How Offshoring Could Prolong the Jobless Recovery

January 18, 2011

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Offshoring is thought to be a major culprit for millions of professional and service-sector job losses in the U.S. and Europe, and new research says it is only going to increase.

American jobs have been moving overseas for decades, and in recent years, those jobs have become more sophisticated. Between 2000 and 2010, close to 2.8 million jobs in the finance, human resource (HR) and procurement sectors were lost in the United States and Europe. In 2008 and 2009, close to 1.1 million jobs in corporate finance, information technology (IT) and other business functions were lost at large U.S. and European companies due to a combination of offshoring, productivity improvements and lack of economic growth.

"While the reductions were accelerated by the recession, they were driven largely by a structural, longer-term trend of ongoing innovation in companies' service delivery models, maturation of offshoring options and increasing levels of automation," according to new research from The Hackett Group.

The dramatic job losses seen by U.S. and European companies in 2008 and 2009 are expected to continue through 2014, according to the global business advisory group.

By 2014, another 1.3 million jobs will disappear from North America and Europe as offshoring becomes an increasingly larger factor, Hackett Group researchers say.

Corporate finance, in particular, is now seeing an acceleration of this offshoring trend. While IT has dominated the mix of business functions jobs lost to offshoring since 2000, growth in IT offshoring is now leveling out. According to Hackett, the total number of jobs lost to offshoring in corporate finance will grow by a compound annual rate of about 20 percent between 2010 and 2014.

In 2014, the annual number of finance jobs lost to offshore locations will surpass the IT figure for the first time.

Offshoring jobs is thought to be a major culprit for millions of professional and service-sector job losses in the United States and Europe, and Hackett's new research says the trend is only going to increase.

"With the modest resumption of economic growth this year, policymakers throughout the industrialized world have been struggling to create jobs," Michel Janssen, chief research officer for The Hackett Group, said in an announcement of the findings. "But our research shows that across key business functions, their efforts are simply being overwhelmed by offshoring and other factors."

Although this trend started more than a decade ago, it went somewhat unnoticed in the early years of the new millennium. Until 2007, economic growth offset part of the jobs lost to productivity improvements and globalization, resulting in a relatively small number of net job losses.

"This pattern came to a crashing halt in 2008. Amid the deepest recession since the 1930s, economic growth turned sharply negative in 2009," Hackett explains. "Combined with ongoing productivity gains and movement of business services work offshore, the recession contributed to a staggering net loss of 669,000 jobs in HR, IT, finance and procurement in 2009 alone."

The Hackett Group's research reveals companies are looking at their overall service delivery models and recognizing that the challenging economic times have also presented them with opportunities to compete globally for the long term.

According to the analysis, one of the most important changes is the offshoring trend, which is accelerating in large part because many companies have developed teams built around a Global Business Services (GBS) model that re-engineers the structure and working environment of a company and demands a worldview instead of local outlook.

"GBS organizations embrace both outsourcing and their own internal offshore operations, which remain owned and operated by the companies, to enable a broad array of functions to be moved to low-cost labor markets and managed in an integrated fashion," The Hackett Group says. "By offering economies of scale, scope and skill, this approach enables companies to drive cost reductions and lower headcounts."

Another driver is the ongoing standardization and commoditization of work, making it more portable. Meanwhile, employee skill levels in emerging markets have improved significantly since the beginning of the offshoring trend. Overall, a confluence of technology, process standardization and innovation in notions about service delivery models has made offshoring jobs easier.

For the forseeable future, the HR, IT, finance and procurement organizations of corporate America and Europe will continue to be a source of "net job destruction" and one of the major factors underlying the "jobless recovery," according to Hackett.

Resources

2.8 Million Business-Support Jobs Eliminated Since2000; One Million More to Disappear by 2014 by Michael Janssen, Honorio Padrón and Erik Dorr The Hackett Group, Dec. 2, 2010

Acceleration of Offshoring Trend Driving Loss of Millions of Finance and IT Jobs in U.S. and Europe The Hackett Group, Dec. 2, 2010

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