WHAT IS THE FUTURE FOR OFFSHORING?
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Globalisation, the age of technology economies shift to an increased and increasing pressure to reduce dominance from the services sector. costs have given rise to outsourcing At the same time, the services industry and offshoring. Offshoring is a itself will face further disruption from strategic tool used by organisations increased automation and growing to reconfigure their activities Asian economic development. across geographic locations – the This future[inc] research explores focus and trend has traditionally the role offshoring can play in the been on information technology economic future of our nations and manufacturing, however it is and where the opportunities for now a common strategy for many organisations may lie. The way organisations in the services sector. we work is becoming ever more This growth in the offshoring of geographically dispersed and with services from Australia and New the march of technology, offshoring Zealand is a consequence of the could be the new way of doing increased tradability of services, business globally. arising from trade liberalisation and Join the conversation. rapid technological developments. However, many offshoring models are now maturing and moving away from a focus on pure cost savings to recognise other benefits such as increased efficiency and flexibility and access to a more diverse range of skills. Lee White FCA Our nations face productivity CEO, Chartered Accountants Australia challenges in the future as our and New Zealand
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JACK WELCH FORMER CEO OF GENERAL ELECTRIC CONTENTS 06 10 13 EXECUTIVE SUMMARY INTRODUCTION THE CHANGING LANDSCAPE: OFFSHORING IN SERVICES TODAY 18 25 37 MEGATRENDS: THE THE KEY ISSUES CONCLUSION FACTORS DETERMINING DETERMINING THE FUTURE FOR OFFSHORING SUCCESS OFFSHORING IN THE FUTURE 40 41 GLOSSARY REFERENCES 6 WHAT IS THE FUTURE FOR OFFSHORING?
EXECUTIVE SUMMARY
Offshoring has become a common strategy the value-add of the existing workforce is an for many organisations in the services sector important element, and this paper explores as a consequence of the increased tradability how offshoring can play a role in this. of services, arising from trade liberalisation As a concept, offshoring may encounter some and rapid technological developments. resistance, with cries that the practice is akin Traditionally associated with manufacturing, to “exporting jobs”, and that barriers should the subject of offshoring tends to attract a be put in place to prevent it. Such arguments lot of discussion. With the services industry ignore the many benefits offshoring can rapidly increasing in importance, there is bring, which can enhance organisational much debate as to what growth in offshoring capability and allow organisations to expand services might mean for the economic future operations elsewhere – the essence of of Australia and New Zealand. “comparative advantage” that trade within an With the demographic tide turning, and the economy and between economies is based likelihood that the boom days for mineral upon. Artificially restricting offshoring would and rural commodity prices are behind us, essentially be protectionism. From a policy Australia and New Zealand will have some perspective, barriers to offshoring should challenges in maintaining growth in living remain low so that organisations can seek to standards over time. Sharp improvements operate as efficiently as possible, helping to in productivity gains are needed. Maximising lift productivity across the broader economy. 7 future[inc]
But that does not necessarily mean But it is not all one-way traffic. Both Australia offshoring is the best decision for every and New Zealand are also sizeable offshore organisation. Far from it. Whether offshoring providers of business services themselves. is an appropriate solution for an individual Australia now exports around A$11 billion organisation is a complex decision. in business services (mostly to the US, This paper seeks to explore the future of Singapore, the UK and New Zealand), while offshoring for Australia and New Zealand New Zealand exports NZ$2.5 billion (mostly and what it means for organisations and to the US, Australia and the EU). Growth in government. It discusses the costs, benefits, the export of services represents a significant risks and opportunities of offshoring business opportunity for both nations. services from Australia and New Zealand. The findings are based on analysis of trade data, MEGATRENDS: THE FACTORS a review of existing studies on offshoring, and DETERMINING THE FUTURE consultation with a range of stakeholders, FOR OFFSHORING including selected services organisations Four key drivers of change have enabled a from Australia and New Zealand that have greater rate of offshoring and are expected to offshoring experience. affect, and in some cases significantly disrupt, the future of services offshoring in Australia THE CHANGING LANDSCAPE: and New Zealand. OFFSHORING IN SERVICES TODAY • Globalisation: Reduction of trade barriers, Offshoring has undergone a significant the Trans-Pacific Partnership and recent transformation in recent years. It has free trade agreements with Asia have become a common part of many services enabled freer movement of business, organisations across the world, particularly investment, labour and resources between in business services such as professional Australia/New Zealand and other services (legal, accounting and management countries, making it easier to offshore consulting), technical services (architecture services in both directions. Globalisation and engineering) and computer services. has also increased competitive pressures, motivating organisations to reduce costs After a slow-down in offshoring activity and increase growth through offshoring. following the Global Financial Crisis, services • Technological advancements: Rapid organisations across the world are moving advancements in technology have made more of their business functions overseas. services offshoring a viable and cost- In Australia and New Zealand this can be effective business strategy for many seen in the growth in business services organisations. In this connected world, any imports in recent years. Australia now work that can be done on computers can imports around A$14 billion in business be done anywhere in the world.1 Greater services per annum, while New Zealand adoption of technology such as enterprise imports around NZ$4 billion. Although the mobility, big data, virtual desktops and United States and Australia remain the main cloud computing may drive increased offshore providers for Australia and New offshoring in the future. Zealand respectively, imports from Asian • Asian economic development: Rapid countries such as India, Singapore and China development in Asia has increased skill have seen significant growth in recent years, levels and professionalism in more mature as organisations are moving a greater share offshoring markets. With higher skills come of their operations offshore. It is this rapid higher wages, and movement along the growth in offshoring to Asia that has gained value chain into more complex business a lot of attention recently. process outsourcing (BPO) and IT offerings. 8 WHAT IS THE FUTURE FOR OFFSHORING?
At the same time, more recent entrants to • Dealing with risks and challenges: the business services offshoring market Traditional risks and challenges to position themselves as low-cost locations offshoring have included regulatory for lower-value work. concerns and cultural differences. However, • Domestic skills shortages and a global new issues are emerging that labour market: Offshoring is not simply will need addressing in the future, such a question of cost cutting, and other as how to retain offshore employees in motivations are becoming increasingly an increasingly competitive environment important, for example, having access to and how to deal with offshoring more skilled employees in areas where onshore complex tasks. competition makes talent scarce. The • Finding the right offshoring model: concept of offshoring itself is also changing, Offshoring strategies are numerous and as – due to technological advancements – varied, with each presenting its own set of labour is no longer tethered to fixed capital. advantages and challenges. Organisations Tasks can now be easily outsourced to should understand that there is no offshore freelancers, or even automated “silver bullet” – the most appropriate via the cloud. offshoring model will be unique to an organisation’s current and future needs THE KEY ISSUES DETERMINING and the environment it operates in. While OFFSHORING SUCCESS IN some organisations will continue to move THE FUTURE towards an outsourcing model as they become more experienced in offshoring, Recognising the increasing importance of others may back away from such a model, offshoring in services, a number of key issues instead reincorporating newly captive will help to determine offshoring success for functions to be part of their core business. organisations in the future, particularly as • Finding the right location: With an offshored functions become more complex. increasing range of potential offshoring • Recognising the diverse range of benefits: locations to choose from, organisations will The benefits from offshoring continue find it easier to diversify their offshoring to move away from pure cost savings. networks and tap into a broad range of Offshoring can enable organisations to capabilities and skills across geographies operate more effectively and flexibly. in the future. It is critical to understand Future benefits include access to a more the various types of future benefits that diverse range of skills, movement to higher different locations can provide. value-add work onshore, and onshore • Planning for the future: Offshoring as a employee retention. business proposition is undergoing rapid • Preparing and getting buy-in: As change, and many organisations are offshored functions are quickly becoming unsure what the services sector will look a more significant part of day-to-day like in ten years – making planning for the operations in many organisations, long- future challenging. At the same time, new term commitment and buy-in are critical technology trends such as automation will for success. While a broader and more disrupt the offshoring model itself. mature range of offshoring options and technological advancements will make offshoring easier, good preparation, a clear strategy, and continuous review and recalibration will be even more important in the future. Success is not guaranteed. 9 future[inc]
CONCLUSION Further, globalisation and the increase in free While it was traditionally about cost cutting trade agreements have enabled Australian in distinct back-office functions, offshoring and New Zealand services organisations to has become far more complex and its use access new markets. This in turn has created continues to evolve. Many offshored functions significant opportunities for growth in services are becoming fully integrated into an exports. We may now see an increasing trend organisation’s operating model and thus have where organisations offshore lower-value impacts that extend well beyond the services services or even automate them, to instead traded. As a result, offshoring is likely to have specialise in being the offshore providers of an increasingly significant impact on Australian higher-value services to other countries. and New Zealand services organisations in The education sector will also need to work the future. But more than that, it can also have closely with organisations to ensure future an impact on the economic future of Australia graduates are leaving with the skillsets and and New Zealand. knowledge to perform these higher-value Offshoring in services can play a key role in services that the workplace is now expecting. addressing future productivity challenges As the importance of the services sector by enabling organisations to operate more continues to increase in both Australia and efficiently, maximising the value-add of the New Zealand, productivity growth – generally existing workforce and assisting organisations and specifically in services – will become the to be internationally competitive. Although key factor determining the rate at which living offshoring is already widespread in the standards can be improved over time. services sector, there are areas for expansion as organisations consider more complex functions as part of the offshoring decision.
