Can the UK government really offshore tens of thousands of jobs?

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Ever since the government announced its massive cost cutting initiative the people I have spoken to all seem to agree on one thing. Costs can be cut by offshoring work to India.

There is certainly scope for more offshoring because there are no Indian companies in the government's top 20 suppliers.

It does seem to make sense to offshore to cut costs but there are some strong counter arguments. There is an example from a reader below.

I write this blog because Ovum has become the latest analyst firm to suggest that now that the government has the drive to cut costs jobs will most probably be offshored to lower cost regions.

I wrote about this in February and got some interesting comments from IT professionals in the public sector.

Here is an example of the reaction the government should be prepared for. This was a comment left in the blog post I wrote in February. See this link for the blog and reaction to it.

"There is no justification whatsoever for the UK government using UK taxpayers' money to subsidise the export of skilled jobs from the UK to the Indian IT industry. Any moves to do so would destroy career opportunities for UK-based IT staff, eliminate skilled jobs, reduce tax revenues from people working in those jobs, increase the numbers of unemployed IT workers having to claim benefits, and contribute to the permanent long-term decline of the IT skills base in the UK.

Nobody who has seen the colossal amounts of money already wasted on government IT projects managed by New Labour's favourite consultancies, much of which has already flowed offshore to the Indian subsidiaries of those same consultancies, would believe that any savings on salary costs through yet more outsourcing to India will be translated into genuine savings for the end client - the UK taxpayer. After all, it's never happened in the past, despite plenty of offshoring and onshoring by government-subsidised consultancies.


So I'm damned if I see why our taxes should be used to support the Indian IT industry instead of our own. Any government that pursues this path had better count on losing a lot of votes - and tax revenues."

 

 

13 Comments

The problem with such remarks is that people tend to overlook the positive side of offshoring. The organization offshoring certain activities incures cots savings, which leads to higher profit, which leads to growth and to job creation (usually on a higher level). And the other aspect that is overlooked is that the people in India will get a better life, will be able to buy more products and services and that many of those products and services are produced by companies from their own country. Most researches about offshoring also show that the value which an economy gets back in terms of higher profits, savings and reverse buying, are higher than the loss it brings.

www.bridge-outsourcing.com

@Hugo:

1. What I've seen of offshoring indicates that it is the middlemen who make the savings and these savings are mostly re-invested abroad. That's why so many IT jobs have been shed by the likes of Logica CMG and others in the UK.

2. In the case of UK public sector projects, my experience is that none of the alleged savings/new jobs created by offshoring have been passed back to the government client i.e. the UK taxpayer.

3. It is not the job of the UK government to fire UK-based workers in order to subsidise Indian workers, and there is no benefit to the UK taxpayer in doing so, even if corporate middlemen want us to believe otherwise in order to sustain their own profiteering from the UK taxpayer.

Having worked for the past few years in the IT department of UK company with a new model of offshoring it’s build work, I can clearly say that the benefits only look good on paper. The reality is that the savings are negligible.

There may be some savings to be made by offshoring low complexity repetitive tasks with small knowledge transfer overheads. However, with anything of a medium to high complexity, the savings are wiped out by knowledge transfer, management and communication overheads, poor quality build, large percentage of rework, and unexpected project delays.

When somebody is on site, in addition to the obvious advantages of face to face working and being in the same time zone, you can clearly see what they are working on. With offshore resource it’s hard to track what you are actually being billed for. Over billing I fear is common but difficult to prove.

Salary inflation and the attrition rate is high in India, we seem to be constantly stuck with low experienced recent graduates. As soon as offshore IT staff have a good few year’s experience behind them, it seems to coincide with them starting a family, and they don’t want to work the unsocialable offshoring hours so tend to favour working for local companies.

Plus, as mentioned by others before, the UK loses tax revenue and training for it’s own entry level young people.

