House of Commons - Trade and Industry

Select Committee on Trade and Industry Eighth Report

7 Increased competition from low-cost economies

118. Manufacturing businesses in developed countries have outsourced part or all of their activities overseas (offshored) for many years to take advantage of the reduced cost of production offered by lower-cost economies. For example, Japanese vehicle producers have offshored their manufacturing plants to the UK to reduce their production costs and to serve the UK and European car markets, while the businesses headquarters' have remained in Japan. The National Outsourcing Association defined outsourcing for us as the procurement of goods or services, which could be performed within an organisation, from an outside provider. They told us that two major categories of outsourcing could be identified:

— Type 1: A UK, or UK based, business procures goods or services it could perform in-house from an outside source in the UK.

— Type 2: A UK, or UK based, business procures goods or services it could perform in-house from an outside source overseas.[222]

119. Along with a UK, or UK based business that performs in-house functions at an overseas facility which it owns, the activities described in type 2 have become commonly known as 'offshoring'.

120. Intensified international competition and the subsequent offshoring of mass production to lower-cost economies by UK businesses has seen UK employment in the manufacturing sector halved since 1979, from just under seven million to 3.5 million.[223] Over the same period, the contribution of manufacturing industries to UK gross domestic product (GDP) has fallen from 26 percent to 17 percent.[224] The period was also a time of high growth in the UK service sector. The contribution and importance of the service sector to the UK economy increased as service sector output expanded from 60 percent to 72 percent of UK GDP between 1989 and 2002.[225] Employment in the service sector also increased from 15 million in 1979 to 21 million in 2003,[226] providing much needed employment for those displaced by the decline of manufacturing.

Customer Contact Centres (CCCs)

121. During the course of our inquiry, the element of the knowledge driven economy that attracted the most interest amongst our witnesses was the rapid growth and development of customer contact centres (CCCs), often described as 'call centres', and the perceived loss of UK jobs in this sector through competition from low-cost economies.

122. The number of CCCs in the UK and Worldwide has grown rapidly over the last few decades as the introduction of new technologies has enabled businesses to set up customer services departments as CCCs. Realising the cost and quality benefits of doing so, many businesses, large and small, have outsourced these activities along with activities they consider non-core such as legal and accounting practices.[227] CCCs have been a major source of inward investment into the UK. Many US businesses, for example IBM and Morgan Stanley, have offshored their CCCs to the UK to take advantage of the culturally similar, English speaking, plentiful, well educated and relatively low-cost workforce and as a gateway into the European market. The UK has held a competitive advantage over the rest of Europe in this sector and now accounts for around 40 percent of all CCC activity in the EU.[228]

123. We were interested to find out from our witnesses what the UK's current position in the CCC sector was. Ms Forsyth of the Call Centre Association (CCA) told us that over the last few years, the growth of CCCs in the UK had slowed, but not stopped, and the industry now considered itself in a consolidation phase.[229] Where once businesses were creating new CCCs in the UK, now new applications, such as automation, were increasing the opportunities for businesses to expand their work from within these CCCs. Not all of our witnesses were as optimistic about the future for UK CCCs. They told us that they were now worried that the growth in the UK service sector, and in CCCs in particular, had reached a 'pinnacle' and the sector was now on the brink of a decline similar in magnitude to the deindustrialisation which had been experienced by UK manufacturing.[230]

EMPLOYMENT

124. When we began our inquiry into the knowledge driven economy, there were no official data on the number of UK CCCs or employment within them. We took evidence from Mr Sunil Mehta, Secretary General of the National Association of Software and Service Companies (NASSCOM), the trade association of the Indian ICT industry, and Ms Forsyth of the CCA who estimated the number of CCCs in the UK to be between 3,000 and 5,000 respectively, while they estimated employment in CCCs at between 600,000[231] and 750,000[232], around 2.5 percent of the total UK workforce.[233] The highest levels of CCC employment sits in UK regions which suffered most from the loss of more traditional types of employment in the 1970s and 1980s. Oxford Economic Forecasting (OEF) has estimated that CCCs employ between three to four percent of all employees in the North West, Scotland, Yorkshire & Humber and North East regions. Areas of concentration within these regions include Newcastle, Glasgow and Leeds.[234] During our inquiry, the DTI commissioned a joint study from NASSCOM and the CCA on CCCs in the UK, which estimated that there were around 790,000 people employed in 5,300 CCCs.[235]

125. Increased employment in CCCs in the UK has had the added benefit of raising the general level of skills in the UK workforce, especially basic and intermediate ICT skills. CCC businesses have increasingly invested in new skill sets for their workforce in order to take advantage of the opportunities created by new technologies. Increased understanding of complex issues such as mortgage and health issues has been required of the workforce, as customers no longer call CCCs with a simple brochure request but require a product which is specifically designed for them and delivered over the telephone.

THE IMPACT OF OFFSHORING ON UK EMPLOYMENT

126. Media speculation has suggested that as many as 40,000 service sector jobs have already been offshored from the UK to lower-cost economies.[236] We asked our witnesses how many and what type of UK service sector jobs they thought were most at risk from offshoring in the future. Mr Fleming, National Secretary Financial Services for Amicus, told us that at least 200,000 jobs in the UK financial services sector were at risk over the next four years; while Ms Drake, Deputy Secretary Telecoms of the Communication and Workers Union, believed that a third of larger CCCs might close by 2005 with the loss of 90,000 jobs.[237] NASSCOM told us that evidence from the US suggested 11 percent of all US service sector employment could be offshored by 2010.[238] With service sector employment in the UK at just under 23.5 million, this could be translated into an estimated transfer of 2.6 million UK jobs.[239] However, further evidence from a report commissioned by NASSCOM into the impact of offshoring in the UK predicted this figure will be lower at around 270,000 jobs.[240]

127. Our witnesses suggested the types of jobs they thought to be currently at most risk tended to be low-skill, low-paid jobs in CCCs and repetitive back-office jobs such as data entry. Several witnesses also expressed concern that these losses were only the beginning of an increasing trend to relocate higher skilled service sector jobs overseas.[241] Intermediate skilled jobs including remote diagnostics, word processing work, insurance claims, credit card processing and airline reservations could also be offshored. Higher skilled job categories, which provide specialist career opportunities, also identified to be at risk by our witnesses included software development, legal advice, accounting, equity research and analysis.[242] In essence, any business process which did not need to be geographically placed was at risk from offshoring.[243]

ADVANTAGES OF OFFSHORING CCCS

128. We were told that the main reason businesses offshored their CCC activities was the relatively low labour costs they found in host countries.[244] The McKinsey Global Institute (MGI) has estimated that labour costs in low-cost economies can be as low as one tenth of those in developed economies.[245] These estimates were confirmed by the evidence we received. We were interested in exploring whether low-cost economies held competitive advantages over the UK other than lower wage-costs. Our witnesses told us that while in the UK there was a perceived lack of the ICT skills which were required by service sector businesses, some overseas countries had an abundance of well educated, high-skilled and productive labour available.[246] An example given to us by NASSCOM was that the skills training required to provide after sales services for older but still utilised computer software was not being undertaken in the UK, while in countries such as India these skills were still available in the workforce.[247] Other competitive advantages over the UK enjoyed by low-cost economies that were given as examples by our witnesses included lower non-wage operating costs, such as utility costs; government assistance in host countries through corporate tax differentials;[248] aid with infrastructure;[249] and employment conditions.[250]

India

129. Our witnesses told us that the preferred host country for UK based businesses offshoring their CCCs had varied over time but English speaking countries, in particular India, had become the main beneficiaries of this type of investment.[251] Businesses which had already announced major offshoring projects in India included; Abbey National, Aviva, AXA Insurance, British Telecom, JP Morgan Chase, Lloyds TSB, National Rail Enquiries, Powergen, the Prudential, and Standard Chartered. More recently HSBC announced the export of 4000 jobs to India.[252] The evidence we were provided with showed that the offshoring of services, including CCCs, from the UK to India was at an early stage. NASSCOM told us that the Indian CCC sector was relatively small, employing between 40,000 and 100,000 people. Of these, about 25 percent were accounted for by UK activity. However, they also told us that the industry was set to grow in India. They had estimated that the number of Indian CCCs would more than double by 2008 and employ closer to 200,000 people.[253]