10 WHAT IS THE FUTURE FOR OFFSHORING?
INTRODUCTION
In 2014, we released Risk-wise and a fair go? This comes at a time when the services A plan for Australia’s continued prosperity sector is rapidly increasing in importance in our future[inc] thought leadership series. in both the Australian and New Zealand This publication considered how Australia economies. The services sector accounts should address the trends and challenges for around 60% of Australia’s output, and that its economy is likely to face over the around 70% in New Zealand. Hence, there next 10 to 15 years and how to best plan is much debate as to what offshoring in for the future. services might mean for the economic future of both nations. One issue, which generated significant interest, was whether Australia was making a fundamental mistake in offshoring work. While traditionally associated with OFFSHORING HAS BECOME A COMMON manufacturing, offshoring has become STRATEGY for many services organisations a common strategy for many services at a time when the services sector is rapidly organisations as a consequence of increased tradability of services, arising increasing in importance IN AUSTRALIA from trade liberalisation and rapid AND NEW ZEALAND. technological developments.2 11 future[inc]
With the demographic tide turning, and the Sharp improvements in productivity gains are likelihood that the boom days for mineral and essential in order to maintain Australia’s living rural commodity prices are behind us, Australia standards. To maintain the current growth and New Zealand will have some challenges in living standards, Australia’s productivity in maintaining growth in living standards in growth would have to double. While the New the future. As chart 1 highlights, productivity Zealand economy is currently faring better growth in Australia has slowed considerably than Australia, it too faces its own productivity since the 1990s. However, it will be essential challenges. Economy-wide productivity for maintaining growth in national income per growth in New Zealand has been lower capita in the coming years, as participation than in most other OECD countries for the rates fall due to an ageing population, and as last 15 years, and labour productivity is now commodity prices decline from their peaks. significantly behind the OECD average.3 Hence, both Australia and New Zealand need As participation rates fall due to an to find new ways to boost productivity – generally, but also specifically in the services ageing population, and commodity industry, which has become such a dominant prices decline from their peaks, sector in both countries. This can come from AUSTRALIA AND NEW ZEALAND a variety of sources, including technology and NEED TO FIND NEW WAYS TO deregulation. Maximising the value-add of employees is another important element, and BOOST PRODUCTIVITY IN SERVICES. this paper explores how offshoring can play a Offshoring can play a key role in this. role in this.
CHART 1: COMPONENT CONTRIBUTIONS TO GROWTH IN NATIONAL INCOME PER CAPITA, AUSTRALIA4
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
-0.5%
-1.0% 1980s 1990s 2000 to 2013 Decade to 2023
AVERAGE ANNUAL NATIONAL INCOME GROWTH PER CAPITA YEAR
Productivity and other Participation Terms of trade Total living standards 12 WHAT IS THE FUTURE FOR OFFSHORING?
Offshoring refers to the relocation of a As an economic concept, offshoring can make business function from a domestic location to a lot of sense: organisations concentrate on an overseas location, resulting in the import what they do best and trade the resultant of business services such as “back-office surpluses with other organisations and/or operations”. In the broadest sense of the nations who are relatively better at other concept, any imported business service can things. Such trade can boost prosperity be considered offshoring, even if the provision and make both sides of the deal better off. of the service never previously took place Offshoring becomes simply a story around onshore. Offshoring is not restricted to large “trade in services”. Both captive offshoring companies, but may also be undertaken by and offshore outsourcing involve international small to medium-sized enterprises, not-for- trade in services, although trade by foreign profit organisations and the public sector. affiliates is typically not reported in official trade statistics. Analysis of import statistics There are a number of business models for can tell much of the story, but not all. the delivery of offshore services, depending on the level of control an organisation wants While it was traditionally about cost cutting of to retain. They include: distinct back-office functions, offshoring has • captive offshoring – where a business become far more complex. Many offshored function is moved overseas but remains functions are now fully integrated into an part of the organisation organisation’s operating model and thus • joint venture model – where organisations have impacts that extend well beyond the form joint ventures with overseas service services traded. However, given the investment providers and transfer their functions into and commitment required to make offshoring the new entity work, it is not necessarily a winning strategy in all cases. • offshore outsourcing (or specialist multi-vendor model) – which involves the use of a third party, such as a specialist service provider, which may provide offshore services for one or many organisations. For the purpose of this paper, Australia and New Zealand are jointly treated as a domestic market; hence relocation from Australia to New Zealand or vice versa is not considered offshoring, and is not discussed in detail – even though there are a number of examples of organisations moving business functions between the two countries. 13 future[inc]
THE CHANGING LANDSCAPE: OFFSHORING IN SERVICES TODAY
Offshoring has undergone a significant OFFSHORING SERVICES transformation in recent years. It has FROM AUSTRALIA become a common part of many services Services have accounted for a growing share organisations around the world, particularly of Australia’s economy over the past 30 in business services such as professional, years, rising from 54% to 61% of total GDP, technical and computer services. After a based on technological advancements and slow-down in offshoring activity following the changes in consumer preferences. In 2014, Global Financial Crisis, services organisations the services sector had an output of around across the world are moving more of their A$820 billion. Growth has been particularly business functions overseas.5 In Australia rapid in the finance, information technology and New Zealand this can be seen in the and professional services components. growth in business services imports in recent Many organisations within these growth years. The focus is on optimising vendor areas are providers and/or purchasers of relationships, improving operational flexibility business services. and diversifying the range of functional offerings based offshore. Internationally, To ensure that the analysis remains relevant to organisations are seeking to expand their the offshoring of business-related functions, geographic footprint from mature markets to we focus on two key types of services imports, new locations. which are most likely to be associated with 14 WHAT IS THE FUTURE FOR OFFSHORING?
CHART 2: BUSINESS SERVICES IMPORTS TO AUSTRALIA, 2000 TO 20146
$20BN 25%
$16BN 20%
$12BN 15%
$8BN 10%
$4BN 5%
$0BN 0% 2011 2010 2007 2005 2008 2006 2009 2004 2013 2014 2012 2002 2003 2001 2000
Business services imports (LHS) Share of total services imports (RHS) offshoring: telecommunications, computer 2000 and 2014, with many engineering and information services, and other firms moving parts of their design and business services. Imports of these business drafting work overseas8 due to the high services came to almost A$14 billion in 2014, proportion of design practice costs representing around 20% of total services represented by labour (around 40%).9 imports to Australia. The dollar value of • Computer services (A$2.1 billion), primarily business services imports has increased hardware- and software-related services, significantly over the past decade, with an grew at an annual rate of 8% between average annual growth rate of 10% between 2000 and 2014. The sector has grown 2004 and 2014. strongly since 2012 as more organisations chose to offshore IT functions.10 The majority of business services imports to Australia are made up of three key areas, The single largest source of business services which together represent around 70% of total imports to Australia is still the United business services imports. States, from which almost A$4 billion (30%) • Professional services, including legal, of imports originated in 2014. However, accounting, management consulting and growth in business services imports has public relations (A$4.4 billion of imports been fastest across Asian countries such in 2014), grew at an annual rate of 13% as India and Singapore, and it is this rapid between 2000 and 2014,a as business growth that has affected public opinion of services firms moved back-office key offshoring locations. The rapid growth in jobs offshore.7 business services imports to Australia from • Architectural, engineering and other Asia has primarily been concentrated in the technical services (A$3.0 billion), which professional and technical services sectors grew at an annual rate of 20% between outlined above.
