Gerhard Rohde

1
EUROPEAN e-SKILLS CONFERENCE 200420 - 21
September 2004, Thessalonica, Greece

• Gerhard Rohde
• Global Sourcing The employee perspectiveUNI
  Europa

2

• 70 70 70
• 70 of all business processes will be bought in
  the future
• 70 of outsourcing will be bought from abroad
• 70 of those outsourcing services will come from
  India (J. Welch, GE)
• Drivers and enablers
• Fundamental transformation of corporate
  structures
• desegregation of vertically integrated value
  chains network economy
• ICT, world wide web
• production phases can be separated
  geographically
• distributed around the globe considering cost and
  opportunity
• Making India the back office of the world

3

• Reasons for outsourcing
• Reaction to increasing complexity of IT
• Keep in touch with latest innovations and avoid
  risks of ownership
• potentially better services, continuous
  improvement
• innovation in processes, higher flexibility,
  scalability
• Sourcing across national boundaries
• Broad range of software products, maintenance,
  system integration, etc..
• Higher value services such as financial analysis,
  industrial engineering, analytics, drug research,
  medical analysis
• Fastest growing segments IT enabled services
  (ITES) and business process outsourcing (BPO)
• legal database, digital content/animation
• remote maintenance
• accounts, financial services, human resources,
  pay roll

4

• Global Sourcing dynamic growth market
• Outsourcing 101 billion (2000) to 160
  billion (2005)
• Offshore figures vary McKinsey ( 33bn) -
  Datamonitor (1.66bn)
• Meta Group 20 p/a until 2008
• 40 of all US companies will practise offshore
  outsourcing by 2004 (Gartner)
• Meta Group one-third of new IT developments of
  big US companies will go overseas, mostly India
• Ovum Holway assume
• 20000 to 25000 IT jobs will leave the UK by
  2006, i.e. 2.5 of todays IT population

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• Why offshoring?
• Primarily a cost saving model (nessary, not
  sufficient condition)
• Savings of gt 40 without sacrificing
  profitability overstated
• More realistic 10-15
• Lower salaries in India e.g.
• Chip designer, masters degree 1000 in India -
  7000 in US
• Programmer 10000 p/a in India - 66100 in
  US
• IT Manager 8500 in India p/a - 55000
  in US
• prices going up in India in these days
• Indian salaries at purchasing power parity with
  USA
• Not based on sweatshop style exploitation
• increasing number of complaints from China
  recently (WSJ,15/09/04)

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Forecast European Jobs Moving Offshore By Job
Type, 2004-2015
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Forecast European Jobs Moving Offshore By
Country, 2004-2008
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• Forrester Research predicts
• 3.3 million skilled service jobs will leave the
  US by 2015
• 472000 IT jobs gone by 2015
• 2001 US IT companies hired 2.1 million and laid
  off 2.6 million (ITAA)
• i.e. 528000 jobs gone during a 12-month period
• churn rate of US labour market 7-8 million
  jobs every quarter
• Layoffs through offshoring
• US 0.9 of all mass-layoffs
• Europe job losses due to outsourcing 2.5
  relocation 4.9 (EMCC)
• McKinsey Offshore a win-win situation?
• McKinsey 1 invested abroad, 1.12 - 1.14
  returns to USA
• Optimistic for US pessimistic for Europe
• Slower structural change, longer unemployment
  periods in Europe

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Offshore highly controversial

• Judgment depends on perspective
• Macro- or micro-economic perspective
• Location (sending or receiving countries)
• Company or employee
• Offshoring has become a controversial political
  issue
• UK, France, USA American jobs for Americans
  unpatriotic investment
• Xenophobia, protectionism
• Downward pressure on salaries, social and working
  conditions
• Not enough neutral scientific research

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Offshore world map
Ireland
CEE
China
Israel
Russia
Philippines
8.3
8.2
7.7
India
Latin America
3.7
3.0
1.1
Israel
India
Ireland
Canada
China
RoW
Source BusinessWeek February 3, 2003
(Source McKinseyCompany 2004 Billion US)
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Indian Government INVESTMENT POLICY

• 100 FOREIGN EQUITY ALLOWED
• 0 DUTY FOR EXPORTS
• CORPORATE TAX HOLIDAY FOR 10 YEARS - UP TO 2010
• FULL REPATRIATION OF PROFITS
• SPECIALIZED ZONES- STPS, EPZ,
• COMMITMENT TO WTO
• TELECOM SECTOR REFORMS

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Role for industrial policy!

• Reinforce support for entrepreneurship
• Stimulate RD spending
• Stimulate spending on ICT related skills
  development (digital literacy)
• Stimulate foreign direct investment, in
  particular from China and India, through
  development zones providing favourable conditions

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• Offshore outsourcing still a fairly young
  business model
• Little experience those in management did not
  know about it when they graduated from university
• Big pressure on business
• consultants set the trend
• pressure from customers to lower prices through
  offshore components
• stock markets like an India story

14

• High failure rate
• in 2003 Gartner estimated 6bn wasted
• almost every second project failed
• Flop rate of 40-50 (clearview consulting)
• Main reasons
• poor management
• low balling leads to bad contracts
• savings potential vastly over-estimated
• underestimation of communication/coordination
  needs
• short term approach instead of long term
  relations building
• mishandling of human resources
• misjudgement of intercultural differences !
• Failed projects are worse than successful ones
  from an employee perspective

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Managing the human resources

• involvement and participation of employees,
• avoid compulsory redundancies,
• protect career value, terms and conditions of
  employment,
• reinvest savings in skill development,
• Knowledge about social situation in target
  country
• respect of ILO labour standards and OECD
  guidelines
• freedom of association and the right to
  collective bargaining
• working conditions are safe and healthy, living
  wages are paid
• UNI offshore outsourcing charter

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• In summary
• Offshore outsourcing is a complex process with
  politcal, social, cultural, ethical and economic
  implications
• Offshore outsourcing not a mechanical, it is a
  social process.
• A holistic view has to be incorporated in
  curricula for training of managers and
  consultants
• UNI Europa starts ESF project under budget
  heading Innovative approaches to the management
  of change with the title
• Making offshore outsourcing sustainable (MOOS)
• Focus is on how to better manage offshore
  projects
• Role for social partners.