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Some say offshoring is taking away many IT jobs from developed economies to emerging countries. Others think the skills shortage coupled with an ageing workforce in Europe and the U.S. force companies to outsource tasks that couldn’t have been performed by local employees anyway. There is also a large debate regarding India’s leading position being threatened by new offshore destinations like the Philippines, Vietnam or South America. Let’s make the point of current trends in today’s IT offshoring industry and their possible consequences for workers.



IT offshoring in Europe: facts and figures



A recent report by the French Institute for Statistics and Economic Studies (INSEE) reveals that 44% of EU 27 companies with at least 10 employees have outsourced some IT tasks in 2006. Denmark, Norway and Finland top the ranking with more than 70% of firms outsourcing IT tasks while Bulgaria, Lithuania and Hungary are those outsourcing the least (around 20%).



As for France this rate is just below 30%. What’s interesting is that the propensity to outsource increases with the size of the company. Regarding the sectors, those outsourcing the most are Energy and Finance followed by Business services. We can note that within the Business services category, the firms active in IT outsource far less than those in R&D.



When it comes to the localization of the service providers, only 2.2% of enterprises have outsourced their IT tasks outside France while only 0.8% have gone out of EU 27. But in this case, the companies outsourcing the most are those active in IT.



The tasks that are mostly outsourced are development and implementation (including softwares, websites, databases and networking) while IT management (strategy, consulting and e-business) is usually performed in-home.



As for the reasons for outsourcing, the most often quoted ones are the lack of qualified candidates and the level of requested salaries. In fact, 43% of French CEO’s who were trying to recruit declared to face difficulties. 88% said they were not able to fill in positions because of the lack of candidates, but if we take into account that only 6% of companies were recruiting in 2006, it means that those who complain about the skills shortage represent only 2% of French companies while only 1.1% of them say they can’t afford paying the wages requested by the workers.



In short, the skills shortage is not as extreme as sometimes claimed and the level of salaries usually doesn’t prevent companies to hire IT staff. These observations may explain why the French and continental Europeans are offshoring far less IT activities than North American companies. But this means that Europe is still a market to conquer for services providers located overseas, and they will do their best to do so. We can thus expect a rise in terms of IT offshoring from Europe in the coming years, but where will firms go? Will it still be India or will they go elsewhere?



Is India still no 1?



With rising inflation and labor costs, some analysts say India may loose its throne. Even though Indian service providers have only marginally increased their hourly rates, they start charging more for on-site work and redefine what means a work week. They increase the number of hours counted as a week (from 40 to 50) or ask for extra-fees when employees have to work overtime. This is especially the case with U.S customers since Indian firms see their profits decreasing due to the dollar’s fall.



This is why European markets represent such an interesting place for Indian providers. And while IT investments will be lower than anticipated for 2008, offshoring might grow up to 40% in the U.S. and 60% in Europe. This is probably how companies will respond to the economic downturn in order to save costs. In fact, “if you look at the IT outsourcing market, the offshore portion certainly has seen the strongest growth” says the research firm Forrester.



Although India needs to adapt itself to a rapidly changing offshoring market, the country still remains the “undisputed leader” according to a recent report by Gartner. But the other BRIC countries (Brazil, Russia and China) are already providing credible alternatives as well as Vietnam where labor costs beats China and India by 10% to 15%. Others like the Philippines even face a shortage of techies because of their rapidly growing IT industry. Apparently, firms are looking to new destinations not to abandon India but to diversify their offshoring strategy.



The new trend consists of using a mix of offshore (i.e., India) and onshore (i.e., U.S. or Eastern Europe) vendors in order to benefit from global sourcing efficiencies and retain local skillss and knowledge at the same time. But companies are increasingly outsourcing part of their “core business” that wouldn’t have been assigned to overseas service providers in the past. That’s why Indian firms’ experience is of increasing importance when enterprises choose their outsourcing destination.



Indeed, ISA predicts India will become a regional design and development hub “before the end of the decade”. In order to reach this status, the country is already forming alliances with many different partners such as China, Egypt, Pakistan, Australia and Dubai. In addition, a company like IBM, for example, doesn’t consider India only as a source of cheap labour anymore but “as a place to drive their regional and global business and technology development plan.”



India’s dream would be to climb up the value chain and move from a services-only model to an innovation business model. The first sign of such an evolution is that Indian companies are implanting their own offshore centers in Europe and the U.S. But where are we in terms of trade and investment between Europe and emerging countries. And what are the expected consequences of such moves for western workers?



EU’s Foreign Direct Investment and trade in services with BRIC countries



In 2006, the EU remained a net investor: its FDI outflows to the rest of the world exceeded inflows by EUR 103 bn and the resulting net income from these investments reached EUR 87 bn. The main destinations of EU FDI remain the U.S., Canada and Switzerland. The BRIC countries certainly represent a non-neglected part of EU FDI but the total amount invested in these countries (EUR 26.9 bn) is smaller than what’s invested in Canada (EUR 30.4 bn) alone.



As for FDI in the EU, the United Stated, Switzerland and Japan are those investing the most, while BRIC countries only invested EUR 2.9 bn in 2006. In terms of EU FDI stocks in 2005, investment in services (which includes among others Telecommunication and Business services) is by far the most important sector since it represents 68% of total FDI assets and 75% of total FDI liabilities. If we compared these numbers to the ones obtained the year before, we see that only the manufacturing sector (16.8%) experienced a bigger increase than services (13%).



When it comes to the service sector itself, Business services ranked second with a 17% share whereas telecommunications represented 4% of total EU outward stocks in services. Regarding outward investments in services, only financial intermediation (56%) received a bigger portion than business services (30%).



Regarding EU trade in services with BRIC countries in 2006, we note that the net surplus for Europe increased to EUR 7 bn from EUR 5.8 bn in 2004 meaning that the old continent exports more services to Brazil, Russia, India and China than the other way round. If we consider only computer and information services, the EU had a deficit with India but a surplus with the other three nations. As for the category “other business services” which comprises among others professional and technical services, the EU had a deficit with Brazil but a surplus with the other countries.



Conclusion



Even though the numbers above might indicate that the EU “gains” somehow from trading with BRIC countries, it is sometimes useful to split up the analysis country by country. For example, the UK alone is responsible for 39% of all imports from India. It may be interesting to investigate how this reality influences the IT labor market in the United Kingdom.



What is certain is that EU workers might be afraid that more and more highly-qualified tasks would be offshored in a near future. But if we consider that “90% of companies that fall victim to computer hacking outsource more than 40% of their code” we can be confident that as long as the skills shortage permits, crucial tasks will remain in highly developed countries where intellectual property and IT security are guaranteed. In addition, recent surveys still state that “outsourcing delivers cost savings, but little else in terms of strategic advantage”.