UK recession wipes out business case for Offshoring - and more

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The April 2009 quarterly survey from Salary Services Limited (SSL) indicates that recruitment advertising has more than halved over the past year. Last week I heard a former offshoring consultant say that the impact of recession on contract rates, on top of the fall in the value of Western Currencies (not just the pound), had all but wiped out the case for moving East to save cost. 

 

Those moving offshore are now more likely to be doing so to avoid the regulatory and other overhead costs of running a business within the UK/EU or to obtain skills that are no longer available here, because of the run-down of our indiginous IT skills base

 

Meanwhile organisations are learning the hard way that that outsourcing can be the millstone that brings down the organisation when times are bad.  It is not unusual this spring for organisations to be faced with the need to make budget cuts of 30% or more in the face of binding contracts for services that are no longer required. And the cost of products and services sourced from outside the UK may well be rising - not falling. 

 

I have quoted Macchiavelli on Mercenaries before: "He who holds his State by means of mercenary troops can never be solidly or securely seated ... Whenever they are attacked defeat follows ... because they have no tie of motive to keep them in the field beyond their paltry pay".

 

Until recently the pay of some contract staff was anything but paltry and advertised rates are only 10% below the peak of a couple over years ago (albeit dropping) - but achieved rates are said to be down 40% with intra-UK demand barely 30% of two years ago.

 

The Mercenaries are being squeezed at a time when their own fear of being brought down by client bankruptcy and need to maintain cash flow has concentrated minds on supporting good payers and checking others for the break-point at which they become non-viable. Outsurce providers no longer have access to risk capital and the bank may be trying to rein in their working capital. Even those who would like to be flexible may no longer have much choice.      

 

One of the most interesting sessions at the recent E-Crime Congress was on the impact of recession on business risk - from the need to focus on cash flow and on what should be cut rather than what is easy to cut - to what happens when a customer or supplier fails. All business information, including customer data and IPR, is in the hand of trustees/administrators whose duty is to the creditors not to customers or suppliers.

 

The pledges of previous staff, even Directors, are worthless. Moreover, even if the administrator wishes to preserve a business as a going concern, its suppliers of resilience and protection services, have no obligation to support an operation that has stopped paying. Its security and your data/IPR, may therefore disappear while its limps on.  

 

I first used data from SSL in my 1991 IT Skills Trends Report  (before then I had analysed recruitment advertising patterns back to 1978). The commentary in the April 2009 Salary Survey makes comparison with the "wholesale loss of jobs seen during 1990/92 and more recently in 2001/2003". 

 

The first of those collapses was followed by the growing trend towards outsourcing in the 1990s, culminating with Y2K. The collapse of the Y2K/dotcom double bubble then saw the move offshore.  

 

I think that the change in balance of economic power, technology sophistication and global connectivity between East and West means that this collapse will be followed by a reverse swing of the pendulum (at least in the UK). The survivors will have little choice but to focus on rebuilding their own skills base, focussing on in-house integration and self-sufficiency, using low risk, mature, commodity ICT products and services. 

 

This will almost certainly include the innovative use of low cost, mutli-media social networking techniques to cement group cohesion and loyalty - including with long-term suppliers and customers . But betting your business on the performance of those you have never met, on the far side of the world, will once again appear strange.

 

When I was a Corporate planner for a multi-national (during the UK crash that began with the 1978 Winter of Discontent), one of the main objectives of the annual budget and performance review processes was to ensure that staff from around the world met those with whom they were routinely dealing over computer based (telex direct entry) messaging systems. My "patch" included the European Subsidiaries, Middle and Far East and at least once a month I had to be in the office shortly after 5.00 a.m. to go over the montly reviews, alias have a "corporate gossip" over the telephone to help cement those relationships. 

 

I have never forgotten the lecture from my new boss, when I joined, on the importance of understanding the cultures of loyalty in the operations with which I would dealing and the way in which corporate loyalty was alien to most. It was therefore to be especially fostered and cherished. It was the cement with which the business was built. Otherwise we might as well have arms length agencies.   

 

That attitude not only has to be relearned but is all the more important because the balance of power has changed. As yet few of you work for subsidiaries of a Chinese or  Indian companies. But many of your children will. And if they can act as cultural brokers between Indian and China, as well as between both and the United States and Japan, as well well as competing with the Dutch and Scandinvians to provide entrepot services to the EU, they will have an intersting future. If not ....

  

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3 Comments

Not sure about your conflation of "mercenaries", contract staff and outsourcing. The last two are unrelated issues as far as I can tell. As for rates, my current "achieved" rate is zero and has been for many months now, I have spent 3 out of the last 7 years out of work, and even offering to work for free or minimum wage has failed to generate work, because there is no work to be had. "Mercenaries"? Well, I started contracting in 1992 because employers were busy adopting the fashion for throwing out their permanent staff and replacing them with contractors, in order to cut their payroll and pension costs and eliminate any long-term commitment to their own staff. Those who survived these early culls rarely received any training or career development from their employers, and understandably started to look to their own resources for managing their career prospects. In recent years, many of my still-permie colleagues have found themselves thrown out of work and replaced by offshore workers. Others are replaced by "onshored" foreign staff, often employed via big outsourcing consultancies. And if you really want to target "mercenaries", try the fat consultancies that charge twice the going contract rate for supplying staff via their offshoring/onshoring scams, especially on government IT projects, but pay their onshored foreign worker a fraction of that amount, while paying little or no tax in the UK. Sorry to sound grumpy, but as somebody who has seen just how little commitment many British employers have to their staff, and who has experienced the downside of contracting through long periods of unemployment, I get pretty sick of us contractors being called "mercenaries" by people who all too often have led the cheers for the various fashions that have systematically destroyed the career prospects of thousands of British IT workers, permies or contractors.

The point contrasting the take-home of the individual sub-contractor with the rates charged by the agency and/or prime contractor is well made. Macchiavelli similarly contrasted the "paltry" pay of the indivdual mercenary with the fees demanded by his warlord.

This contrast also lay at the heart of the case for IR 35: under which (inter alia) contractors trying to maintain leading edge skills are expected to pay for training (above a derisory low limit to cover courses on regulatory form-filling for health and safety et al) from after tax earnings.

Once of the aims was to stop customers (including government departments) from contracting with individuals they knew and trusted (including former employees) and have framework agreements with major consultancies instead.

Not surprisingly many of those with world class in critical shortage moved themselves off-shore, thus boosting the skills pool in locations like Singapore, Hong Kong or Dubai - where the ruling elites understand the concepts of fiscal and regulatory arbitrage.

This is another reason why the impact of recession on the UK is expected by some to be rather greater than that on other parts of the world.

Thanks for your interesting response, Philip. You almost make it sound like this was a deliberate policy to promote the interests of a few bloated consultancy firms by successive governments, as if those firms somehow had close contacts in strategic government departments where they could influence major public sector IT projects and government policy on issues such as immigration rules for non-EU IT workers, for example... It's still the 16th century in Whitehall, in more ways than one!

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This page contains a single entry by Philip Virgo published on April 16, 2009 8:15 PM.

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