Offshoring Trend Could Extend the Jobless Recovery

The offshoring of corporate finance and IT jobs to India and other overseas locations means U.S. and European companies can expect to see more job losses in those areas for the foreseeable future, according to new research from The Hackett Group Inc.

The Hackett Group’s latest research found that close to 1.1 million jobs in corporate finance, IT and other business functions were lost at large U.S. and European companies in 2008 and 2009 due to a combination of offshoring, productivity improvements and lack of economic growth. Over 1.3 million additional jobs will disappear by 2014, The Hackett Group predicts, with offshoring becoming a larger factor each year. These figures represent annual job loss rates of close to twice those seen from 2000 to 2007.

Corporate finance in particular is now seeing an acceleration of this offshoring trend. While IT dominated the mix of business function jobs lost to offshoring since 2000, growth in IT offshoring is now leveling off. By contrast, the total number of jobs lost to offshoring in corporate finance is expected to grow by a compound annual rate of about 20% between 2010 and 2014. In 2014, the annual number of finance jobs lost to offshore will be higher than the IT figure for the first time.

The Hackett Group’s research finds that companies are looking at their overall service delivery models and recognizing that the challenging economic times have presented them with a compelling environment to make change that will enable their business to compete globally for the long term. According to The Hackett Group’s analysis, one of the most important of these changes is the offshoring trend, which is being accelerated by the fact that many companies are now creating their own global business services (GBS) organizations in India and other low-cost labor markets.

GBS organizations embrace both outsourcing and their own internal offshore operations, which remain owned and operated by the companies, to enable a broad array of functions to be moved to low-cost labor markets and managed in an integrated fashion. Over the past few years, many companies have become more mature in their use of GBS organizations, expanding them beyond a basic shared services approach to manage operations in multiple functional areas such as IT, finance, procurement, and human resources. By offering economies of scale, scope and skill, this approach enables companies to drive cost reductions and lower headcounts. Companies are also looking to enable global enterprise operating standards that will streamline their businesses and drive better overall results.

“With the modest resumption of economic growth this year, policymakers throughout the industrialized world have been struggling to create jobs. But our research shows that across key business functions, their efforts are simply being overwhelmed by offshoring and other factors,” says Michel Janssen, chief research officer for The Hackett Group. “This is what’s driving the ‘jobless recovery’ we’re seeing in key white collar job categories, and it’s likely to continue for the foreseeable future. The trend spiked in 2009, when nearly 700,000 jobs in finance, IT, and other areas were lost to a combination of offshoring, productivity improvements, and lack of economic growth. We see the number leveling out at around 250,000 jobs lost each year through 2014, and possibly beyond. That’s a reality that’s nearly impossible to avoid.”

According to Honorio Padron, global business services practice leader for The Hackett Group, “A number of factors have helped create this situation. Certainly, the savings that can be generated by moving jobs to low-cost labor markets is too great for most companies to ignore. In addition, many companies have become much more mature in their use of offshore resources. They began with shared service centers nearly a decade ago, taking basic transactional areas offshore on a one-off basis. But today we’re seeing the rapid ascendance of comprehensive cross-functional GBS operations that are moving far beyond transactional work, to handle the lion’s share of the support function for many companies. The result is a globalization trend from which there’s simply no turning back.”

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