@Hugo - I have read some of the research on the economic benefits of offshoring. Ignoring the fact that most research was done before the recession, there is evidence that offshoring is beneficial. However all the benefits were seen in offshoring manufacturing between OECD countries. Offshoring services and offshoring to non-OECD countries had little benefits for the UK and resulted in falling wages. With the current high level of unemployment and economic inactivity in the UK workforce, offshoring is damaging to the UK.

It is perfectly fair for businesses to do that, but the government needs to look at the bigger picture.

@Hugo - I have read some of the research on the economic benefits of offshoring. Ignoring the fact that most research was done before the recession, there is evidence that offshoring is beneficial. However all the benefits were seen in offshoring manufacturing between OECD countries. Offshoring services and offshoring to non-OECD countries had little benefits for the UK and resulted in falling wages. With the current high level of unemployment and economic inactivity in the UK workforce, offshoring is damaging to the UK.

It is perfectly fair for businesses to do that, but the government needs to look at the bigger picture.

The principles of offshoring to save costs has been proven to be self destructive. The spiral of decline in our wealth is self evident and led by such principles. The European economies have been devastated by classroom economic policies that allow our businesses to fail whilst enriching both India and China. We need to create wealth by developing new revenue streams not losing more. We can compete with China by adopting the principles that they already use. Firstly recognise that Government has considerable impact on business. This can be destructive or helpful depending on policy. Our Government can lessen the costs to our businesses by developing areas of brownfield sites which are low rent and low rates to enable them to stay here without being hypertaxed at source.The benefits come straight back through increased income tax revenues. Our ridiculously overpriced housing market carries the blame for many of our problems, allowing business to be exploited by a parasitic landlord mentality. On top of that our business rates at nearly 48% and VAT at 20% are contributing to the highest tax levels ever recorded. We exceeded the Laffer curve a long time ago. Outsourcing and offshoring jobs will only make things much worse.

The principles of offshoring to save costs has been proven to be self destructive. The spiral of decline in our wealth is self evident and led by such principles. The European economies have been devastated by classroom economic policies that allow our businesses to fail whilst enriching both India and China. We need to create wealth by developing new revenue streams not losing more. We can compete with China by adopting the principles that they already use. Firstly recognise that Government has considerable impact on business. This can be destructive or helpful depending on policy. Our Government can lessen the costs to our businesses by developing areas of brownfield sites which are low rent and low rates to enable them to stay here without being hypertaxed at source.The benefits come straight back through increased income tax revenues. Our ridiculously overpriced housing market carries the blame for many of our problems, allowing business to be exploited by a parasitic landlord mentality. On top of that our business rates at nearly 48% and VAT at 20% are contributing to the highest tax levels ever recorded. We exceeded the Laffer curve a long time ago. Outsourcing and offshoring jobs will only make things much worse.

Here is what is going to happen

More and more companies, and the Government will offshore or onshore work for the cheapest price possible.

Profits, and the tax take will fall gradually over the years in the UK as more and more UK citizens are unable to find work, and onshored workers have their salaries paid in their home countries and due to ICT pay tax in their home countries too, not the UK.

The larger benefit bills will probably lead to a financial crisis or outright economic collapse within the UK (Already underway)

Profits for companies will rise in the countries where outsourcing takes place, as workers there become more affluent due to having work and jobs, wages will rise as competition increases.

Eventually these companies and the Government will find that UK workers are a "bargain" as they are as cheap or cheaper than the offshore staff (Cue articles about how talented, intelligent and generally wonderful UK staff are hence the move back to the UK, nothing to do with salaries, honestly!).

Repeat

Eventually we may end up with world wide parity of salaries and this stupidity will end, however the cost for developed Western economies workers will be grim, the next few decades will probably see great financial distress and general unhappiness for everyone in the UK, and a general collapse in living standards.

@BobF: Spot on, unfortunately.