a Excludes advertising and market research services 15 future[inc]
CHART 3: SOURCES OF BUSINESS SERVICES IMPORTS TO AUSTRALIA, 2004 AND 201411
United States European Union Singapore Hong Kong 2004 India China Philippines New Zealand Other countries
2014
While imports of business services to OFFSHORING SERVICES Australia have grown in recent years, the PROVIDED BY AUSTRALIA domestic services sector has continued to In addition, Australia also has sizeable exports see employment and wages growth. Wages of business services to other countries, which across the IT, finance and professional have grown at around 5% per annum since services industries have grown at around 2000 to reach A$11 billion in 2014. This is 3% per year over the past five years, in line where Australia is the offshore provider, 12 with the economy-wide average, while exporting services to other countries. Growth employment in these industries has generally has been particularly strong in computer and 13 remained stable or increased. This suggests information services as well as professional that the offshoring of business services has and management consulting services exports. not had a substantially adverse effect on jobs The largest destinations for Australian exports and growth in the domestic services sector. are the United States, Singapore, United Potentially, the offshoring of business services Kingdom and New Zealand. The increased is allowing employees to move towards imports of business services may be one higher-skilled or greater value-adding roles factor that is actually enabling the growth within the industry. in business services through comparative
Continued growth in wages and employment in business services suggests that OFFSHORING HAS NOT HAD A SUBSTANTIALLY ADVERSE EFFECT on jobs and growth in the domestic services sector. $4.5BN $3.0BN $3.5BN $2.0BN $2.5BN $0.0BN $0.5BN $4.0BN $1.0BN $1.5BN 2015, representing around 25% of all services 25% of services all around 2015, representing to March year the in billion over NZ$4 just at were valued services of business Imports of Australia. that than economy Zealand New of the part significant amore form imports to GDP, 2015. Relative to March services year the in of billion) services A$14 (approximately billion NZ$16 around imported Zealand New countries. to other exported be then can that services and specialise in higher-value services organisations can offshore lower-value advantage – for example, Australian 16 the lessee. According to the official statistical bureau, operational leases in New Zealand are usually for aircraft and oil rigs. oil and aircraft for usually are Zealand New in leases operational bureau, statistical official the to According lessee. the b 4: CHART of rate 6.4%. growth average annual an with strong, been has decade past over the growth of late, plateaued to have appear imports in dollar value. Although business services decline asignificant experiencing before 2009, in imports of total services ashare as business Offshoring servicesimports. peaked WHAT IS THE FUTURE FOR OFFSHORING? FOR FUTURE THE IS WHAT NEW ZEALAND NEW FROM SERVICES OFFSHORING Operating leasing services consist of renting out produced assets under agreement to provide the use of a tangible asset to to asset atangible of use the provide to agreement under assets produced out renting of consist services leasing Operating BUSINESS SERVICES IMPORTS TO NEW ZEALAND, 2000 TO 2014 (YEAR TO MARCH) TO (YEAR 2014 TO 2000 ZEALAND, NEW TO IMPORTS SERVICES BUSINESS 2000 Business services imports (LHS) (LHS) imports services Business
2001
2002
2003
2004
2005 Share of total services imports (RHS) imports services total of Share 2006
2007 services. offshore of efficiency and value the reduce greatly can barriers zone time and linguistic cultural, as important particularly are points latter These Zealand. to New proximity cultural and geographic to draw, also which but from labour of skilled pool larger amuch not only offers and Zealand, to New imports services of business source largest the is Australia • • • • business services imports: of over total 50% representing sectors four accounting, consulting, public relations), with legal, (including services by professional led is Australia, like in market, offshoring The operating services lease computer services 2014 in imports services of business 18% professional services technical services technical architectural, engineering, scientific and 10% 2008
2009
2010 – NZ$337 million, 8%. million, –NZ$337 2011 16% million, –NZ$626 14 – NZ$713 million, million, –NZ$713
2012 b – NZ$401 million, million, –NZ$401
2013
2014
30% 0% 5% 10% 15% 20% 25%
17 future[inc]
CHART 5: SOURCES OF BUSINESS SERVICES IMPORTS TO NEW ZEALAND, 2007 AND 201415
Australia United States European Union Singapore 2007 Hong Kong India China Philippines Other countries
2014
Since 2012, business services imports from OFFSHORING SERVICES Australia have declined, while those from PROVIDED BY NEW ZEALAND the United States have grown consistently New Zealand is also a significant services over this period. Countries that provide fewer services to New Zealand tend to have more exporter, being an offshore provider of erratic import figures, particularly those in services to other countries. In 2014, business Asia, though business services imports from services exports were valued at more than China have increased by more than 25% in NZ$2.4 billion, growing approximately 5.4% the past five years and now represent more per annum since 2000. While growth in than 4% of all offshored services. ICT services exports has been modest, research and development services exports The prominence of Australia and the United States is perhaps unsurprising, as, grew almost 8% per annum between 2000 contrary to popular belief, offshoring is not and 2014, and technical and trade-related simply a question of cost reduction, and services grew at almost 10% per annum. New organisations are progressively moving Zealand’s primary business services export away from an attitude of “cheaper is better”. destinations are the United States, Australia This reflects quality concerns and a growing and the European Union, though Singapore understanding that cost savings can be and Japan also represented important negated by language and cultural barriers. segments of the export market in 2014. 18 WHAT IS THE FUTURE FOR OFFSHORING?
MEGATRENDS: THE FACTORS DETERMINING THE FUTURE FOR OFFSHORING
Offshoring as a concept has already undergone GLOBALISATION a significant transformation, which will Globalisation represents the integration of continue in the future. To analyse how markets and economies around the world, offshoring in services might evolve over time, and the progressive reduction or removal of we look at four megatrends that have already barriers to allow business, trade, investment, had an impact on offshoring and will affect, labour and other resources to move more and in some cases significantly disrupt, it in freely across national borders. Globalisation the future: is not a new trend, with various waves of • globalisation globalisation having taken place in preceding • technology centuries with the emergence of international • economic development in Asia trade and capital markets. • domestic skill shortages and a global In recent decades, globalisation has labour market. accelerated, with an increase in free trade These megatrends are considered the agreements (FTAs) and regional integration.16 most important drivers of change over the For example, in the last year Australia has next 10 to 15 years and are likely to affect entered into FTAs with China, Korea and Australia and New Zealand alike. They are Japan, and is currently negotiating FTAs also interrelated – for example, technology with a number of other countries, including has enabled an increasingly global market India and Indonesia. New Zealand also has for labour. a number of FTAs that have come into force 19 future[inc]
over recent years, including with Taiwan, Hong The trade barriers which prevent the Kong, Malaysia and Singapore. offshoring of business services, can be quite different to tariffs, quotas and other The establishment of the Trans-Pacific more “traditional” barriers associated with Partnership (TPP) is another significant goods trade. The OECD’s Services Trade development. The TPP covers Australia, New Restrictiveness Index (STRI)18 identifies five Zealand and ten other Pacific nations including key types of barriers that can restrict trade the United States and Japan – collectively in services: restrictions on foreign entry, 40% of global GDP – making it the world’s restrictions to the movement of people, largest regional free trade agreement. The other discriminatory measures, barriers to agreement will open up export opportunities competition, and regulatory transparency. for Australia’s and New Zealand’s service sectors. This includes increased access Not all of these policy areas apply to the for universities and vocational education offshoring of business services, and some providers in TPP country markets. The barriers can have a larger impact on financial services, telecommunications and particular types of business services. For health sectors will also benefit from increased example, restrictions such as qualifications market access and a simplification of access and licensing requirements are relatively rules in TPP countries. high for trade/offshoring in legal and accounting services.19 Meanwhile, for trade/ Globalisation has resulted in significant offshoring of architecture and engineering opportunities and challenges within both services, discriminatory measures were countries. Increased global economic identified to be a significant factor, as integration has changed the competitive large-scale infrastructure projects are landscape faced by organisations, as often publicly funded and procurement they face new competition from overseas processes can involve discrimination against organisations in domestic markets, as well organisations where services are partially as enabling them to compete with overseas provided overseas.20 organisations in foreign markets. The fact that a sizeable share of Australian and New Globalisation has not only enabled organisations to engage in offshoring by Zealand economic activity is currently tied breaking down trade barriers and regulations, to international trade and investment flows but has also provided further motivation for suggests that both countries have largely organisations to offshore because of the benefited from globalisation, and this is impact on competition discussed above. In expected to continue as these international particular, “offshoring has been encouraged economic linkages grow stronger in the future. by global deregulation, reductions in Globalisation has not only allowed Australian international trade barriers, greater and New Zealand organisations to access worldwide competition, and risk mitigation new markets, but also to relocate or offshore specific business processes. By lowering barriers to trade, globalisation has facilitated THE INCREASING INTEGRATION OF increases in both production offshoring GLOBAL ECONOMIES and the (organisations relocating their manufacturing reduction in barriers to services trade processes overseas, such as Pacific Brands transferring its Australian manufacturing to will facilitate more offshoring of Asia in 200917) and services offshoring, which business services. is the focus of this paper. 20 WHAT IS THE FUTURE FOR OFFSHORING?