130. The NOA told us that India was the preferred country for UK CCCs offshoring their activities because it had an abundance of low-cost, well educated and high-skilled English speakers.[254] Starting wages in Indian CCCs are generally one-tenth of those in Western economies' CCCs and one eighth of those in the UK.[255] India produces around two million graduates a year, of which 70 percent do not find full employment immediately, providing a large 'pool' of skilled people to draw on.[256] The Indian ICT sector also has around half a million 'professionals', of which 70 percent are university graduates. Seven percent of the population, approximately 72 million people, are English speaking while for each CCC vacancy on average 400 job applications are received.[257] India was also considered attractive by our witnesses as it offered lower infrastructure costs, such as land and rental costs, lower utility costs, such as electricity and internal telecommunications, and lower costs of ancillary services such as lawyers and consultants. It also enabled businesses to offer a continuous 24-hour service to their UK customers due to time zone differences.[258]

131. NASSCOM told us there were further workforce advantages for UK businesses investing in India including greater flexibility, higher quality and higher productivity. An excess supply of labour in India enabled UK businesses to scale up their operations quickly should they need to, an option that was not always possible in the UK due to a 'tight' labour market. NASSCOM also told us that some UK businesses had increased productivity through offshoring to India by reducing error rates in transactions by 20 percent and by increasing the number of calls/transactions processed per hour.[259] However, the DTI's study into UK CCCs suggested that such claims of higher productivity in India depended on how productivity was measured in each case. Although calls are answered more quickly in India, the proportion of callers who had their enquiries solved with a single call was lower, 60 percent in India compared to 87 percent in the UK.[260]

132. NASSCOM told us the total benefit for the UK economy for every CCC position offshored to India was just over £46,000 per annum. Within this total, they told us that the direct financial benefit for a UK business offshoring their CCCs activity was just under £20,000 per 'agent' employed in India. Of this, 84 percent was accounted for by operating cost reductions for the UK business with the remaining 16 percent being accounted for by profit repatriation from the captive overseas CCC to the UK parent business. In addition to the benefits for individual businesses, there were further benefits for the UK economy which amounted to an extra £27,000 per person per annum. The majority of this benefit, 79 percent, accrued from the economic contribution of UK employees redeployed in new, higher skilled positions.[261]

133. The figures supplied to us by NASSCOM to show the benefits for the UK from offshoring CCCs to India appear to highlight only the positive aspects for the UK. Negative consequences to the UK economy from offshored jobs, such as the cost of laying off UK workers and currency transaction costs, were not included in their analysis. The analysis also assumed that the UK and World economies would continue to expand and no analysis was provided for the case if this is not so. Although we agree that there is evidence of a positive benefit to the UK from offshoring we remain unconvinced that the magnitude of the benefits is quite as high as suggested by NASSCOM.

134. India was not the only country our witnesses suggested provided competition for the UK's CCCs. Countries with a high level of English speakers including Ireland, the Netherlands, South Africa, the Philippines and Jamaica were all mentioned. It was also suggested that as new technologies, such as automated messaging, negated the need for English language skills, foreign language countries such as China, Russia and many Eastern European countries would emerge in the future as further competitors to UK CCCs.[262]

Disadvantages of offshoring

135. Not all UK based private sector businesses believe there are positive benefits to be gained from offshoring.[263] There have been cases reported where businesses have investigated the offshoring option but have opted to keep their activities in the UK. For example, Response Handling Ltd (RHL), which provides services for BSkyB and Scottish Power and is part of the Murray Group, recently announced they were to expand their UK facilities rather than move overseas.[264] Other reported businesses which have chosen to keep their activities within the UK have included; Nationwide Building Society, Legal & General, Royal Bank of Scotland, Royal Sun Alliance, Alliance & Leicester and the Co-operative Bank.[265] Some, businesses such as Shop Direct and Littlewoods had offshored some of their activities previously but had subsequently returned (inshored) them back to the UK.[266] The main reason they gave for returning was the hidden costs of offshoring they found, both direct costs from higher than anticipated staff turnover costs and indirect costs from consumer dissatisfaction with offshored activities.[267]

