Report: Offshoring to Have No Sudden Bad Effects

While offshore outsourcing is expected to affect wages and employment in developing countries, it won’t have any sudden negative impact on developed countries’ economies, according to a report released Feb. 22 by the McKinsey Quarterly, the business journal of the global management-consulting firm McKinsey & Company.

The report “Sizing the Emerging Global Labor Market” attempts to find a middle ground between those who argue that nearly all service jobs will eventually move from developed countries to low-wage ones, and those who feel that rising wages in cities such as Bangladore and Prague indicate that supply of offshore talent is already running thin. It attributes these rifts to a confusion surrounding the relatively new global labor market.

In analyzing the potential availability of offshore talent in 28 low-wage nations as well as the likely demand for it in service jobs across eight of the develop world’s sectors–IT services, packaged software, retailing, financial services, health care, insurance and pharmaceuticals–the report found that these sectors provided about 23 percent of the nonagricultural jobs in developed country.

Demand for Offshore

The report estimates that 11 percent of these services jobs around the world could be carried out remotely. However, this number can be higher or lower depending on the sector.

Click here to read more about IT service jobs being offshored.

The retailing sector, for example, with its large number of customer-facing jobs, only stands to be able to offshore 3 percent of its jobs by 2008, but being such a huge employer, this would be equivalent to 4.9 million positions. The packaged software industry, however, stands to remotely undertake almost half of its jobs in the same time frame, but being a smaller industry, this would be only 340,000 positions.

The engineering occupation was deemed the most amenable to remote employment (52 percent), followed by finance and accounting (31 percent). Generalist and support staff work were determined the least amenable (9 percent and 3 percent, respectively). Yet again, however, though a small percentage, the vast number of workers in this category across each industry brings the number of jobs to 26 million.

In practice, the report expects that just a small fraction of the jobs that can be offshored will be. While 565,000 service jobs in the eight sectors have been offshored to low-wage countries today, the number is expected to grow to 1.2 million by 2008.

Total offshore employment was at 1.5 million jobs in 2003 but is expected to grow to only 4.1 million in 2008, or just 1 percent of the total number of service jobs in developed countries.

Offshore Talent Supply

The report argues the developing countries produce far fewer graduates suitable for employment by multinational countries than the raw numbers suggest, though it is quickly growing. The report found 33 million experienced young professionals in developing countries, versus 15 million in developed nations, and 7.7 million in the United States alone. Language gaps, an emphasis on theory versus practical knowledge and a lack of cultural fit are considered hindrances to actually employing much of this offshore talent.

Market Limitations

Though the report finds that the potential supply of offshore talent suitable for employment exceeds the demand in the eight categories they analyzed, this view wrongly “creates an illusion of abundance,” since companies tend to hire offshore talent in locations where others have had success.

This can often create local supply and demand imbalances, wage inflation and raise levels of attrition among workers. The Czech Republic, India and Russia are given as examples, with bigger squeezes expected from Prague and Hyderabad by 2008.

Implications for Countries

The report advises companies that rather than being sidetracked by the absolute number of graduates in a given country to instead consider the supply of suitable labor and the demand for it.

On the flipside, it advises supply-side countries to improve the quality of their talent, and not just its quantity, and for their governments to reduce the number of bureaucratic hassles involved in created these relationships.

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