strategies based on diversification”.21 In to countries such as Brazil, Panama and the new globally competitive environment, Ecuador in the future. In particular these were the fact that Australian and New Zealand US organisations, as Latin America is closer to organisations can potentially reduce their them in terms of geographical distance and operational costs by offshoring service- time zone. related processes (as well as production processes) can be important in giving TECHNOLOGY organisations a competitive edge in their While globalisation has enabled organisations overall business strategy. to engage in offshoring by reducing barriers Looking forward, the reduction in barriers to to cross-border flows of business, trade, services trade and the ongoing negotiations investment and labour, it is the rapid of FTAs between Australia and New Zealand advancement in technology over recent years and the rest of the world will facilitate more that has made services offshoring a viable offshoring of business services. Deloitte’s and cost-effective business strategy for many Global Outsourcing Survey 2014 found that Australian and New Zealand organisations “future opportunities [for offshoring] exist – in much the same way that cheaper in areas with low levels of current offshore transportation costs made production service delivery”.22 In particular, the report offshoring viable. Importantly, however, unlike highlighted Latin America as a region where production offshoring, which is only an option offshoring activity is relatively low at present, for organisations with a manufacturing (or but where governments are supportive of similar) component, “service offshoring is a free trade and promoting English language transversal concept across sectors [and] does 24 support programmes to attract offshoring not involve one particular sector only”. service providers. Around 20–35% of global Information, instructions and outputs can organisations surveyed stated that they be conveyed electronically, allowing for more are planning or would consider offshoring timely interactions and almost instantaneous
CHART 6: GLOBAL OFFSHORING LOCATIONS23
INDIA UNITED STATES CHINA POLAND PHILIPPINES MEXICO BRAZIL MALAYSIA SOUTH AFRICA GUATEMALA ECUADOR PANAMA ICELAND NICARAGUA
0% 20% 40% 60% 80% 100%
Already there Planning to go or would consider 21 future[inc]
Developments in enterprise mobility, big data, hosted virtual desktop, business process as a service and cloud computing will IMPACT UPON ORGANISATIONS’ OFFSHORING DECISIONS.
delivery of the required materials. Further Many of these are new technologies that advancements have provided organisations organisations have only just begun to adopt in with a variety of efficient and convenient their operations. The wider adoption of these methods to increase connectivity across technological advancements will create new geographies. In a connected world, “any work opportunities for offshoring by both large that can be done on computers can be done and small organisations across Australia and anywhere in the world”.25 Developments such New Zealand. Cloud-based computing and as document management systems and products in particular have the potential to integrated development environments are be embedded across the scope of services also making it significantly easier to manage a offered by many organisations across a globally distributed workforce.26 wide range of industries, and this could In the future, technological developments will significantly impact upon future offshoring continue to impact upon Australian and New decisions. Chart 7 shows the percentage of Zealand organisations’ offshoring decisions. organisations that are more likely to outsource Over 50% of organisations have indicated as a result of cloud-based computing and that developments in enterprise mobility, other technological developments. big data, hosted virtual desktop, business Furthermore, new digital technologies are process as a service, and cloud computing opening up new roles and operations which 27 will increase outsourcing [in the future]”. can be performed offshore. Examples include
CHART 7: IMPACT OF TECHNOLOGICAL DEVELOPMENTS ON FUTURE OUTSOURCING DECISIONS28
80%
70%
60%
50%
40%
30%
20%
10%
0% Business process Hosted virtual Cloud computing Big data Enterprise mobility as a service desktop 22 WHAT IS THE FUTURE FOR OFFSHORING?
the increase in demand for data analytics changing. IT powerhouse India is capitalising capabilities amid growing interest in “big data”, on higher skills levels to expand into more as well as the use of digital marketing for complex business process outsourcing (BPO), connecting and transacting with a wider range while expanding traditional IT offerings to of customers. These functions have emerged include complex R&D. This trend is not confined as technological advancements enable to India either, with wage growth reducing the organisations to engage with information cost savings of offshoring business services and communications technology in new ways. in several Asian economies (especially China) Several organisations have begun to offshore and elsewhere, such as Brazil. at least some of these operations, and over the While new low-cost opportunities have coming years these functions could represent emerged with more recent entrants to the significant areas of future growth in offshoring. offshoring market, such as Bangladesh and The interaction between globalisation and Indonesia, service providers in India and China technological advancements has been are not homogenous, and higher wages are important in facilitating the offshoring of not a universal reality. Moreover, higher wages business services globally: “Globalisation do not necessarily mean fewer opportunities has been made possible largely as a result for service providers. In countries like of developments in technologies. At the Malaysia, business service providers offer same time, closer integration fostered by highly skilled employees in a politically stable, globalisation and the increased importance multilingual environment, which appeals to of innovation as a result of global competition more risk-averse organisations. has led to significant technological The development of Asian economies, and breakthroughs.”29 Given that greater global consequently the development of business economic integration and further technological services export sectors, has a number of advancement is expected in the future, important implications for offshoring. this interaction could become increasingly important in driving offshoring trends. • With higher rates of education, and higher levels of attainment, the scope ECONOMIC DEVELOPMENT and complexity of tasks that may be outsourced increases. IN ASIA • The quality of output increases, Over the last two decades, emerging narrowing the professionalism gap economies in Asia have been a major driver between developed and developing of global economic growth, led by China, nations. A 2014 survey found that where annual output growth averaged 9% “professionalism” was the primary between 2000 and 2013. China’s growth consideration in choice of offshore in turn lifted the economies of many other service provider,30 and Asia’s economic neighbouring nations through increased development is crucial to forming a investment, as well as demand for goods, modern and professional business culture. services, minerals and agricultural products. • As service providers (and countries) Much of this growth has been due to rapid position themselves at distinct points on industrialisation, and the broader trend the value chain, organisations have the in countries like China and India is one of option of dividing functions among service urbanisation as rapid income growth and job providers according to their competitive opportunities attract people to the cities. advantage. With rising economic development comes A more indirect impact of economic higher wages, and for several Asian development in Asia is a shift in the types economies their place in the value chain is of products sought by these emerging 23 future[inc]
expansion of organisations from Australia FIGURE 8: EVOLVING ECONOMIES PRESENT OPPORTUNITIES FOR MULTI-LOCATION OFFSHORING and New Zealand, if they are to successfully capture this enormous opportunity. Not only does offshoring provide a unique means of EMERGING extending an organisation’s global footprint OFFSHORE through foreign affiliates and subsidiaries, Non-core, basic functions: high volume, commoditised but outsourcing peripheral tasks also operations facilitates rapid business expansion by allowing organisations to focus on core MATURE OFFSHORE processes. The same survey referenced Non-core, complex above found that almost two-thirds functions: knowledge of respondents’ decisions to use more process outsourcing affordable employees overseas was based OFFSHORE on a desire to expand their overall team. Core functions: those that are highly complex, strategic DOMESTIC SKILLS SHORTAGES or require high AND A GLOBAL LABOUR MARKET levels of security Not all offshoring is to low-cost destinations, and can often be driven by domestic skills shortages. As discussed earlier, Australia and economies. In recent years, rapid population New Zealand both outsource a substantial growth, urbanisation and industrialisation proportion of business services to the United have underpinned unprecedented demand States, and Australia itself is the largest in Asia for the products of primary industries offshore provider of business services to in Australia and New Zealand. While demand New Zealand. For smaller countries, this for agricultural and mineral resources will can often be driven by a desire to increase continue to grow, as Asian economies mature the quality of output by drawing on services their demand for high-quality services will from countries with larger skilled workforces. expand more rapidly. This will be driven However, it can also be the case that in large in part by the growth of more mature countries, smaller organisations struggle to businesses, but will also be supported by a compete with industry leaders for talent, and burgeoning middle class expected to reach must look elsewhere. 31 3.2 billion people by 2030. Within emerging economies, particularly in While this is ostensibly an opportunity for high-growth regions like South East Asia, services exports to Asia, business services rapid economic development has brought with imports will play a fundamental role in the it a new generation of highly educated, young
Rapid economic development in emerging economies has brought with it a NEW GENERATION OF HIGHLY EDUCATED, YOUNG EMPLOYEES. Through offshoring, they can help fill skills shortages in developed nations. 24 WHAT IS THE FUTURE FOR OFFSHORING?
