2006 – Offshoring trend in human capital
The practice of moving various
company services to cheaper labour markets will
grow dramatically in the next few years as available
skills improve in developing countries, a new
report says today.
But the role of human resources
professionals in influencing labour sourcing decisions
is questioned in a section of the report that
raises concerns for the future of HR at the highest
level of companies.
The report, Key Trends in Human
Capital, compiled by Saratoga, the human capital
business owned by PricewaterhouseCoopers, is the
second annual overview of labour market data among
15,000 employers across Europe and the US.
One of the most striking changes
in labour sourcing, it says, is in the rationale
for “offshoring” – the practice
of shifting work from the home country to centres
where wages and overheads are much lower.
Much of the early phases of offshoring
involved low-skilled services such as call centres.
But the report says that there has been a significant
shift in the sophistication of work that companies
are prepared to move abroad.
“It is becoming progressively
evident that it is far more than low-skilled services
and manufacturing that are being ‘exported’.
India’s growth in particular has been fuelled
by an astonishingly rapid development of skills
and know-how, notably in information technology
and other professional services,” says the
Low costs, it says, remain a
powerful draw, particularly in India where the
cost of operations is some 37 per cent lower than
China’s and 17 per cent lower than Malaysia’s.
An increasingly influential additional
attraction, however, is the scale of skill improvement
within some of the most popular offshore centres.
The Philippines, for example, produces around
300,000 college graduates each year, all of them
English speakers, while India has about 2m graduates
a year, 80 per cent of whom speak English.
The report stresses that employee
skills – what it calls “the human
capital issue” – are at the heart
of successful offshoring moves. “Decisions
to outsource or offshore motivated purely by reducing
costs are providing disappointing results,”
it says, adding: “it is the relative cost
of labour and skills availability that are overwhelmingly
dominant factors.” As skill shortages grow
in the UK due to demographic trends, they may
begin to influence labour sourcing decisions.
The report acknowledges that
management, quality of service and sometimes a
lack of cultural understanding, have raised concerns
in some existing arrangements, but it says the
evidence of strong investment flows in to India,
China, Brazil, the Philippines and central and
eastern Europe suggests that companies have not
been deterred by these problems.
Anecdotally, indeed, there are
signs that consumers are beginning to accept overseas-based
services. In two separate conversations last week,
friends in the UK told me of their dealings with
Indian sales staff at Dell, the computer company.
In both cases they had developed a personal relationship
with an individual sales assistant who they would
call back at intervals to discuss their computing
needs. Both seemed happy with their sales discussions.
What would have seemed strange only a year or
two ago, is now accepted as the norm.
Spending by UK and US-based companies
on offshoring contracts worldwide, says the report,
is forecast to rise from Euros 8bn in 2004 to
Euros 48 bn in 2008, 40 per cent of which is likely
to come from the banking and insurance industries.
In the same period the Organisation
for Economic Co-operation and Development (OECD)
has suggested that as many as a fifth of all jobs
in the US, Australia, Canada and the European
Union before enlargement could be jeopardised
by decisions to move work overseas.
While it is sensible that employers
take in to consideration future wage increases
as developing labour markets mature, pay is not
expected to rise anywhere near western rates in
the short term.
Offshoring arrangements do,
however, require a broad understanding among human
resources professionals of the management and
employee skills underpinning any decision to take
the offshore option.
“The success or failure
of these decisions has been shown to depend largely
on addressing the associated human capital issues.
As such HR executives have a pivotal role to play,”
says the report.
Just how pivotal, however, is
debatable since the report says there is “little
evidence” of increasing HR influence in
companies. If anything, the reverse is the case.
The number of HR directors on the main boards
of FTSE 100 companies, it notes, has fallen to
six. More worrying still for the profession in
Europe is a visible trend of declining influence
in the US. In 2003, some 81 per cent of HR directors
reported directly to the chief executive. In the
latest survey the proportion of those reporting
directly had fallen to 61 per cent.
While it is arguable that full
board membership is less essential to HR directors
than having a high profile within the top executive
team, most would expect to report directly to
the chief executive rather than finding themselves
one stage removed.
The PWC report speculates that
such moves may reflect the increasing importance
of human capital for corporate leadership. “The
strategic importance of human capital may mean
that CEOs and other senior executives are taking
more personal responsibility and control over
human capital issues, obviating to some extent
the requirement for HR executives to sit at or
close to board level,” it says.
Such comments are a wake up call
for HR professionals in the UK who must seek a
clearer understanding of the metrics underpinning
the principles of human capital if they are to
establish the discipline as a recognised feature
of corporate reporting.
The decision in the autumn by
Gordon Brown, chancellor of the exchequer, to
abandon requirements for Operating and Financial
Reviews has led to a Government rethink on the
reporting of significant intangibles such as the
costs, development and contribution of employees.
An industry-wide alliance of
HR, management, auditing and investment interests,
the Human Capital Standards Group, meeting at
the London headquarters of Investors In People,
is working on a common set of metrics and approaches
that might be applied across UK industry. Unlike
the compliance-led OFRs, the standards group is
seeking to establish a firm business case for
a unified approach to human capital reporting
that will allow “like for like” investor
comparison of certain standard measures.
At the same time these standard
measures might be used as a platform on which
companies can tailor distinctive individual approaches
to workforce development that can provide measurable
improvements in organisational performance and
productivity. The Department of Trade and Industry’s
consultation on reporting requirements - taking
submissions up to March 24 – would seem
an ideal opportunity to create a more effective
human capital reporting approach than had been
proposed in the original OFR guidelines. If the
HR profession succeeds in placing itself in the
vanguard of that debate it will do much to deflect
the kind of criticism implicit in the Saratoga
*Copies of the Saratoga report can be obtained by contacting: