Examination of Witnesses (Questions 246-259)
NATIONAL OUTSOURCING
ASSOCIATION
10 FEBRUARY 2004
Q246 Chairman: Good morning, it is a
wee bit later than we had anticipated but that is not a problem.
There are one or two fewer than we had at the beginning but we
are still well-placed. I think we could almost start off where
we finished with the union reps. The DTI suggested that the UK
is the second most popular destination for overseas foreign direct
investment after the US. Has the UK been a primary destination
for non-UK businesses that outsource overseas as well? Have we
been the recipient or the beneficiary of the kind of things we
are now saying should not be happening with the business going
outside of the UK?
Mr Roxburgh: I think in short
the answer is yes but not quite in the way you would think. Historically,
inward investment has obviously brought much American investment
in our economy. This has not been in the form of business processes,
which we are about to talk about, it has been much more in the
transfer of whole parts of businesses. I wonder if it might be
helpful if I defined "outsourcing" as the National Outsourcing
Association sees it because parts of the debate I have heard going
on this morning seem to pick on various elements of that and assume
it is all the same. What we have defined outsourcing as in the
White Paper, which I think we circulated, is "the procurement
of a value-creating activity that either was or could have been
performed in-house", which is quite broad, broader than many
definitions but backed by an academic side. Just to bring it down
to the level of a small business, say in one of your constituencies,
it is an issue that maybe a single-man business or maybe a couple
of people will be looking at as to how they raise all those invoices,
how they chase all those debts, how they do that marketing, how
they deal with the supply chain, and one reaction is to employ
people and another is to buy a service. It is just as commonsense
as that. We do see it historically. For example, it has happened
in accountancy for many years where such companies have gone to
an accountant who will perhaps do their book-keeping for them.
Outsourcing, if you like, for the large companies and for the
small to medium-sized enterprise is very much about providing
those services to a certain quality level and to a best practice.
So for a local business most outsourcing you could say was common
sense. Something like 70% of UK businesses have outsourced either
one business process or more but less than 5% have outsourced
as many as five business processes. We have talked a lot this
morning about offshore outsourcing and only 1% of all business
process outsourcings are offshore. There are indications from
NelsonHall that by 2008 that that could grow to 8% but currently,
to reiterate, it is only 1%. If you break that down, as I would
like to, into just three segments—and this is where some
of the confusion lies—there are three areas of outsourcing
which have different implications for the economy. You can offshore
for a BPO using a UK base company. I do not mean a UK national
company, I mean one who operates from the UK, and that has one
set of implications. You can offshore through a foreign-owned
BPO company, say an Indian company like Tata, and that has a different
set of implications for the UK workforce. The third form, which
from recent research seems to be by far the most predominant,
probably at least 50% of historical offshorings have been of this
nature, is what we call a "captive facility" and this
is where the original company, the employing company of the UK
staff, decides to put that work offshore into another country
but runs that as if it is a subsidiary. So that is 50% of the
story and it does not actually include outsourcing. The thing
that allows you to do all of those things is the underpinning
technology. Without that you do not really achieve much at all.
You could take a back office in Birmingham and put it in Bangalore
but you would not have achieved a lot without the underlying technical
infrastructure. That in itself brings savings and cost reductions
but the additional element is the people you are using in Bangalore
are as much as a tenth of the cost of those people you might use
in the UK. What adds back the cost elements, as our previous speakers
were saying, is the telecommunications, which probably gives you
the 30 or 40% saving. That is a long way round to answering your
question and I have a slide entitled "Country Suitability"
here which hopefully will be helpful. Am I allowed to pass you
copies? I have one for you.
Q247 Chairman: Go ahead.
Mr Roxburgh: The question you
asked—and it is a very, very important and a good question—has
people scratching their heads because it is not the way it is
usually asked. What you will see here is a matrix with lots of
nice coloured dots showing the capabilities of individual countries
who would be our competitor and hence my reason for tabling this,
how they are perceived between "poor", "fair",
"good", "very good" and "excellent".
This table is produced by Gartner and they produce it at events
like NOA conferences to show which countries you should invest
in. This slide has a left-hand component which is the UK which
is never on the Gartner slides. I did ask Gartner about this and
the question threw them into confusion. Basically what the "Country
Suitability" slide is saying is, to an offshore country,
so let us say America, looking over here, then Northern Ireland
and Southern Ireland look very good prospects but India is better.
If we look at how they judge what is better or worse then language,
government support (which is interesting given the debate we have
got today), the labour pool, the infrastructure that supports
it, the educational system, the costs associated with that labour
(which has received a lot of discussion today), political stability,
cultural compatibility and data and IP (which got a mention earlier),
and security; all of that is important in making these decisions.
The reason I think Gartner places India at the top of the list
as "very good"—and you will see that is the best
anyone achieves and it outshines Ireland and Northern Ireland—is
because of the low costs associated with the labour pool and the
capaciousness, if you like, of their labour pool. They produce
two million graduates a year, which is something this country
could never hope to do. There are two million educated people
coming out into that system and it is estimated that perhaps 70%
of them do not find full employment, in which case it is an "available"
labour pool. I could not really in my mind, having not been able
to persuade Gartner to bite this bullet, distinguish us enormously
from Ireland, which is interesting but fair. Possibly you might
say that our labour pool was a bit tighter but I think Ireland
and Southern Ireland itself with its rapid growth over the last
few years has been having difficulty and our costs are probably
on a similar level, but you will see that we are marked down on
cost because we are a developed economy and a high cost economy.
So overall I concluded that we were much like Ireland and probably
if Gartner were to do this analysis they would put us in the "good"
but not "very good" range. Does that answer your question?
Q248 Chairman: It is very useful, I think.
It is a very simple although nobody else is able to see it yet.
Mr Roxburgh: I apologise for that.
Q249 Chairman: We do not really have
the means whereby we can use graphic evidence in that way for
people but that is very helpful. We have had from the unions their
perception of the impact of outsourcing on the British labour
market and on the workforce. How do you see this as an issue?
You are an organisation which facilitates outsourcing. How do
you think British industry is coping with the fact that people
are losing the jobs and skills that they have?
Mr Roxburgh: Again, I would like
to draw attention to two elements: extent of offshore BPO and
job loss mitigation factors. 99% of business process outsourcing
takes place onshore and usually takes place without loss of jobs,
and we will come possibly later to talk about some of the legislation
that surrounds all that. I think in those cases there is a big
change for the UK economy in that people are increasingly going
to move from the large corporates, the environment they know currently,
to business processing type specialist organisations which will
have a stronger technical basis, if you like, so I think that
will mean that there is increasing specialisation of skills of
those people as they move from one organisation to the other.
There will be some disquiet because changing organisations is
never a comfortable business, but history shows that most people
make the transition well. The other aspect to that is they get
exposure in that specialism to lots of different companies and
different ways of doing things, which is generally regarded as
enhancing their career because they gain more views and possibly
learn more in it. There is no doubt that offshore outsourcing,
which I have said is possibly the 1% but growing, will produce
a churning of employment in the economy where there had not been
before because there is no option to move those jobs, as the onshore
operators have, because you cannot move those people all to India
because they would not want to go. I have heard of perhaps one
or two cases where people have gone to the Indian organisation.
So there is only one option basically, which is to make them redundant
in as reasonably humane and supportive a way as possible. So that
is an impact but there are mitigating factors. One of the mitigating
factors that the NOA talks about in its Offshoring paper, not
the one I have put in here because I had not taken offshoring
as the main debate here, but we do have a Code of Practice which
perhaps we will come on to later, is that the labour pool in the
UK is actually shrinking, particularly amongst the young community.
Overall the NOA estimates—and this is by no means perfect
but based on government statistics—that by 2011 the pool
will actually have shrunk by one million people. The majority
of this shrinkage comes from the fact that there is a lower birth
rate in the population and that means that the younger age groups
are hit most and, interestingly, in the case of contact centres,
something like 60% of the employees in contact centres are under
30, so it is a rather interesting point that this is an area where
we do need inputs of skills, and you might argue that if we weren't
to offshore it we might have to encourage immigration to fill
some of those positions. If you talk to people like the Contact
Centre Association as in the discussion we had at the DTI last
week, it was actually said that in many of the constituencies
that recruitment is difficult for this very reason. There is huge
competition amongst contact centres for the existing skills pool
and that traditionally has tended to push up the wages in these
establishments. The other thing is that ultimately—and that
has been mentioned this morning—the price advantage that
offshore has will expire as GDP per capita grows. Again, you can
have arguments about how long this will take. I know India has
looked at possibly their advantage lasting 10 years. Make no doubt
that after that date—and if that really is just 10 years—then
it will be another country that the employment could be transferred
to. So I see significant changes occurring but not of the doom-laden
nature of some. I believe some jobs will go offshore but not all
jobs.
Q250 Linda Perham: You may have heard
my colleague ask this of the previous witnesses, and it is about
the UK employment regulations such as TUPE. Does that mean that
UK employees are at a comparative disadvantage compared to overseas
employees, when a business evaluates how or where it is going
to outsource?
