HUMAN RESOURCES

Study Predicts Increase in Offshoring

By 2008, 4.1 million service-side jobs will be offshored, according to a recent McKinsey study.
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July 6, 2005--Service-related companies take note -- by 2008, 4.1 million service-side jobs worldwide will be performed outside the country where the service is sold, according to a study that the McKinsey Global Institute released in June. Yet the number is a fraction of the total number of jobs -- 160 million -- that could potentially be offshored.

The study, "The Emerging Global Labor Market," projected the number of jobs that would be outsourced across eight different service sectors, including retail, IT, banking and pharmaceuticals. It argued that offshoring depends on both industry and company level factors.

On the whole, companies in sectors with more customer facing functions, such as retail, are less able to offshore these functions. Only 0.1% of retail and 0.07% of health care jobs, in contrast to 18% of jobs in the packaged software and 13% in the IT industries, would be performed remotely. Certain job functions within a sector were also to move overseas -- 52% of engineering and 31% of finance and accounting jobs, compared to 3% of support staff positions, can potentially be moved overseas.

At the company level, unsuitable business processes and inward-looking management attitudes and strategies inhibited offshoring. For example, companies that either had gone through a series of mergers and as a result had evolved "business process that are too convoluted to allow easy separation into discrete groups," or were led by managers with "little or no experience leading operations overseas," failed to offshore, even if they were packaged software companies. Insufficient scale also played a part.

Even if a company were to offshore, finding adequately qualified workers might not be easy, noted the second part of the study. Only 19% of the graduates in developing countries were perceived as having the necessary language, practical and interpersonal skills to fit into the workplace by human resource managers in multinational companies, with candidates from certain countries seen as more suitable for particular occupations than others.

In addition, in the large emerging economies, many graduates do not live near and are unwilling to relocate close to international airports -- only 51% of Chinese graduates were regarded as "accessible" to multinational corporations, in comparison to 44% of Russian and 83% of Indian graduates.

In effect, the study warned companies to thoroughly analyze the costs and benefits of each potential offshore location.

To produce the estimates of demand and supply for offshore labor contained in the study, six McKinsey professionals spent a year interviewing consultants and companies through the McKinsey offices in 44 countries, and pulled together data of operating costs in 16 possible offshore locations.

Perhaps to alleviate fears that service jobs would go the way of manufacturing, the study also pointed out a total of only 9% of service jobs in the U.S. could potentially be offshored, compared with the 11% of manufacturing jobs that have actually been moved overseas.

Last updated: Jul 6, 2005




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