FIG. 1 Net G&A job losses (in 000s)*, JOBS CREATED DUE TO ECONOMIC GROWTH

Transcription

1 Enterprise Strategy Job Losses from Offshoring and Productivity Improvements Far Outpace Gains from Economic Growth Projected slowdown in services offshoring after 2014 poses challenge to India and other low-cost destinations Management Issue By Michel Janssen, Erik Dorr and Martijn Geerling Complimentary Research Manufacturing offshoring and reshoring to reach equilibrium by 2014 The Hackett Group recently conducted a study on global manufacturing sourcing strategies. The study results indicated that manufacturing industries are nearing a state of equilibrium, with some capacity moving out of developed economies into low-cost geographies, and some moving in the reverse direction ( reshoring ). Most movement today is occurring between low-cost geographies (Fig. A). More in-depth analysis of the study results will be released in coming weeks. FIG. A Movement of manufacturing capacity between regions, * Percent of manufacturing capacity impacted Between high-cost countries Between low-cost countries From high-cost to low-cost countries "Reshoring" (i.e., from low-cost to high-cost countries) 9% Source: Supply Chain Optimization Study, The Hackett Group, % 24% 23% * projected Executive Summary The first signs of modest growth are returning to developed economies, resulting in new jobs in corporate business services functions (finance, human resources, IT and procurement) domestically. However, the transformation of global operating models for these support services, which started well before the recession, continues to eliminate jobs (through productivity improvements) or move them to low-cost geographies. As a result, rather than increasing, the total number of business services jobs located in North America and Europe will actually continue to shrink. According to new research by The Hackett Group, only about 4.5 million of the 8.2 million business services jobs located in North America and Europe at the start of 2002 will still exist in Companies in these regions are quickly changing their global operating models to remain competitive. By 2016, the number of potentially offshorable jobs will have been reduced to one million. This decline has far-reaching implications for India, China and Eastern Europe, which will need to develop alternative sources of demand in order to maintain growth in the offshoring/outsourcing business services industries that have energized their economies. Transforming Business Services Delivery: The Journey Continues The movement of jobs from developed into low-cost geographies is an increasingly sensitive political issue. Understandably, the recession and subsequent jobless recovery have drawn even more attention to this phenomenon. From the executive suite perspective, movement of jobs around the globe is an integral element of the execution of business strategies that increasingly involve globalization of the operating model of the business. Research by The Hackett Group has covered the globalization trend extensively (see Related Hackett Research section). In contrast with the continued movement of service jobs offshore, the movement of manufacturing jobs appears to have reached an equilibrium with reshoring (see sidebar ). However, manufacturing job movement is driven by a different set of forces than business services jobs, and analysis of the former rarely includes the latter. This research focuses on jobs in business services in finance, IT, procurement and human resources. In these pages, we assess the past, current and projected state Page 1

2 of these jobs in the North American and European economies. To uncover new insights about productivity gains, outsourcing and offshoring of the delivery of business services, we analyzed our proprietary benchmarking and study data about the processes, organization, technology, governance and other aspects of business services in large global companies in combination with IMF data on historical and projected economic growth rates in North America and Europe 1 and financial reports filed by publicly traded companies. Jobs in business services have been moving out of developed economies for the past decade (Fig. 1). The large job losses of were of course a direct result of the economic crisis. The numbers projected for indicate a slowing of job cuts, at least in absolute numbers. The main reason is that, through the compounded impact of years of cutbacks in business services jobs, the absolute number of these jobs has declined steadily since about As a result, the same productivity improvement percentages represented a much larger number of absolute job losses in 2002 than in FIG. 1 Net G&A job losses (in 000s)*, *projected * 2013* 2014* 2015* 2016* JOBS CREATED DUE TO ECONOMIC GROWTH JOBS LOST DUE TO PRODUCTIVITY INCREASES JOBS LOST DUE TO OFFSHORING FIG. 2 Jobs lost/created*, ** Finance IT Procurement HR *at companies with over US$1 billion in 2011 revenue Source: IMF World Economic Outlook data, Hackett proprietary data and publicly available company data -42% -54% -25% -36% -39% Productivity Offshoring improvements -33% 20% Economic growth * projected ** expressed as a percentage of 2001 baseline Source: IMF World Economic Outlook data, Hackett proprietary data and publicly available company data The effect of this shrinking FTE (full-time equivalent) job base is particularly significant in IT, which has experienced the largest number of losses as a percentage of the baseline number at the start of 2002 (Fig. 2). Alhough job losses due to offshoring and productivity improvements were higher in , greater economic growth during this period offset more of the losses than what is projected for 2012 and beyond. Since the early 2000s, offshoring has been a major contributor to the decline in highcost business services jobs in Europe and North America. The numbers are stabilizing at about 150,000 jobs moved offshore per year. More than anything, it is the prospect of continued, sluggish economic growth that is causing the popular and political backlash against globalization. Under normal economic circumstances, continuous 1 IMF World Economic Outlook Page 2