Mr Roxburgh: That is an interesting
question. I think that UK regulations, which are largely about
the protection of the worker, are a strength of the UK and they
are good for the UK economy overall. You could claim that they
are a competitive advantage in the world market and not a comparative
disadvantage. If I just explain the two elements that come in
here or just go through them so we understand how they affect
the different groupings above. There is TUPE, which is the Transfer
of Undertakings and Protection of Employment, so it is definitely
minded to protect the employees. This is where I was talking earlier
about the fact that there is a requirement if you are transferring
an undertaking, particularly in outsourcing, that the people have
the right to transfer with the job. What there has to be is a
reasonable location because people do not travel huge distances
for their job. A question asked earlier was what happened when
people in the south of England were told their jobs were transferring
to the north of England which was cheaper, and the answer I would
have liked to have given is that 95% of them did not transfer,
not because of any other reason than it would have been uneconomic
for them to have done so. Often in outsourcing we seek to locate
the new building or whatever where the people are working. I have
seen outsourcing done in that way. In the case of Xansa where
we outsourced the finance of BT, the post-BT employees stayed
exactly where they were. In other cases in outsourcings that I
have done personally I arranged for the supplier to come to the
town—which was Basingstoke—and the people who could
have been made redundant were TUPE"d across and they worked
in the town where they had been working before. So that is how
TUPE protects. What it also protects is all their conditions of
employment, say salary, any shift working patterns they have got.
The only thing it possibly does not protect at the moment is the
pension fund which is an issue that probably needs sorting out
somewhere. It is good practice amongst outsourcers to make sure
that pension funds are mapped, and again I have had direct experience
of that. There is something very similar in Europe which affects
and rubs against and occasionally changes TUPE and that is the
Acquired Rights Directive or ARD. Legislation taking place in
Europe does influence what we do in the UK. There is Employment
Law which really controls the whole issue of redeployment and
compulsory redundancy and ensures that people are given reasonable
terms and conditions of severance if it comes to that. So again
reiterating, we at the National Outsourcing Association think
that it is good for the UK economy and that is good for the employees
and good for flexibility of business.
Q251 Linda Perham: Is that different
for UK and non-UK businesses?
Mr Roxburgh: The law remains the
same for everyone in this country. I think the only differences,
if we are talking about offshoring, is that it would be almost
inconceivable that large groups of people would TUPE to India
because their establishments are out there. TUPE does not tend
to come into effect except in very rare cases where perhaps senior
executives and sales persons move out. Obviously the employment
law will then apply to the company which was seeking to move that
work offshore and he would have to make sensible plans to redeploy
these people or make them redundant under the law so again the
protection is very good but we need to look at that and make sure
it is appropriate for the changing times as we move into the knowledge
driven economy.
Q252 Sir Robert Smith: Let me pin down
some of this. We were looking at your written evidence which talked
about 200,000 workers employed in business process outsourcing
at the moment and suggested that this number would double over
the next two years, whereas there are all these headline stories
in the media about all call centre jobs going abroad. We were
wondering about reconciling these two different views.
Mr Roxburgh: If I could try anyway.
The 200,000 is an estimate based on market research estimates
based on what the business process outsourcing market is at the
moment and is likely to be in the future and we have just taken
a view on the sales per head, which is a reasonable financial
tool to make that calculation. I think it is backed up by looking
at the size of the business process outsourcers as well. You can
come up with numbers of that nature. What I would say within this
point of view again, just to reiterate, is that only 1% of that
currently goes offshore. That is set to grow to the 8% I mentioned
earlier by 2008 but it is a small percentage. Set against that,
we are perhaps talking about 500,000 call centre jobs and the
majority of these—80 to 90% of them—probably are still
within the major corporates so they are not actually outsourced
as they stand at the moment. As I was saying earlier, many of
these are moving across to captive locations offshore that still
remain with the company. So then it falls back to that company,
to refer back to Linda's question, to make sure that employment
law is respected in relation to re-employment.
Q253 Sir Robert Smith: To pin one thing
down, the doubling of business processing jobs, (because the nature
of it will be people transferred from jobs in-house to outsourced
jobs) does not necessarily mean an increase in employment in the
economy as such.
