The Long Backlash Against Offshore

The US and Western Europe account for the lion’s share of the market for Offshore services. In the medium term they are expecting slow or no growth and at least in the US, high unemployment rates.

In such a scenario, we should expect that the public opinion will turn against offshore. Naturally therefore, the anti-offshore rhetoric in the media and from politicians will ratchet up.

In the past, the polemic against “offshoring of jobs” at the national scene has generally focused on China and the loss of manufacturing jobs in the US. The reasons for this are:

– The impact of Chinese manufacturing on US jobs preceded Offshore services outsourcing by almost a decade. The magnitude of the impact was also much larger.

– Loss of manufacturing jobs is a union issue. The Dems are extremely sensitive to union issues, especially in the Rust Belt (which became rusty because of Chinese outsourcing).

– The early impact of Offshore services was on IT workers. And for a while the impact was softened because of the growth in the IT sector. The employment in the sector grew so much till the tech bubble burst, that it easily absorbed both domestic workers and outsourcing.

– IT Workers were typically better educated and higher paid. If they failed to find another job, they had a college degree and would be able to find some other form of employment. Probably lower paying but they wouldn’t be without a job for too long.

But things are different now.

Chinese manufacturing still has a much bigger impact. Which is why there is so much angst in the US about China’s pegged currency rates (which is deserved, IMO). But there are other things that are different this time around.

First, the impact of Offshore services is slowly veering away from IT workers to regular white collar workers – from customer service to business analysts. Many of them don’t have a college degree and don’t have flexible skills.

Second, while the US was losing manufacturing jobs to China, the service jobs were picking up the slack. Over a couple of decades, the composition of the US workforce shifted dramatically to where services jobs accounted for the bulk of the workforce. Now as services jobs slowly start leaking out to India, there is no mega trend to rescue it. To make things worse, unemployment is expected to stay close to 10% for a while.

As you might expect, the backlash has begun. There was the Borders Bill. Then state governments, who are incidentally running budget deficits, have started barring government outsourcing to include any offshore component.

From the NY Times article on the Border Bill

“I’m thrilled that these companies are complaining about having to hire more Americans,” said Senator Claire McCaskill, Democrat of Missouri. “That is the whipped cream and cherry on top of this sundae.”

Indian services companies run the risk of becoming punching bags for American politicians. Unless they do something about it.

The first thing you need to do if you are responsible for your company’s response to the backlash, is to be clear about your own position. Offshore services may be called outsourcing. It may be that you can point to the guy in India who took away a specific American’s job. But despite all this, Offshore services is no different from trade in merchandise of any kind. Offshore is trade in services. Keep repeating that sound bite. If people attack Offshore, they are anti-trade.

This is not about twisting facts to make a bad situation look good. It is in fact exactly right. Which is why no economist worth his salt will stand up and say that the US should place restrictions on Offshore services. Because it is trade. And unlike Keynes, there are no economists contesting Ricardo.

Next, talk about all the American goods that Indians consume. From Nike shoes to Cisco routers. I haven’t confirmed this yet, but someone I spoke to today said that India-US trade ran a deficit on the Indian side after accounting for services.

Then, talk about the fact that there is a shortage of IT workers in the US. Unemployment may be at 9%, but that doesn’t mean that unemployment among college educated software engineers is anywhere close to that. This does sidestep the issue of the impact of BPO but if you had the aggregate numbers I am sure one could craft a response there as well.

Finally, craft a coordinated PR plan through an industry body. Don’t just sit back and let the media and politicians control the message. Some of this seems to be happening as is evident from this article in the FT where both Infosys and Cognizant are quoted.

The action above should be happening in the media and in meetings with clients and, importantly, employees. Employees who are onsite meeting clients are often asked these questions by concerned client managers. If they are armed with the right messages and data, they can handle these questions much better.

Another important area of action is to influence governments. I doubt if lobbying US legislators is going to go too far, at least in this charged atmosphere. But it does help to at least have industry body representatives get their point of views in front of legislators.

On the other hand, lobbying the Indian government to take action is likely to be very effective. India and the US have a special relationship. Neither side will want a trade war and will work to avoid a situation where India does a tit-for-tat targeted tax on consumer products from companies which are majority owned by a US company.

Lastly, the best friends of Indian Offshore companies are American corporations. They like the cost, flexibility and availability of talent in India. They are global corporations and believe in open markets. They would love to do more business in the Indian market. And they have leverage with US lawmakers.

Outside the US market, the UK market is going to follow a similar pattern. Outside the US and the UK, the stakes are anyway smaller. The environment is going to get tougher and more unfriendly to Offshore over time if things don’t improve unemployment wise. It’s important to stay focused on this matter and be proactive. Damage control after a bill like the Borders Bill, achieves very little.

[Update: For completeness’ sake, I must mention that the most important action point perhaps is to actually hire more Americans. Or Britishers. There are Indian companies who seem to be doing that with some success. An earlier post on local hiring.]