While outsourcing is now taken as a fact of business, more and more companies are also off-shoring key services to lower cost economies
When American President George Bush embarked on a tour of Asia some years back, the comedian David Letterman quipped that he was visiting American jobs. The paranoia about outsourcing is as global as the trend itself and some of it is justified.
At one level, outsourcing is an established fact. The top 500 American companies either off-shore some of their activities or have outsourcing agreements with third-party providers. A recent report by PricewaterhouseCoopers showed that 91 per cent of customers worldwide, whether happy with outsourcing or not, will outsource again.
But amid all the paranoia, much of the mundane truth about the phenomenon is forgotten. Outsourcing and off-shoring, for example, are two very different concepts.
Even the smallest companies outsource functions - IT maintenance or simply cleaning. This can hardly be regarded as a new trend. It could even be regarded as the underlying principle of trade. Why do for yourself what someone else can do better or cheaper?
Off-shoring is when the work goes overseas, mostly commonly to one of the rising giants of international trade such as India, and increasingly eastern European countries.
There is no doubt that this poses a threat to Irish jobs. But, since Ireland was among the forerunners in promoting itself as an outsourcing location, to object now is a bit like complaining that a rising tide is lifting other boats, not just our own.
According to Fergal O'Brien, senior economist with IBEC, Ireland has benefited more than it has been threatened from the off-shoring phenomenon. "The reason we have American multinationals here is that they decided to off-shore a lot of their activity rather than carry it out in the US. They would have seen the attraction of a relatively low-cost, highly-skilled workforce. When you look at our economy, you can see how beneficial that's been and it's only in the last few years that we've started to see it as a threat because some of what's come here could now go further afield," he says.
While the focus until recently has been on the threat to low-skilled manufacturing jobs which across the world are shifting to the Far East, a far more troubling trend is emerging or, at multinational level, has already been established.
"If we look at the service sector - and that's where all the growth is in terms of western economies, manufacturing is actually contracting - with the availability of technology there are all sorts of services that can now be off-shored," says O'Brien.
He points to a paper written by Alan Blinder of Princeton University, Fear of Off-shoring, which differentiates between personal services and impersonal services. Childcare or hairdressers are personal services which will remain in western economies, or as Blinder puts it "richer nations".
But a whole host of other services could shift to less developed economies. In the healthcare field, while we may continue to come face to face with a doctor, a radiologist, for example, could easily operate in a different country.
"Having a high skill set won't protect all workers from the threat of off-shoring but it will help in terms of providing a competitive advantage," says O'Brien.
"We haven't seen how rapidly things can change, how quickly services can move overseas. At least part of our professional services have been reasonably cosseted or protected to date.
"If you look at accountancy or even legal services, they haven't been fully exposed to the pressures of global competition. Our ability to change is going to be a key factor. It's going to be a challenge for all economies."
If Ireland has an advantage it is that we are a relatively small and therefore agile economy.
We have a reasonably flexible labour force compared to say more traditional economies such as France or Germany.
On the flip side, we are also highly dependent on big multinational companies and most of these are focused on their cost bases at the moment, says Garrett Cronin, advisory services at PWC Ireland. "If you look at what happened prior to the dot-com bust, companies were doing well, but when they went down it happened very quickly. Companies now want their cost base to be as flexible as possible so they can flex up or down and adjust the cost base accordingly. If they go into a down-turn, they don't want to be hit by those costs again," he says.
Skills are another critical issue for large companies. "If they have a problem with certain skill sets, they go out and buy them putting the onus on another company to find the people," says Cronin.
On paper at least it may seem like the easiest thing in the world to move operations to a lower cost, but still highly-skilled, location such as India, but in practise these large shifts have thrown up a significant number of unexpected issues.
"A lot of the banks in the UK have pulled out of India because there were problems - customers weren't getting the information they needed or calls were being dropped," says Cronin. "In some places which had once been low cost, you're now getting to a situation where the skills you need are not readily available. If you go to the tier one locations, you might be able to find the people, but you would have to pay a price where you might not have had to in the past."
Like Ireland, many of these once emerging economies are becoming victims of their own success. But the nature of the global market means that new countries are emerging all the time. Both Romania and South Africa, for example, are trying to develop as outsourcing locations. South African and Chinese delegations have visited Ireland to see how this country managed to ride the outsourcing wave and learn how to replicate this back home.
Probably the current biggest threat in the Irish context is the hundred or so "shared service centres" operated by multinationals here. Instead of having individual accountancy and administrative functions in each local office, multinationals centralise these activities in one centre. Ireland's low rate of corporation tax makes it an ideal location, since companies can route profits from European bases through this country and avail of the lower tax.
According to Cronin, Ireland's increasing cost base is making it a less attractive location, and there are already signs that some of these activities are shifting elsewhere. For the moment, though, most big shifts in labour are occurring at multinational level. While large indigenous Irish companies are outsourcing - Bank of Ireland's deal with Hewlett Packard on IT for example - there are few signs of these activities going overseas. "Some people want to keep their arms around their processes. They don't want to deal with the time difference or to have to jump on a plane to visit a centre," says Cronin.
The problem, however, is that the outsourcing companies are global and it is already starting to get difficult for Irish companies to keep outsourced activities onshore.
For smaller companies it's actually easier. There are an increasing number of Irish-based providers for a range of activities from cash collection to back office functions, ably demonstrating that wherever there is a threat there is also an opportunity.
Mathew Vallance is at the cutting edge of the global outsourcing trend as regional director for Europe of First Source, an Indian company which provides back-office operations. First Source employs more than 1,000 people at two call centres in Northern Ireland, to cater for UK customers who don't want to operate voice services from India.
One operation is located in Derry precisely because it is a lower cost location compared to other cities on the island and staff attrition is less of a problem. "It is difficult to create a company culture in a workforce of 1,000-2,000, particularly one that is constantly changing. By comparison a smaller town with a smaller available workforce is a good opportunity. In remote areas, salary levels are lower, attrition is lower and you can still set up a decent-sized centre," he says.
"One thing you should never predict is the future," stated Alan Blinder in his paper on off-shoring. There is no doubt that enormous change is taking place in global trade and Ireland will not remain immune. But the specifics of how these trends will play out are by no means clear as yet.
There are certainly threats but there are clearly opportunities too. Rather than join the global paranoia, it would seem to be a lot more profitable to seek to understand the phenomenon