3 A net decline of 45% of total business services jobs between 2002 and 2016 Hackett estimates that, at the end of 2001, North American and Europebased companies with over US$1 billion in 2010 revenues employed about 8.2 million people in business services positions. (The total number of companies included in this analysis is 4,700.) Between 2002 and 2016, 3.7 million of these jobs will have been eliminated through a combination of productivity improvements (3.2 million, or 39%) and offshoring (2.1 million/25%), partially offset by 1.6 milion jobs (20%) created through economic growth (see Fig. 2 on previous page). This represents a net decline of 45% over a 15-year period. productivity improvement combined with economic growth would be considered a healthy pattern. Of course, the other side of the coin is the creation of a proportional number of jobs in the primary offshore destination geographies, led by India. Considering the decline in total business services jobs, the stable absolute number indicates only a small increase in the percentage of jobs moving offshore each year. Hackett research indicates that by 2016 the total cumulative number of offshored jobs will reach 60%- 65% of the total number of jobs with the potential to be offshored. Further analysis by business function shows that IT departments not only experienced the largest decline (as a percentage of the 2001 baseline number of jobs), but also bore the brunt of the reductions in absolute terms. It is important to understand that the lost IT positions strictly reflect jobs at companies with over US$1 billion in revenue. These cutbacks aside, as companies embed technology into an expanding range of products, new IT jobs in their product development organizations are being created. Finally, the IT industry (hardware, software and telecommunication) itself continues to grow, creating additional demand for IT workers. As a result, the picture of the IT job market is not nearly as bleak as suggested by the 15-year trend implied in Fig. 3. Instead, companies went from making technology to buying it, and from a sourcing model that changed from insourced to outsourced. This trend is irreversible; the rapid adoption of on-demand technology provisioning models such as software-as-a-service (Saas) is only accelerating the pace. FIG. 3 Net business-services job losses (in 000s)*, by function, ** * at companies with over $US1 billion in revenue in 2011 ** projected for FINANCE IT PROCUREMENT HR Source: IMF World Economic Outlook data, Hackett proprietary data and publicly available company data Page 3

4 Understanding the Drivers of Business Services Delivery Rationalization The previous section presented the macro view of the decline in traditional North American and European back-office jobs resulting from productivity gains and offshoring. Next, we turn our attention to the initiatives by individual companies that underlie this trend. The most powerful by far in the early 2000s was the consolidation of routine, transactional business-support activities into shared services centers. More recently, companies have expanded the portfolio of services offered by these organizations to include higher-value, knowledge-centric processes. Multifunction service centers have overtaken the previous model of singlefunction entities, allowing further leverage of skills. Hackett s 2011 study of these Global Business Services (GBS) organizations (as this next-generation approach to shared services is known) revealed that some companies now execute over 50% of their transactional business services work in a GBS organization. Notably, the percentage of knowledge-centric activities performed in the GBS is not far behind(fig. 4). The evolution and expansion of GBS organizations is the driving force behind the productivity gains being anticipated. FIG. 4 Percentage of FTEs residing in Global Business Services (GBS) organization 58% 47% 45% 45% 46% 44% 30% 20% 19% 9% 7% 3% n/a n/a Captive GBS Outsourced GBS Captive GBS Outsourced GBS Knowledge-centric Transactional Source: Global Business Services Performance Study, The Hackett Group, 2011 FINANCE HR IT PROCUREMENT GBS organizations, like the companies they serve, function best if they move work to wherever it can be done most efficiently and effectively. (This is the global in Global Business Services.) The result is that GBS organizations are themselves also expanding their global footprint, moving substantial numbers of jobs to lowcost geographies. Thus, the rise of GBS organizations accounts for much of the rise in offshoring of business services jobs. A 2011 Hackett study of globalization trends showed that companies are planning to accelerate the movement of work into low-cost geographies across the entire spectrum of services (Fig. 5). 2 The study data offers a micro-level explanation of the macro trend outlined in the first part of this research. (For more in-depth analysis of the evolution of GBS organizations, see the Related Hackett Research section.) 2 It is important to note that the study participants were companies that already have a presence in low-cost geographies. Therefore, the absolute numbers shown in Fig. 5 are higher than those representing the amount of globalization of business services by all companies. Page 4