employees. Increasingly, where skills shortages investment in fixed capital, followed by exist in developed nations, organisations are employment of a workforce proximate to that turning to offshore solutions.32 capital investment. Increases in technical skills and professionalism, However, the nature of work being offshored as well as the internationalisation of professional is changing, and as fixed capital (plant and qualifications and software platforms, have equipment) becomes less relevant, the also allowed organisations to offshore core and market for labour becomes global. That is, more complex functions. The rise of knowledge jobs are no longer located either in Australia process outsourcing has been largely driven by or India; instead, the task is located in this increasing supply of highly qualified labour Australia, and the labour used to complete in offshore locations, and this trend is expected that task may come from anywhere. to continue as technological literacy grows in This shift will likely continue to gain emerging economies and access to education momentum, aided in particular by two increases further. primary forces. The first is the rise of freelance Perhaps the most significant trend in offshoring offshore employees. Freelance platform in recent years is a movement away from Upwork now claims to have nine million the term itself, and toward a more nuanced registered freelancers, servicing four million understanding of the modern workforce. registered clients,33 with 60% of hours worked Offshoring as a concept often engenders in BPO.34 Given this growth, will we now see thoughts of jobs that once “belonged” to the the next generation of graduates choosing domestic economy being moved overseas. to work as freelancers rather than for large This may once have been appropriate when organisations? Second, the automation the types of work being moved overseas were of tasks will greatly reduce the focus on manufacturing tasks that required significant location. While basic automation is nothing new, rapid increases in computing power and automation possibilities are dramatically As fixed capital becomes less changing the nature of work that machines relevant, the market for labour can perform. In the short term, however, this becomes global. THE LABOUR trend will struggle with human acceptance of technological capabilities, and the significant USED TO COMPLETE TASKS MAY initial investments required. These forces COME FROM ANYWHERE. potentially represent a major disruption to the existing offshoring service model. 25 future[inc]
THE KEY ISSUES DETERMINING OFFSHORING SUCCESS IN THE FUTURE
Recognising the increasing importance of RECOGNISING THE DIVERSE offshoring in services, a number of key issues RANGE OF BENEFITS have arisen during our consultations with The benefits from offshoring continue industry and wider research. These issues will to move away from pure cost savings. determine offshoring success in the future, Offshoring can enable organisations to as the business case for offshoring continues operate more effectively. Future benefits to change and offshored functions become include access to a more diverse range of more complex. Key issues noted during consultations include: skills, movement to higher value-add work onshore, and onshore employee retention. • recognising the diverse range of benefits • preparing and getting buy-in LOWER COSTS AND • dealing with risks and challenges COMPETITIVE PRESSURES • finding the right offshoring model Consultation with industry suggests that one of the primary motivations when • finding the right location organisations are beginning to consider • planning for the future. whether to move particular functions While offshoring of services has never or processes offshore is the lower costs been easier, it is not necessarily a sure-fire associated with offshoring. Competitive recipe for success. Planning for offshoring pressures such as increased competition – now and in the future – is important, from overseas organisations entering especially as Australian and New Zealand domestic markets, or smaller client and services organisations tend to be behind customer bases in the aftermath of the their international counterparts in making Global Financial Crisis, have motivated offshoring part of their business model. organisations to look towards cost-cutting 26 WHAT IS THE FUTURE FOR OFFSHORING?
measures as a means of maintaining profits. – niche IT skills such as specialised technical Furthermore, as offshoring has become a developers was one area where this benefit business strategy that is widely employed was viewed as being particularly important. across various sectors, some organisations Therefore, the quality of the work performed have adopted offshoring practices simply in the offshore centre would be better. More to be able to compete with others in generally, any skills shortages experienced their industry. by organisations onshore can potentially be mitigated by using offshore employees, who In moving functions offshore, Australian and are becoming increasingly qualified. This New Zealand organisations generally report motivation could become more important labour cost savings of between one-half in the future as domestic labour markets to one-third across a range of business become tighter with increasing baby boomer functions, including both back-office and retirements, while offshore locations offer an (easily commoditised) front-office tasks. Some increasing supply of high-quality labour. organisations choose to pass these savings on to customers or clients in order to offer more competitive prices and increase market share, while others have opted to maintain their As domestic labour markets become tighter prices and secure larger margins. with increasing baby boomer retirements, Given that many industries continue to be offshore locations offer A DIVERSE AND disrupted by new and increasing competitive INCREASING SUPPLY OF HIGH-QUALITY forces – such as the emergence of online sources of competition – this cost saving LABOUR AND SPECIALIST SKILLS. benefit will remain an important motivator for offshoring in the future. At the same time, the potential cost savings associated with moving The second benefit associated with being services offshore could decrease in the future able to access more employees is that it as rising economic growth in the developing provides organisations with a degree of countries traditionally chosen as offshoring workforce flexibility that would be difficult locations drives higher wages across the to achieve in-house. Offshore employees labour market. These trends could have that are hired on a flexible basis can allow significant implications for organisations’ organisations to employ a core team of motivations in offshoring services with onshore employees to handle the expected respect to the drivers of cost savings and or regular workflow while still ensuring competitive pressures. that the organisation has capacity to take on additional work during busy periods. ACCESS TO A DIVERSE POOL OF In some cases, the agility and flexibility SKILLED EMPLOYEES provided by having an offshore team enables The other key motivation that Australian organisations to engage in large projects and New Zealand organisations have for that otherwise would not be achievable with offshoring is the ability to access a larger the onshore team alone, because of the and more diverse pool of skilled employees requirement to be able to scale up quickly. to overcome domestic skills shortages. The Offshoring can provide an efficient staffing benefits associated with this are two-fold. model that allows organisations to have Firstly, it allows organisations to employ onshore employees to manage continuous specialist knowledge and resources that workflow while still retaining the flexibility to might not have been available domestically deal with the peaks. 27 future[inc]
MOVEMENT TO HIGHER VALUE-ADD PREPARING AND GETTING BUY-IN WORK AND ONSHORE EMPLOYEE As offshored functions are quickly becoming a RETENTION more significant part of day-to-day operations Another benefit that organisations report is in many organisations, long-term commitment that by offshoring basic routine tasks such as and buy-in are critical for success. While a low-level data processing and information broader and more mature range of offshoring gathering, onshore employees are able options and technological advancements to move to higher value-add tasks, such make offshoring easier, good preparation, as higher-level analysis or engaging more a clear strategy, and continuous review and with current and potential new clients and recalibration will be even more important in customers. This may be particularly beneficial the future. Success is not guaranteed. for smaller organisations, where the domestic time savings generated by offshoring TEAM SUPPORT AND COMMITMENT particular tasks can have a greater impact on Having the support and commitment of the resourcing capacity of the organisation as domestic employees within the organisation a whole. is important for offshoring to become part of This outcome also benefits domestic a long-term business strategy. While this is employees, with organisations reporting applicable to employees across all levels of the that onshore employees generally have little organisation, the support of the leadership interest in working on the basic routine tasks team is particularly critical to ensure the quick that are commonly offshored. As offshoring and smooth implementation of any offshoring these tasks can allow junior employees to strategy. Industry consultations suggest that be fast-tracked up to higher-level work, in organisations where offshoring has been consultations indicate this often leads to developed organically across an organisation an improvement in employee retention. (rather than being mandated), business Onshore employees are not only able to work functions aligned to senior executives who on tasks that they view as more interesting, were more supportive of offshoring and but there could also be opportunities for more engaged in the process tended to have faster career progression from a graduate greater success in setting up an offshoring level in certain industries – particularly unit compared to those that were not. if these junior employees take a role in managing the offshore team. In doing so, it is important that the domestic team continues The COMMITMENT AND SUPPORT to maintain some capabilities in the tasks of the senior leadership team will be being offshored, so that they are able to understand and manage the work that is an important factor in determining sent back from offshore. the success of offshoring ventures. 28 WHAT IS THE FUTURE FOR OFFSHORING?
As an organisation’s senior leadership PROCESSES AND QUALITY CONTROL determines the strategic direction of It is essential that in preparing to offshore, offshoring decisions, it is essential that they organisations have the right systems and are committed to the entire process to processes already in place. Generally, ensure an efficient and effective transition organisations reported that any inherent between onshore and offshore operations. problems within their internal processes Aversion to change or a low appetite for were not solved by offshoring – the same risk within the senior management team issues were experienced by the offshore can be significant hurdles to overcome team and these were reflected in the work when offshoring. Conversely, having that was sent back to the onshore office. Any senior executives that are motivated to tasks or processes that are sent to be done use offshoring to achieve other strategic offshore need to be clearly mapped out by the outcomes (such as shifting to a more domestic team, with instructions provided to customer-centric model) can help to the offshore team. One example highlighted drive the implementation of an offshoring by industry was of organisations looking to strategy. In the future, as the number offshore particular functions shortly after and complexity of tasks moving offshore significant merger and acquisition activity. increases, the commitment and support These organisations tended to have greater of the senior leadership team will be an difficulties with offshoring because their important factor in determining the success operations had not been properly consolidated of offshoring ventures. Strategic planning at and organised before moving them offshore. the high level with a long-term framework Even once these business processes have in mind can help to mitigate future risks and been streamlined and communicated to the challenges that could arise. offshore team, it is important when preparing A common perception surrounding offshoring an offshoring strategy that quality control in both Australia and New Zealand is that standards and procedures are implemented it involves “sending local jobs offshore”. It is internally to ensure that the work received therefore important that when preparing from offshore is of sufficient quality. This is to implement an offshoring strategy, particularly important for organisations just organisations keep their employees informed starting to offshore, as they work to build on the process – the purpose of offshoring, an understanding of expected standards how it will happen and the role of domestic with the offshore team. A number of employees in the future model – and organisations that were consulted had only discuss their concerns and perceptions on decided to expand their offshore operations offshoring. In general, organisations reported once quality standards had been assessed that offshoring did not result in reducing as being adequate following the initial existing employee numbers onshore. While move offshore. As a number of countries in some cases future hiring was reduced after moving functions offshore, the purpose of offshoring was primarily to add to the It is important when preparing resourcing capacity of the organisation an offshoring strategy that rather than relocating entire units overseas. QUALITY CONTROL STANDARDS Communicating these intentions to the broader workforce in a clear and timely AND PROCEDURES are manner can help to allay some of the implemented internally. common concerns surrounding offshoring. 29 future[inc]
are now becoming established centres for and the Philippines, employee turnover can business and knowledge process offshoring, be higher due to a more competitive labour organisations looking to offshore in the market. A number of organisations noted that future may be more confident in their ability turnover is particularly an issue in large cities, to source appropriately skilled employees in where demand for quality employees is high. these offshore locations, enabling more rapid Economic development in Asia could see expansion of offshoring operations. employee retention become an increasing challenge in the future. Although there is a DEALING WITH RISKS growing supply of high-quality labour, the AND CHALLENGES competition for talent increases as more Traditional risks and challenges to offshoring organisations choose to offshore more have included regulatory concerns and complex business functions. Offering higher cultural differences, but new issues are pay is not the only way to attract and retain emerging that will need addressing in the offshore talent. Other factors such as an future, such as retaining offshore employees inclusive culture, employee engagement in an increasingly competitive environment and diverse career paths are also key and offshoring more complex tasks. considerations. Solutions could include rotating people across processes and tasks, RETAINING OFFSHORE EMPLOYEES or allowing them to do higher-level work Employee retention overseas was highlighted that is more technical or analytical as they by a number of organisations as a challenge advance through their careers. One example associated with offshoring. One reason for of this is having offshore employees who this is that the tasks being sent offshore are have built some experience in processing typically low-end jobs that can be repetitive or data move onto analysing the data to draw not very interesting. While some organisations out relevant insights. This also benefits the have found that offshore employees can organisation as the offshoring team offers be more willing to specialise in such areas more value in the tasks performed. compared to their employees in Australia and New Zealand, in general the key to retaining REGULATORY CONCERNS AND RISKS offshore employees is ensuring that people The regulatory framework in offshore have diversity in their work and can progress locations can have a significant impact on their careers over time. offshoring decisions. Regulatory risks are a Another relevant issue is increasing concern – both in countries that have poor competition between organisations for regulatory frameworks, and those where the quality or specialist offshore employees in government does not enforce the regulations particular locations. In established centres for that are in place. This was viewed as an issue offshoring, where many international services not just because of the difficulties associated organisations are represented, such as India with offshoring in a country with a poor regulatory framework, but also because of the potential impact on customer and client perceptions. Organisations generally The key to retaining offshore employees deal with these regulatory risks by choosing is ensuring that PEOPLE HAVE not to offshore in countries where there are concerns surrounding the regulatory DIVERSITY IN THEIR WORK and can framework – even if it would make sense progress their careers over time. to have an offshore presence there in the context of the organisation’s capabilities. 30 WHAT IS THE FUTURE FOR OFFSHORING?
In addition, some organisations have used offshore employees that come from a more previous experiences in other countries (for “literal” culture). example, setting up an office in an overseas Cultural understanding differs based on the location or early experiences with offshoring offshore location, but is important in ensuring to particular locations through third-party that offshore employees are integrated with providers) to assess the potential regulatory the onshore team – particularly in the future, challenges that could arise when offshoring in as offshoring tasks become more integrated. a particular destination. Cultural differences can be bridged through One particular regulatory concern that could cross-office interactions such as visits have an increasing impact in the future is between the offshore and onshore teams a country’s privacy laws and standards. and offices. As organisations become more Industry consultations suggest that in some experienced in offshoring, they offer cultural countries, the standards surrounding privacy training programmes to educate offshore mean that the government is legally able teams in Australian and New Zealand culture, to access client and other information of though there was a lack of examples of the organisations with offshore operations in reverse (onshore teams being trained in the that jurisdiction. This could apply even if culture of the offshore country). an organisation is only using IT services, such cloud technology or automation In general, it appears that cultural differences services, hosted in the jurisdiction. This then are a challenge that can be overcome raises concerns regarding whether data through education and frequent engagement security and information confidentiality, between offshore and onshore employees; including domestic laws and regulations, however, the concern is that organisations might be compromised. Given that global often underestimate the costs and time interconnectivity is expected to increase and required to do so. Cultural differences the use of cloud computing and automation should be addressed by promoting mutual is on the rise, these privacy concerns could understanding between onshore and become a more critical risk factor in the future offshore teams, rather than seeking to when organisations decide on where to locate impose the onshore culture on the offshore their offshore operations. office (both with respect to social and work culture). A number of organisations consulted CULTURAL DIFFERENCES with raised the idea of using compromise to One challenge that organisations suggested get around cultural differences, and being was generally underestimated by those looking flexible enough to adapt business processes to offshore is that cultural differences can to suit the offshore team’s culture. be a large barrier to a successful offshoring strategy if they are not addressed. These differences include interpretations of local Cultural differences should be language, and Australian or New Zealand addressed by PROMOTING MUTUAL slang words that are not used elsewhere, as well as verbal tones and cues that can get UNDERSTANDING between onshore lost in translation across different cultures (for and offshore teams. example, a misunderstanding of sarcasm by 31 future[inc]
FINDING THE RIGHT challenge for those considering offshore OFFSHORING MODEL outsourcing. Outsourcing core competencies, or those business functions that handle Offshoring strategies are numerous and confidential or sensitive information, can lead varied, with each presenting its own set of an organisation to lose depth of capability advantages and challenges. Organisations and data security. should understand that there is no “silver bullet”. The most appropriate offshoring OFFSHORE OUTSOURCING model will be unique to an organisation’s Outsourcing as an offshore solution has current and future needs and the environment grown in popularity since the 2000s. The it operates in. While some organisations will offshore outsourcing industry is enormous continue to move towards an outsourcing and dominated by major offshore service model as they become more experienced in providers (such as IBM, Accenture and Tata) offshoring, others may back away from such a and major offshore destinations (such as model, instead reincorporating newly captive the US, India or the Philippines). For instance, functions to be part of their core business. India’s National Association of Software CAPTIVE OFFSHORE and Service Companies estimates that offshore IT, BPO and contact centre work While offshoring as a concept is often thought now accounts for 25% of India’s exports, with of as a rather homogenous collection of offshore outsourcing popular due to its lower strategies, the reality is quite the opposite. investment costs and flexible options. Offshoring strategies are both numerous and varied, each presenting its own set of While some organisations remain concerned advantages and challenges. about quality and risk, providers have become more advanced in addressing such One model used by organisations who wish to concerns (such as through onshore tests). retain control over their offshore operations, Success often has more to do with building is captive offshore centres, which are owned partnerships with the offshore service and operated by the organisation onshore. provider and its employees. Organisations These centres need not operate merely as an cannot assume that it is a “set and forget” offshore office that services the organisation situation, and must invest in the relationship, onshore, but can instead operate as a align employee and organisation incentives, self-contained office servicing a market and provide training where appropriate (such overseas while also performing work for the as cultural training for contact centres). organisation onshore. For those with overseas offices, this can be a way to: One of the primary advantages of engaging • build overflow capacity in offshore locations an offshore third party is the flexibility it provides, and the increasing quality of service • test the offshoring waters using an in- driven by competition between providers. house model, and This flexibility can be dramatically reduced • encourage a modern business model where as switching costs increase, and yet without work can be packaged, and performed by investment in training and relationship building, anyone with the right set of skills. organisations onshore cannot expect to reap While many early players in the offshore the full benefits of offshore outsourcing. market established captive offshore models Consultations suggest that it can take time, in places like India, some have since sold and extensive engagement with service those offices to third parties and hired back providers to ensure that they understand the services on a contract basis. However, onshore requirements, and can therefore add a recent trend of returning key functions real value by proposing new capabilities rather to captive offshore sites reveals a future than merely meeting demands. 32 WHAT IS THE FUTURE FOR OFFSHORING?
Consultations have also revealed that outsourcing contracts can require careful SIGNIFICANT INVESTMENT in offshore capacity monitoring due to the risk of perverse now may not be appropriate if automation incentives. For example, in a well-established outsourcing relationship, where benchmarks combined with onshore capacity will be sufficient are revised based on previous performance, within a ten-year timeframe. service levels may plateau as providers seek to avoid having their targets revised upwards. easier as freelancing grows in popularity, FREELANCE OFFSHORE EMPLOYEES and perceptions of freelancers evolve from A more recent trend in outsourced offshoring temporary staff at small enterprises, to is that of freelancing. Freelancers provide strategic hires for large organisations. a low-cost, small-scale alternative to more traditional outsourced offshoring, and allow FINDING THE RIGHT MODEL organisations to take advantage of talent from As there is not one model that suits all types a wider range of locations without long-term of organisations, choosing the most suitable contracts and start-up expenses. Freelance model is about working out the strengths platforms such as Upwork and Work Market and weaknesses, leveraging existing assets allow organisations to link with freelancers (such as offshore offices) and doing the in higher-risk locations such as Pakistan and research. Regular reviews of offshoring Ukraine, without having to make significant arrangements are also an important part of any successful strategy. Reviews should investment in those locations. be implemented to ensure targets are being The future of freelancing is undoubtedly bright met, and relevant relationships are being within developed economies such as the managed effectively. Consultations indicate United States, where the industry derives a lot that cultural differences in certain offshore of strength from the supply side, as modern locations can often lead to overwhelmingly employees increasingly expect more control positive performance reviews that do not over how and when they work. In the world of reflect reality, and this may necessitate more offshoring, the future is less certain, though rigorous review processes. the potential is enormous. The combination At the same time, organisations need to of freelancer platforms, and co-working be aware of their long-term strategy. For space providers such as WeWork, may create instance, significant investment in offshore collaborative workplaces where individuals capacity now may not be appropriate may use their skills for overseas clients. if automation combined with onshore Domestic organisations can therefore access capacity will be sufficient within a ten-year offshore talent without cumbersome service timeframe. Offshoring also poses the danger level agreements or significant investment in of important skills being lost in the onshore high-risk locations. This transition will be made office, so it is essential that organisations
FREELANCERS PROVIDE A LOW-COST, SMALL-SCALE ALTERNATIVE to more traditional outsourced offshoring that allows organisations to take advantage of talent from a wider range of locations without long-term contracts and start-up expenses. 33 future[inc]
identify what should be retained in-house. low-cost labour may require additional Overall, it is important that organisations supervision. This may simply require external continuously review and recalibrate their service providers to manage and report on model to ensure it remains appropriate. operations overseas, or it may also require the relocation of onshore management. FINDING THE RIGHT LOCATION These costs tend to increase with cultural With an increasing range of potential and language barriers, and consultation offshoring locations to choose from, with industry has revealed a preference for organisations will find it easier to diversify countries with a strong tradition of English their offshoring networks and tap into language education, and use of English in different capabilities and skills across government, such as India and the Philippines. geographies. It is critical to understand Additionally, instability in the location’s foreign the different types of future benefits that currency may make it harder to forecast the different locations can provide. expected cost savings, particularly in the short to medium term. UNDERSTANDING THE SKILLS NEEDED Beyond these more obvious concerns, Rapid economic development in emerging consultations have shed light on more subtle economies, as well as the proliferation of anxieties. Relevant experiences include a desire offshore service providers, has dramatically to avoid jurisdictions where client information increased the diversity of offshore locations. may be compulsorily obtained under national As with finding the right offshoring model, security legislation (including the United States), finding the right location is far from as well as those jurisdictions where closing straightforward. offshore operations can lead to lengthy legal At the heart of offshoring is a desire to battles with overseas authorities. In the coming realise efficiencies, such as in the recruitment years, as new offshore destinations emerge, process or labour rates. On the surface, this and mature markets seek to differentiate can appear to be a rather simple process. themselves, operating environments and Developed nations offer skilled employees regulation are likely to become more business- in stable political environments, and in some friendly, and the cost of operation in unfamiliar places, such as “tier 2” cities in the United markets will come down. However, unlike States, this labour force can often prove corruption, political instability or inefficient more affordable than in local markets. regulations – which tend to decrease with Equally, developing nations have in recent economic development – invasive national years experienced strong growth in both security legislation remains a feature of even rates of education and levels of attainment. the most advanced democracies. Along with strong overall economic growth, this has produced enormous pools of skilled employees in modern cities all over the world. However, unlike corruption, political BEWARE THE HIDDEN COSTS instability or inefficient regulations – It is important that organisations look which tend to decrease with economic beyond simply lower wages when making development – INVASIVE NATIONAL decisions about the location. Each offshore SECURITY LEGISLATION remains a location carries with it additional costs in much the same way that onshore operations feature of even the most advanced require overhead expenditure. As well democracies. as infrastructure and regulatory costs, 34 WHAT IS THE FUTURE FOR OFFSHORING?