HIDDEN COSTS

136. One indictment of UK CCCs has been their poor staff retention rates.[268] Attrition rates in UK CCCs are around 15 percent, per annum, relatively high when compared to rates in other UK sectors. However, the DTI's recent study of CCCs found that annual attrition rates in lowcost competitors CCCs sectors could be higher. For example, they found India's CCCs attrition rates were around 24 percent[269] with the average length of tenure being around 12 months compared to three years in the UK.[270] These higher rates of staff turnover hide higher costs of recruitment, language training, cultural training and training to do the job itself. Higher attrition rates may also damage the quality of customer service as new staff develop their knowledge and skills. The DTI study found that workforce costs which had not been fully factored into business's evaluation of offshoring included: the additional costs of employing local law specialists, consultants and accountants as well as the cost of redundancy, redeployment or reskilling displaced UK workers. It was also recognised by some of our witnesses that non-workforce operating costs could also be higher than anticipated. Although low-cost economies tended to have lower power costs; poor infrastructure meant that many offshoring organisations had to install their own power supplies, at extra cost, to guarantee supply. The unit cost of international calls and longer call lengths had also made operating overseas more expensive.[271]

CONSUMER SATISFACTION

137. As consumers' expectations have risen in the UK, increasingly it is customer service which has become the differentiator between businesses.[272] Customer satisfaction surveys have found that UK consumers do not like businesses which they believed had offshored their services, preferring to deal with CCCs in the UK. UNIFI told us that they had anecdotal evidence that there were occasions where finance businesses' UK customers had dealt with offshored CCCs and had been dissatisfied with the service they received. To rectify their problems, these customers had eventually physically gone into one of the finance business's 'branches' to talk to staff there about the problem, reducing the cost benefits to the business gained from offshoring.[273]

138. Some UK businesses have begun to realise that this type of customer perception can damage their corporate image. The Alliance & Leicester's recent decision not to offshore was partially based on a survey which suggested that 87 percent of people in the UK wanted their banking and other financial services looked after by CCCs based in the UK. Those who responded that they would not be happy to be served by an overseas CCC were also asked to indicate why this was. 82 percent responded that they would not be happy because of "concerns about the loss of jobs from Britain", 78 percent because of "problems in communication" such as language, culture and a general lack of understanding of respondents' circumstances, 51 percent because of "concerns about the security of my personal information" and 47 percent because they "believe I'd be given a lower standard of service".[274]

139. More generally, UNIFI told us that some businesses' customers had gone to the extent of changing their supplier because they believed that the business had offshored their services, while more had indicated they intended to change in the near future.[275] However, the recent DTI study found that many customers were not making these decisions based upon their personal experience of the level of service they had received from offshored CCCs but that it was more likely that bad media coverage was to blame for these attitudes.[276]

Corporate social responsibility (CSR)

140. We were interested to find out whether offshoring conflicted with business's commitments to corporate social responsibility (CSR). Businesses in the UK spend a large amount of expenditure on promoting their CSR image. Amicus, in particular, were concerned that businesses were highlighting CSR as a major part of their strategies but were failing to involve trade unions as stakeholders in negotiations or planning before making a decision to offshore their business activities.[277]

141. UNIFI told us that because of offshoring large businesses were potentially risking the confidence of local communities, which had supported them and which they needed to continue successfully.[278] They suggested that businesses were also damaging their image by the quality of decisions they had made with regard to offshoring and cited the problems caused in Newcastle and the North East of England by Lloyds TSB's announcement that they were to close their operations there.[279] Amicus also warned us that, although the effect of job losses through offshoring may be small in comparison to UK total employment, they were worried about the impact offshoring had on local communities when large local employers left. The examples they provided were the Prudential in Reading and Aviva in Norwich.[280]

142. The unions were also concerned that while presently activities were being moved to democratic countries where the employees had access to union representation, in future the low-cost economies chosen as hosts could be those which do not welcome independent trade union representation and International Labour Organisation arrangements, such as China and the Philippines.[281]

143. We were interested to find out what was being done for UK service sector workers whose jobs were under threat from offshoring. UNIFI told us that they had had discussions with a number of financial businesses, on a case by case basis, aimed at reducing the impact of their decision to offshore on their employees. Arrangements they had already made included a Framework Agreement with Barclays that the union described as "groundbreaking".[282] The core components of the agreement included:

— Providing as much lead time as possible in order to plan for the changes and allow the measures to work;

— Tailoring the supports to suit the particular circumstances of a project and the people concerned;

— Providing professional career support for all concerned so that people have all the tools to support them through the change;

— Providing escalating levels of support so that if people want to be re-deployed in the bank but do not secure another role, other supports become available to them; and

— Providing a redeployment team to help identify and match people with alternative opportunities.[283]

144. UNIFI suggested that early consultation and money for reskilling and retraining should represent the basis of any agreement with businesses and were committed to negotiating a guarantee of no compulsory redundancies. Since giving evidence to the Committee, UNIFI has made similar agreements with Lloyds TSB and HSBC.

Opportunities for the UK economy

145. There is no doubt that countries such as India have an advantage over the UK in that they have an abundance of workers willing to take lower wages. However, the UK service sector and the CCC industry in particular has many other competitive advantages over low-cost economies. To retain this advantage, the UK service sector, and in particular CCCs, needs to exploit the things which it does best. This includes exploiting the experience and skills which they have built up over the last few decades.

146. Most of our witnesses agreed that customer service is one of the areas in which the UK has a competitive advantage over other countries. The CCA told us that UK economy had: "a lot of experience in setting up and managing customer service departments and contact centres here in the UK, which they [businesses which offshored] will not get in emerging markets".[284] The quality and experience of UK CCCs' operations has meant that the UK has been successful in attracting inward investment in the past, especially from the US.[285] UNIFI told us that the original reasons for such businesses to site their CCCs in the UK still held true, that is, the quality they provided with high skills and training. This, they suggested, had been proved by the number of US businesses which had remained in the UK despite the low-cost opportunities available to them.[286]

147. The CWU told us that there still was a high margin for improvement in productivity and entrepreneurial response in UK CCC businesses. They argued that if UK businesses could capture this it might outweigh the increased margins from cost reductions businesses gained simply by going to low-cost economies.[287] The NOA suggested that only a fraction of the potential value of outsourcing had been extracted by UK business. Increased productivity, profitability, global competitiveness and enhanced economic growth could all be achieved through re-evaluation by business of their approach to outsourcing. They believed that if these benefits were realised in the UK, businesses would not need to offshore their CCCs. The NAO also argued that the UK was ideally placed in Europe to capitalise on the trend towards greater outsourcing by businesses in other countries by improving the quality of its services, an advantage which other Community members would find hard to match.[288]

148. As low-cost economies develop, new opportunities will arise for UK businesses to trade their products and services within these new markets. In the long-term, low-cost economies will 'migrate' further up the value chain, promoting development in these countries and ultimately increasing the global markets for UK products and services.[289] The geographic nature of offshoring also brings its own advantages. UK businesses which offshore will be able to take advantage of their presence in these countries to provide similar products and services to indigenous businesses and consumers. Developers and support personnel in the relevant regions will have a better understanding of customers' needs, regulatory compliances and regional preferences in these economies, and will be better placed to successfully launch new products or services which are being provided.

149. Outsourcing and, in particular, offshoring, provides UK businesses with the solution to specific needs, for example lower costs and the ability to expand operations quickly. However, businesses need to be sure that these benefits are weighed against the costs they could incur from poorer infrastructure and lower consumer confidence.

150. We are aware that the Government is currently in the process of compiling a more detailed response to the issue of offshoring and we look forward to its results. We recommend that the Government keep this situation under review. If it becomes clear that job losses in the service sector are becoming a serious problem, we have no doubts that this will be one area our successor Committee will want to pursue in the future.

222 Q 246 Back

223 Q 203 Back

224 National Statistics (series EWSP, ABML) Back

225 National Statistics (series QTPZ, ABML) Back

226 National Statistics (series YEJA ,YEJC ) Back

227 Appendix 17 Back

228 Q 268 Back

229 Q 271 Back

230 For example see Q 154 (UNIFI) and Q 221(Amicus) Back

231 Q 339 Back

232 Q 264 Back

233 ONS website (23 February 2005): www.statistics.gov.uk/pdfdir/lmsuk0204.pdf Back