore become less about cost and more about value, it is crucial for the HR profession to place itself at the centre of the debate.
Top 10 offshoring destinations
- Czech Republic
- Hong Kong
Economist Intelligence Unit, 2005
Offshoring driven by cost-cutting not quality
National Outsourcing Association