5 FIG. 5 Percentage of FTEs located in a low-cost geography 26% IT - Knowledge-centric 1 1 Infrastructure development, application development and 37% implementation, planning and strategy, function management IT - Operational 36% 50% HR - Knowledge-centric 2 18% 2 Staffing services, workforce development services, labor relations, organizational effectiveness services, total rewards planning and function management HR - Time and attendance, data management and reporting 18% 34% HR - Total rewards administration 17% 30% HR - Payroll administration 24% 43% Procurement: Knowledge-centric 3 30% 3 Sourcing execution, supply data management, compliance management, supplier management and development, sourcing strategy and analysis, customer management Procurement - PO processing, scheduling, receipt processing 22% 40% Finance - Knowledge-centric 4 15% 24% 4 Tax management, compliance management, planning and performance management, business analysis, function management Finance - General accounting and external reporting 23% 40% Finance - Cash disbursements 43% 64% Finance - Revenue cycle 26% 47% CURRENT IN 2-3 YEARS Source: Business Services Globalization Study, The Hackett Group, 2011 A second driver behind the disappearance of business services jobs in developed economies is the broad-based globalization of all aspects of typical company operating models. As product/service lines, go-to-market strategies and supply chains become more global, the portfolio of business services required to support these global operations must become more global as well. The result is that it is no longer natural or even appropriate for the center of business services delivery to remain in the traditional domestic market. If, for example, India evolves into the optimal location for a global application-development competency center, the Indian IT organization progresses from an offshore arm providing capacity to the North American or European-headquartered organization into the global IT center itself. The same transition could take place for elements of the procurement, finance and HR services portfolio. This explains the ongoing movement of business services capacity away from developed economies. Page 5

6 Put slightly differently, the redesign of the value chain has forced companies to rethink business services delivery. The expansion of GBS organizations is certainly one aspect of this evolution, but the impact is much broader. The need to support a global operating model for the business translates into a need for global standards for information, process and technology platforms. Not only is this necessary to support the business, but essential if companies are to remain competitive. Implications for Destination Geographies While services industries in India, China and other low-cost geographies continue to grow, one important driver of this expansion North American and European companies moving business services work offshore will level off significantly during the next few years (Fig. 6). FIG. 6 Productivity, growth and offshorable business-services jobs (in millions), * Offshored: 0.2 million North America/Europeheadquartered: 8.2 million TOTAL (in millions) Lost to productivity 1.0 improvements: 1.6 million OFFSHORED OFFSHORABLE REMAINING Offshored: 2.3 million North America/ Europe-headquartered: 4.5 million NON-OFFSHORABLE REMAINING Jobs baseline: 2001(year-end) * projected for Source: IMF World Economic Outlook data, Hackett Group proprietary data and publicly available company data There are several reasons for this. First, the number of business services jobs being offshored is rapidly declining because the majority of these jobs have been moved already. In addition, the lack of sufficient economic growth to offset the impact of productivity improvements is also taking a large bite out of the number of offshorable jobs. Many of the new jobs created through growth are less suitable for offshoring (e.g., controlling and analysis), whereas those eliminated through productivity improvement are largely of the offshorable variety (e.g., transaction processing). A decade from now, the landscape will look fundamentally different, as demand by Western companies for traditional offshore capacity will have largely dried up. To maintain growth of their business services industries, low-cost geographies need to replace this demand with: Page 6

7 1. Domestic demand, including local industries and local operations of Western companies in low-cost countries. 2. Demand for new services beyond traditional finance, HR, procurement and IT back-office services. 3. Demand from technology providers (software, services and hardware), in particular in the information technology industries. In the more advanced low-cost destinations such as India, all three sources of demand are currently driving strong growth. In China, nurturing greater domestic demand will be of particular importance. FIG. 7 New business services jobs moving to low-cost geographies, Rest of world China Other (Asia- Pacific) Total = 750,000 19% 10% 20% 38% India Eastern Europe Source: Business Services Globalization Study, The Hackett Group, 2011 Focus: India India remains the destination of choice for most companies that have established GBS organizations or plan to do so. Hackett s 2011 Business Services Globalization research identified India as the number-one location for GBS centers: 74% of companies consider India to be a top potential destination for new capacity, followed by China at 55%. Nevertheless, India s overall share in total business services capacity in low-cost destinations is expected to decline slightly, from 39% in 2011 to 38% in Combining anticipated growth by region with projections of business services jobs moving into low-cost geographies between 2012 and 2016 reveals that India will create fewer than 300,000 jobs from these traditional source of demand (Fig. 7). (Note that this does not include any demand from technology services providers; demand for business services outside of the areas of finance, HR, IT and procurement; or domestic demand.) Strategic Implications Projections of continued elimination of business services work in developed economies will have major ramifications for developed and emerging economies alike. First, companies need to plan for a reduction in the size of their business services organizations in developed markets. In Europe, there may be legal hurdles to downsizing, while in the US, offshoring can be a public relations nightmare. Also, employee engagement tends to suffer when there are questions about job security. Companies need to rigorously adopt best practices for handling downsizings, including clear and open communication and reliance on natural attrition to the maximum extent. As the composition of the global labor force changes, strengthening talent management practices will be of paramount importance. Traditional talent management practices based on a top-down, command and control culture are ineffective for managing a global service delivery organization. Talent management practices must balance global process standards with local cultural differences. Page 7