Mr Roxburgh: It could mean an
equal transfer but I think the key here is how much business can
be attracted from overseas and elsewhere in this respect. I think
there are opportunities there. I think the other thing, again
to keep things in perspective, is to recognise that it does not
make sense to outsource everything or offshore everything. There
are reasons such as resilience in your business processes, the
ability to control them, the ability to develop them. As the National
Outsourcing Association we recommend corporates keep some of that
activity in-house otherwise you do get to the situation which
we have seen (and we have got ways of overcoming this) where organisations
having outsourced something for five years and falling out horrendously
with the outsourcer suddenly cannot remember what they were doing
five years ago and they are "over a barrel". So we do
put in place processes in outsourcing methodology to make sure
you are never in that situation. One is to keep at the very minimum
a core of capability in-house so you are never in that situation.
Q254 Sir Robert Smith: Earlier some of
the witnesses were talking about lemming or herd-like instincts
in certain sectors whereby because it is the flavour of the month
and your competitors have outsourced, therefore to be seen to
be a front runner in that sector you should also be outsourcing.
There should be a health warning that every company should look
at the value and merits on the business model for their business.
Mr Roxburgh: I think the union
position is very valid. Companies ought to look very seriously—and
I would be surprised if companies were not looking—at the
business case for offshoring if that is the step that they care
to take. Maybe they can make savings of 40% by doing work internally.
There have been shared service centres, which I talk a bit about
in this report, which is one response for organisations and that
improves the efficiency. It eliminates duplications, it puts in
new technology, automation. We are talking about IT again but
things like enterprise resource planning systems (ERP), basically
a computerisation of the organisation from end to end so that
you do not need to process your expense claims in every single
building you have in the UK; you can have one centre that does
it and you can choose to locate that wherever you want in the
UK. Ultimately it may make sense to move that offshore but we
are not saying that is essentially the case. Or you may decide
that you have got to a stage as an organisation where offshoring
presents you with a very real opportunity and you want to go that
way, but we would never in the Outsourcing Association say
that even outsourcing is the only way and we would certainly not
say that offshoring is the only way. It is horses for courses.
In certain organisations the management are just totally opposed
to outsourcing, period, let alone offshoring, and it will take
them time to turn around to a different view maybe but only if
they see their competitors achieving real success in the marketplace
for having done some of these things, and there are examples.
Q255 Mr Berry: In your written evidence
you say that you are developing a Code of Practice covering outsourcing
issues. Can you say a little about that, in particular how that
Code might relate to offshore outsourcing?
Mr Roxburgh: I did bring with
me a copy of the NOA Offshore Outsourcing Industry Position Statement
(v6), but I do not have lots of copies.
Q256 Chairman: If you just want to submit
it to us we will incorporate it with your evidence. If you give
us a very brief outline of the points, that would be helpful.
Mr Roxburgh: Again, this was produced
much in consultation with our members, first of all, to be a Code
of Practice; and it was specifically aimed at offshore, to answer
your question. Why did we start with the offshore? We do plan
a more embracing Code of Practice but about a year ago we saw
that this was an issue that was growing, that members were actually
asking us for advice on, so we set about a consultation to try
to allay some of the fears, to try and recognise some of the issues
in the economy, some of the things that I have been talking about
now, but also to ensure that the members did adopt a good way
of dealing with this. Looking at the business case, making sure
there was a business case, looking after their employees, and
making sure that whatever they did, if they were offshoring them,
they adhered to what in UK terms we would regard as ethical business
practices when the work was offshored. So we refer here to both
the UN Human Rights and Business Principles which take into account
ILO principles as well. I am no expert on these but we actually
refer to those as forming part of our Code of Practice. This is
being debated with our members. I think this is the sixth issue
of the paper and I am sure it will go through more iterations.
Q257 Mr Berry: Has there been a consultation
with the unions or with government or both?
Mr Roxburgh: Recently I think
the answer is both. We did contact the TUC about a couple of weeks
ago to see where they were on this situation of offshoring and
they themselves are going through a consultation process, as I
understand it, and we have agreed to touch base with each other
at the beginning of March. The view is that we will hold a breakfast
seminar where we will debate this together. From the government
point of view, part of the reason for this White Paper was that
although the paper we submitted was a positioning paper to the
DTI for last week's meeting it was very much about stimulating
the debate with government as well.
Mr Berry: Would it be possible for the
Committee to have a copy of the latest draft of the Code of Practice?
Chairman: I think that is what we are
getting.
Mr Berry: Forgive me, thank you. That
was a good question.
Q258 Mr Clapham: I note from your submission
that you say that the UK leads the rest of Europe in business
process outsourcing, so I think it is fair to say that there is
great potential globally for development, and we have the kind
of services that are likely to be outsourced, some of which were
put to us by the Unions. For example, in addition to the call
centres and insurance they talk in terms of the likelihood of
legal services being outsourced. Given that, do you feel that
government could encourage business to develop in this sector
and if they were to become much more involved in encouraging business
what would be the benefits to the UK?
