Managing growth in offshore hotspots

Over the past 15 years, most offshore service jobs have gone to a handful of cities in India, eastern Europe and Russia: Hyderabad, Bangalore, Delhi, Mumbai, Budapest, Prague and Moscow.

by Harvard Business Review
Last Updated: 23 Jul 2013

As a result, local labour markets have tightened: turnover among IT staff in banking is up to 40% in some Indian cities; in Moscow and St Petersburg pay for software engineers has jumped 50% in the past couple of years.

However, tight labour markets in such offshore hotspots remain the exception: more than 90% of the huge and rapidly growing supply of college graduates suitable for employment by multinationals live elsewhere and three-quarters are in countries other than India.

Some are in less well-known cities of countries with developed offshore centres: Zlin in the Czech Republic and Chandigarh in northern India, for example. Others are in countries relatively new to offshoring such as South Africa, Morocco, Argentina and Brazil.

According to the McKinsey figures, this pool - graduates with up to seven year's experience - totalled more than 6 million back in 2003 and is expected to keep growing for the foreseeable future such that, in aggregate, average wages should remain low.

Even engineers, the most supply-constrained group, will still on average be earning less than 30% of their developed market equivalents in 2015.

Offshoring companies have tended to be attracted to the same centres because of the development of proven local talent pools, the growth of local service vendors and better infrastructure. Many companies may not feel comfortable choosing as their first offshore site a destination that isn't tried and tested.

Equally, companies with established offshore units, particularly capital-intensive operations like call centres (which typically cost more than $5million to set up) and R&D facilties, are understandably reluctant to pull out because of sunk costs.

But this stickiness combined with worsening local labour market conditions and the emergence of attractive alternatives make it increasingly crucial to make the right choice in the first place. Rather than simply following the pack, that means making a more structured analysis of needs and options than has generally been the case previously.

Solutions could also include persuading attractive employees to move from other cities to existing hotspot operations - using low-cost housing loans, for example - or arranging for employees to telecommute from other centres.

Governments are also assessing their distinctive advantages and setting out their stalls to multinationals: high-cost Dubai with its robust infrastructure is marketing itself for IT-disaster recovery facilities while South Africa, with its high numbers of financially qualified people, is targeting insurers and banks despite its cost disadvantage compared with India.

Companies, by giving more thought to how prospective offshore sites can serve their special needs, can also create potentially longer-term benefits for business and developing countries generally.

By spreading the load, offshore labour costs should remain lower overall and rise more steadily. At the same time more centres will benefit and greater numbers of entrepreneurial graduates will gain skills and experience that they can then use to start local businesses and develop their own countries.

Source: Smarter Offshoring Diana Farrell Harvard Business Review, June 2006

Review by Steve Lodge

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