8 Operations in emerging markets also must make preparations. There is an urgent need to elevate the capabilities of staff to be able to function in a globally connected organization. This transition may involve transfer of senior executives into these geographies, developing local leadership talent, and facilitating the adoption of company cultures and values. India, which has the longest history of providing business services in a global context, will be most affected by this transition. Related Hackett Research Business Services Globalization, Part 1: Accelerating the Pace, July 2011 Business Services Globalization, Part 2: Managing the Risks and Realizing the Value, July 2011 Business Services Globalization, Part 3: Globalization Practices, July 2011 Delivery of Business Services: The Case for a Leveraged Model, May 2011 New Data: 2.8 Million Business-Support Jobs Eliminated Since 2000; One Million More to Disappear by 2014, November 2010 Page 8

9 About The Hackett Group The Hackett Group, a global strategic business advisory, operations consulting and finance strategy firm, is a leader in business best practices, business benchmarking, and transformation consulting services including strategy and operations, working capital management, and globalization advice. Utilizing business best practices and implementation insights from more than 5,000 business benchmarking engagements, executives use The Hackett Group s empirically-based approach to quickly define and implement initiatives to enable world-class performance. Through its REL group, The Hackett Group offers working capital management solutions focused on delivering significant cash flow improvements. Through its Archstone Consulting group, The Hackett Group offers Strategy consulting & Operations consulting services in the Consumer and Industrial Products, Pharmaceutical, Manufacturing and Financial Services industry sectors. Through its Hackett Technology Solutions group, The Hackett Group offers business application consulting services, including SAP implementation and Oracle implementation, that help maximize returns on IT investments. The Hackett Group has completed over 5,000 best practices benchmarking studies with 2,800 major corporations and government agencies, including 97% of the Dow Jones Industrials, 84% of the Fortune 100, 80% of the DAX 30 and 49% of the FTSE 100. Founded in 1991, The Hackett Group was acquired by Answerthink, Inc. in Answerthink was renamed The Hackett Group, Inc. in The Hackett Group has global offices in the United States, Europe and Asia/Pacific and is publicly traded on the NASDAQ as HCKT. info@thehackettgroup.com About the Advisors Michel Janssen Principal and Chief Research Officer Mr. Janssen is responsible for developing The Hackett Group s core intellectual property, including thought leadership. He works with the company s Executive Advisory Council to understand the strategic impact of new and emerging trends on the business functions. He also heads Hackett s team of researchers and analysts in the US, Europe and India in the design and implementation of research studies; analysis of results; and production of resulting findings. Previously Mr. Janssen was president of Supplier Solutions for Everest Group and co-founded the Everest Research Institute. In addition, he provided strategic oversight for Everest s Outsourcing Center, the world s largest outsourcing community and vehicle for identifying early industry trends. He was also a senior director in Gartner Group s Strategic Sourcing practice and held numerous management positions with EDS. Erik Dorr Senior Research Director, Finance and EPM Executive Advisory Programs Mr. Dorr started his professional career of over 20 years as an IT consultant, and then moved on to a CIO position at a large manufacturing company. Next, he worked as a research analyst covering enterprise business applications and technology strategy. Leveraging the extensive experience he gained working with financial organizations and optimizing financial processes, he was named to his present role in early Martijn Geerling Europe Practice Leader, Global Business Services Mr. Geerling has over 10 years of consulting experience in business process redesign, shared services development, outsourcing and benchmarking. During this time he has worked with global companies delivering transformation engagements in finance and other business functions. Prior to joining The Hackett Group, he worked at KPMG Consulting assisting clients in finance function optimization and compliance management. Amsterdam: Atlanta: Frankfurt am Main: London: Paris: Sydney: Zurich: Page 9