I'd like to see a lot more serious attention paid to this issue by the computing press, because politicians and mainstream journalists simply parrot the same old corporate lies about all the alleged savings to be made through offshoring/onshoring IT work, while utterly ignoring the real cost in jobs, tax revenues and long-term prospects for the UK IT industry.

Every time Karl raises this issue here - and indeed every time two or more IT contractors are gathered together - we hear the same story from right across the industry: UK jobs being de-skilled and offshored or UK workers being forced out of work after having to train their onshored replacements. Yet there seems to be no serious interest in examining the damage being done to our IT industry. The BCS is little more than a cravenly irrelevant talking shop, and the PCG suffers from still being seen as a marginal contractor-oriented pressure group. This issue is killing our industry, but nobody outside the industry seems to give a damn.

CW has in the past played an important role in revealing serious problems in the IT industry, but of course these investigations mainly targeted government screw-ups e.g. Chinook, NPfIT, RPA etc. It would be good to see a similarly critical investigative approach being taken to the major private sector consultancies who are scamming the UK taxpayer out of billions, dismantling our IT industry and flogging off the spare parts to India under the camouflage of a largely mythical or self-inflicted "skills shortage". Still, asking awkward questions might upset powerful corporate interests, so I guess CW knows which side its bread is buttered, eh?

It comes to something when you have to rely on Tory think-tanks to raise at least some of these issues, and even they are suspiciously quiet about the question of offshoring/onshoring:

http://www.computerweekly.com/Articles/2010/09/07/242643/Dismantle-Labour39s-IT-to-save-1638bn-says-Tory-advisor.htm

I just got fed up with it all, after 18 years contracting (continuously) I have now taken a permanent job in the Netherlands, this after 6 months out of work and another 6 months working for very low money inn the UK (sent out 1,400 cv's in the 6 months I was out of work; I usually do apps support work for SQL, Java & .NET on UNIX/Linux/Windows web apps so hardly due to an obsolete skill set).

Things have definitely changed for the worse in the last 4-5 years as the ICT bandwagon has run out of control in the UK, most of the companies I've worked for have had literally hundreds of Indian ICT staff on board (including a few major Government projects), and I've been to some places where even the network infrastructure and PC/Server support staff are ICT (rotated on a yearly or 6 monthly basis of course).

I quite often get calls from agents for jobs in the UK, and they say they can't get experienced people with skills to which I usually laugh sarcastically, and it usually ends with them asking me about living costs and accommodation and if there is much demand for recruiters over here!

UK industry is making it's own bed and will have to lie in it, when was the last time you saw anyone under 30 being brought in for a trainee role who wasn't ICT?

Since I have been working in Europe I have met many experienced UK IT workers who have moved for the same reason as me, everyone I have spoken too has said they are very unlikely to ever move back.

I think your question is more "So what is the Dutch government's attitude to non EEC citizens working in the Netherlands", as most of my workmates are French, German, & English :)

I think they are much more focused on admitting skilled workers than our Government and I see no evidence of the large scale use of on-shored staff to cut costs actually within the country, though they do outsource.

Not an authoritative source as I've only been here six months working for just one company but I've found Dutch tax and Government officials very helpful and the atmosphere is sooo relaxed compared to the UK, and you do feel a lot safer, did some work in Germany for a time and it was the same there.

In all they seem much more concerned with creating a nice place to live where things work rather than generating maximum profit


And thats all fine and dandy for a private company or a PLC to do that. They take their chances, in terms of costs and quality and stand or fall by such decisions.

I absolutely do not see the benefits to the UK workforce, to the UK Exchequer or to the UK customers of UK taxpayer funded public services as legitimately including "a better life for people in India". No, absolutely not.

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This page contains a single entry by Karl Flinders published on August 23, 2010 9:22 AM.

Could China be about to reduce India's offshore IT dominance? was the previous entry in this blog.

Can Xerox/ACL do well in European outsourcing? is the next entry in this blog.

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