Mr Roxburgh: What we would say
is that the potential for business process outsourcing is huge.
Ultimately—and again I rely on NelsonHall figures here or
an extension of those figures—the potential market in Europe
is probably about £700 billion. Quite when the market will
ultimately be saturated, if it ever will be, is open to discussion.
Worldwide that could possibly be double that amount if you take
Europe and the States as being roughly equal markets. So we are
into by that stage thousands of billions, are we not? NelsonHall
have forecast in a fairly recent publication I have seen of theirs
that by 2008 it (the worldwide market) would be about £100
billion which would therefore be about 10% of that potential.
So you can see it is a rapidly growing market with a huge opportunity.
Just before saying what government should do to encourage that,
maybe if I said what the benefits might be. I think if we can
attract that market here—and that is an "if"—it
would be about jobs, it would be about economic growth, and it
would be about some of the things McKinsey studied like repatriation
of earnings, particularly if we can get UK companies to continue
to lead that trend. What the Government might do, and I can only
give ideas of what the strategy could be in response to this,
they might champion the sector as a job creating one, not necessarily
a job losing one, and we believe that there is a possibility of
approaching it that way. You might raise the UK profile as an
export market. As you see from the surprise on the Gartner one,
we would not necessarily be on someone's scope of offshore destinations.
We would not necessarily be thought about even in American corporate
boardrooms. They make offshoring decisions and they possibly do
it without even thinking of their friends in the UK. I do not
mean they mean to do that; it is just they think underdeveloped
economies and less developed economies are the place to go offshore,
and we do not offer them a huge saving in salary terms. However,
we could work on that. If we can try and attract the work on behalf
of the US and EU, we could certainly gain a large amount of business.
We could get the government maybe to espouse diversity in the
mindset, we have had that mentioned earlier, and used in many
ways but perhaps using some of our skills which are pretty traditional.
If I refer to the football field, if you watch television you
may support your local teams and—and I am not a football
supporter myself—if you look on the football pitch we have
a "United Nations of players" and we do not think that
at all unusual so why can the UK not do something similar with
its IT sector industry and encourage ourselves to have a full
range of skills and nationalities in those centres to make it
attractive for, say, American organisations or EU newcomers to
be involved? We can also try and attract linguistic skills. If
we insist on speaking English we will find it much harder to attract
business from Europe. But again some of these skills could come
from the EU newcomers in the "25". That is a possibility.
Advanced technology is certainly an aspect. We can use some of
the new technologies—so can India of course because they
certainly do not have a shortage of high tech skills out there—but
we can use it to blend these centres. You do not necessarily have
to import the German speakers from Czechoslovakia; you could have
them working over there in parallel with their own call centres
because contact centre technology is powerful enough to enable
us to do that. BT have even run experiments on call centres with
people working from home. They do not even take them to a centre.
So promoting the use of advanced technology in this sector is
important. Finally, perhaps government ought to insist on accreditation.
Perhaps we ought to take a leaf out of the Indian nationals' book
where an enormous amount of effort has been put into CMM Level
5, which is the traditional one, but in this sort of service 6
Sigma tends to be much more recognised and perhaps we ought to
be looking at that (accreditation) 100%. There is BS7799 which
is the security one, which again if we strengthened our offering
there we could make that a competitive advantage. There is another
Carnegie Mellon Standard which is eSCM which I believe stands
for "eService Carnegie Mellon", and 20% of organisations
are looking at that. So there are a number of encouragements that
would be needed but it is not impossible to derive a strategy,
I would have thought, for the UK if it wants to attract jobs in
this sector.
Q259 Mr Clapham: Given that there is
that great potential there and one which if government was involved
you feel could be exploited, you seem to feel that there would
not be the sufficient skills amongst UK workers and therefore
we would be looking at economic migration to be able to deal with
the increased capacity?
Mr Roxburgh: I think there would
certainly be a need to retrain people. I think I would look at
it as possibly one of the ways in which you could mitigate some
of the skills shortages in other areas if you could grow this
sector. It is only one of many possible ways. You would certainly
be looking to the IT literate to be involved in this sector and
young, aspiring workers in contact centres would certainly appear
to have some of those skills. So IT literacy would be important,
training in process methodology I think would be important but
supplementing those skills by virtual workers, if you like, from
anywhere within the EU or outside of that would also make sense.
Those blended skills could actually provide the UK with a leading
edge, if you like.
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