Understanding these potential costs is an expressed concern regarding the quality important step in finding the right offshore of English language education. This is less location, and there are many ways of of an issue in countries like the Philippines, mitigating risk. Partnering with organisations where many organisations now have contact overseas, whether as external service centre operations. The Philippines, among providers or as part of a joint venture, has others, has also benefited from concerted been regularly noted as a successful strategy government efforts to promote the BPO by providing an on-the-ground understanding sector and insulate it from risks such as of political and legal systems. endemic corruption, by establishing the Philippine Economic Zone Authority. In selecting the right offshore location, however, it is important to be aware of the hidden Importantly, offshoring is not limited to benefits as well. By maintaining offshore emerging economies or low-cost destinations, operations in overseas markets, organisations and the prominence of the business services often gain both a deeper understanding of trade between Australia, New Zealand and those markets, their drivers and opportunities, the United States is evidence of the success and exposure to industry players. Such that can be achieved through offshoring work understanding can be useful in later efforts to to traditionally high-cost jurisdictions. expand into those markets, and this potential The diversity of offshoring locations will only upside is a worthwhile consideration when continue to increase in the future, making it selecting an offshore destination. even more important for organisations to understand why they choose offshoring and CURRENT AND FUTURE OFFSHORING LOCATIONS what they want from an offshoring location (be it low labour costs, particular technical In the early days of offshoring, many large skills, language capabilities or a low-risk organisations established a presence in business and legal environment). Asia. Since then, offshoring has grown to become such a significant part of many Asian PLANNING FOR THE FUTURE economies that the region now dominates the global offshoring market, offering a variety of Offshoring as a business proposition value propositions. is undergoing rapid change, and many organisations are unsure what the services India is regularly described as the most sector will look like in ten years – making desirable offshoring location, with particular planning for the future challenging. At the expertise in IT, BPO and contact centre same time, new technology trends such operations. As major Indian cities have as automation will disrupt the offshoring developed around the industry, so too have model itself. the services evolved. Service providers that once offered skills in basic, commoditised AUTOMATION tasks are now providing complex IT services, Planning for the future of offshoring is bundled BPO services and even R&D. difficult. The offshoring industry is moving at China, which has more recently emerged a remarkable pace, and this will only increase as a desirable offshoring location, is fast as technology continues to facilitate new developing a reputation in the IT sector, offshoring models and reduce the significance though wages are in some cases rising faster of geographic boundaries. than in competitor nations. Elsewhere in Perhaps the most significant shift in offshoring Asia, Thailand and Indonesia have gained over the coming years will be the movement popularity due to their large, well-educated toward automation of operations.35 Already, populations, although organisations sectors such as finance in which highly skilled 35 future[inc]
roles also require employees to complete • consultations suggest that organisations small, time-consuming tasks, are looking to onshore are increasingly looking to offshore robotic solutions to increase time spent on service providers to introduce organisations high-value activities. to the potential of automation and facilitate that development. However, this trend is not limited to basic • automation may reduce dependence tasks. Already, software is available that in on offshore headcount, as organisations 15 minutes can perform tasks that previously look to automatic problem detection occupied urban planning and engineering and basic trouble-shooting, lessening professionals for weeks. By drawing the need for contact centre and problem on enormous databases, and learning resolution employees. from results, computers are performing Chart 9 illustrates the expected rise of increasingly complex tasks with ease. automation. In the 1990s, emerging offshore This trend is not important for offshoring markets began as captive centres for because it necessarily involves payment to the completion of basic tasks in low-cost an overseas software provider; rather it is destinations. In the 2000s, the arrival of high- important because: quality offshore service providers heralded • it will radically alter the way in which the advent of complex task offshoring, and offshoring is used, and offshore service the quality and scale of this work has only providers will be forced to improve their increased since then. Automation is now value proposition as low-level tasks slowly gaining acceptance as an alternative become automated to labour, and though the complexity of
CHART 9: THE RISE OF AUTOMATION
MATURE OFFSHORE COMPLEXITY OF WORK
EMERGING OFFSHORE AUTOMATION
Pre-2000 2000s Now 36 WHAT IS THE FUTURE FOR OFFSHORING?
tasks remains low, it is expected that this will The second is that over time and with rise quickly. increasing skills levels, career consideration Automation is not, however, an immediate or given to offshore employees becomes panacean solution. Just as with offshoring, increasingly important. While contractors organisations will be hesitant to make may not require such career development, significant investments. This is especially a permanent staffing model requires true of high-cost software, which renders training and options for career progression. organisations beholden to technology Industry accounts reveal that offering career providers. Despite this, an understanding pathways, and treating offshore employees of robotic process automation is an with the same respect afforded to onshore important part of forward looking analysis. employees, increases employee engagement, Organisations must ask how automation will reduces turnover, and in turn increases the play a role in future operations, how it might quality of output. reduce or change their reliance on offshore Another aspect that will be important in the operations, and whether offshore capacity future is that as the basic or lower value-add will be a useful or necessary complement. tasks are offshored (or indeed automated), the onshore career ladder for new graduates HUMAN CAPITAL will be missing the bottom rungs. Graduates In a similar vein is the need for organisations will be expected to start at a different level to manage the impact of offshoring (and or have different skillsets, such as high levels indeed, automation) on their human capital. of reasoning, judgement and strong creative The search for wage-cost savings can and collaboration skills.36 These structural often lead to the sacrifice of employees’ changes will have a profound implication for development, and organisations need to be services organisations as well as the tertiary aware of what they could lose in the process. education sector. Universities will need Consultation with industry revealed that to review their curriculum to ensure they many organisations with offshore operations are preparing graduates for future roles. tended to lack long-term plans for offshore Without change, they could be preparing employees. This raises two key issues. The graduates for entry level jobs that no longer first is that in high competition regions such exist or that will require different skillsets. as the Philippines, employee turnover rates Organisations also have a role to play are often unattractive due to the lack of working with the education sector around investment in employee retention. This can the skillsets they are looking for and the jobs lead to significant expense. they have to fill. 37 future[inc]
CONCLUSION
While it was traditionally about cost cutting of the existing workforce and by enabling of distinct back-office functions, offshoring organisations from Australia and New has become far more complex and its use Zealand to be internationally competitive. continues to evolve. Many offshored functions It can provide organisations with the ability are becoming fully integrated into an to circumvent domestic constraints and drive organisation’s operating model and thus have future organisational growth. impacts that extend well beyond the services However, despite the range of potential traded. In a sense, offshoring is similar to opportunities that offshoring offers, the use of digital technology. While digital success is not guaranteed, and offshoring technology used to be a distinct offering, it requires significant preparation, investment has now become part of normal business and long-term commitment. Organisations practices. As a result, offshoring is likely to in Australia and New Zealand need to have an increasingly significant impact on carefully consider if and how offshoring Australian and New Zealand organisations can fit into their future business strategies in the future. But more than that, it can also as they strive to lift their productivity have an impact on the economic future of and, in turn, lift the productivity of both Australia and New Zealand. nations. For instance, significant investment Offshoring in services can play a key role in in offshore capacity now may not be addressing future productivity challenges appropriate if automation combined with by enabling organisations to operate more onshore capacity will be sufficient within a efficiently, by maximising the value-add ten-year timeframe. 38 WHAT IS THE FUTURE FOR OFFSHORING?
Offshoring also requires buy-in from onshore become increasingly capable of integrating employees and acceptance by clients, complex functions performed overseas, as and – though becoming more widespread well as negotiating cultural differences and across many services organisations – public managing regulatory risks. perception is lagging behind and often Demand will also increase as offshoring focused on the cost cutting element alone. continues to spread to all types of service Therefore, better communication of how industries, and not merely professional, offshoring is being used and integrated technical and computer services. However, in Australian and New Zealand services there is still significant scope for growth as it is organisations is important. Offshoring will not yet fully utilised across the whole services undoubtedly become more widespread sector. In part, this may be because it requires as more of the benefits are realised and significant investment and commitment, competitive pressures provide increasing which may not be a winning strategy in all motivation to offshore business functions cases. However, it may also be that in some where it is more efficient to do so. services areas, such as education and health, There are a number of supply-side trends it is still less accepted or understood as an that will influence offshoring as a business option, and thus opportunities for productivity proposition in the future. For instance, improvements may be missed. Automation higher education levels in Asian countries, will disrupt offshoring further, with tasks as well as their increasing experience in currently offshored having the potential working with offshore suppliers, will result in to be automated either on or offshore. the possibility of offshoring more complex Technological advancement will also have tasks. In addition, the expansion of potential significant impact on productivity within the offshoring destinations increases the services sector. diversity of tasks that can be offshored Globalisation, the TPP and increase in FTAs and can provide organisations with further have enabled Australian and New Zealand reasons to move work offshore, such as services organisations to access new markets. access to new geographies, languages and Australian and New Zealand organisations time zones. now have the opportunity to offshore Moreover, demand-side trends will continue lower-value services, and instead specialise to support significant growth in the industry. in higher-value services that can then be Organisations that are experienced in exported to other countries. Further, the offshoring are starting to become more education sector will need to work closely with strategic in their offshoring decisions, and organisations to ensure future graduates are are beginning to offshore more complex leaving with the skillsets and knowledge to functions. There remains substantial growth perform these higher-value services that potential in this area as organisations the workplace is now expecting. As the importance of the services sector continues to increase in both Australia and New Zealand, PRODUCTIVITY GROWTH – generally and specifically in services – WILL BECOME THE KEY FACTOR DETERMINING THE RATE AT WHICH LIVING STANDARDS CAN BE IMPROVED over time. 40 WHAT IS THE FUTURE FOR OFFSHORING?
GLOSSARY BPO Business process outsourcing CA ANZ Chartered Accountants Australia and New Zealand DAE Deloitte Access Economics FTA Free trade agreement GDP Gross domestic product ICT Information and communication technology OECD Organisation for Economic Cooperation and Development R&D Research and development STRI Services Trade Restrictiveness Index TPP Trans-Pacific Partnership 41 future[inc]
REFERENCES
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ADDITIONAL SOURCES
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