'Offshoring' of service sector jobs prompts union concerns

A series of highly publicised decisions by several major companies in late 2003 and early 2004 to relocate - or 'offshore'- jobs in activities such as call centres and back-office operations to low labour cost countries such as India and China has prompted widespread concern amongst trade unions and a consultation exercise by the UK government.

Recent decisions by Norwich Union, one of the UK’s largest insurance businesses, Lloyds TSB bank and the National Rail Enquiries service to transfer call centre operations involving, respectively, 2,350, 1,000 and 600 UK jobs to India, are part of a growing trend amongst large UK businesses to move call centre and 'back-office' operations to lower labour cost locations in south and east Asia. HSBC bank has also announced that it intends to shed 4,000 jobs in the UK as it relocates such work to India, Malaysia and China over the coming two years. The bank already runs global processing hubs in Hyderabad and Bangalore. These four companies are amongst 28 large firms identified by the Communication Workers’ Union (CWU) that have moved offshore, or announced plans to move offshore, some 50,000 'customer-facing' and back-office service sector jobs from the UK.

Whilst relocation of manufacturing operations to industrialising regions in relatively low labour cost countries is a well established trend, 'offshoring' in the service sector of the economy is a relatively new phenomenon. According to financial services union Unifi, the offshore operations of UK financial services groups are estimated to have grown from 200 employees in 1996 to 3,000 in 2002 - and are predicted to rise to over 5,000 by the end of 2004. Financial services have been prominent in the growth of offshoring, but call-centre, data processing and other back-office operations across a wide range of service sectors are involved. So too are remote software development and maintenance activities. Thus, in addition to financial service groups, companies as diverse as Accenture, British Airways, BT, Dell, Ideal Shopping Channel, Reuters, Tesco and Vertex (the customer service arm of United Utilities) have moved some activities offshore.

Moreover, the phenomenon looks set to become more widespread: a 2003 survey by the Confederation of British Industry found that 29% of companies have already sent work offshore, and that 59% are likely to do so over the next two years. The Trades Union Congress (TUC) estimates that between 150,000 and 750,000 jobs in the UK might eventually be affected by offshoring, with the eventual outcome depending on the public policy response.

Employment in call centres at risk?

The offshoring of call centres has attracted particular attention, since they now employ almost half a million people across the UK, representing nearly 2% of the workforce. Many call-centre operations are located in areas which had suffered industrial decline over the past quarter century as traditional industries shrank, such as south Wales, central Scotland and the north-east of England. The employment and incomes brought by the growth of call centres have been important to the economic regeneration of these regions. Signs of these new-generation jobs disappearing overseas prompted a consortium of public agencies, employers’ organisations and trade unions to commission a report on the threat to the call centre industry in Scotland - where employment in call centres grew from 11,000 in 1997 to 46,000 in 2002 - posed by the challenge of offshoring ([Call centres in Scotland and outsourced competition from India](http://www.scotecon.net/publications/Call Centres Scotland.pdf), Phil Taylor, University of Stirling, and Peter Bain, University of Strathclyde, September 2003).

The report concluded that: despite predictions of contraction over the past two-three years, the number of centres and employment in the sector has continued to grow; and, amongst recent closures in the sector, offshoring to India has to date only had a marginal effect. The report identified certain types of call-centre work - high-volume, short-duration and repetitive - as being most vulnerable to offshoring, but underlined that growing use of call-centre services in the public services was likely to be a source of employment growth in the UK. Although firms which had moved call centres offshore to India were attracted by the combination of low labour costs and skilled English-language labour, problems of high labour turnover appear to persist or even be exacerbated in the offshore operations. Concerns were expressed by some firms about quality and consistency of the customer service provided from offshore locations, as well as about the adverse impact on the morale and motivation of staff remaining in the UK. Such concerns have been echoed by those financial services groups, such as the Alliance and Leicester, Cooperative Bank and Nationwide, which have taken decisions not to offshore any call centre or back-office operations. Overall, the Scottish report indicates that firms contemplating offshoring are faced with assessing a balance of advantages and disadvantages. Hence future developments are highly uncertain.

Government consultation exercise

Launching a consultation exercise with an initial position document, Services and offshoring: the impact of increasing international competition in services, in autumn 2003, the government’s Department of Trade and Industry noted that offshoring brings both benefits and challenges for the UK economy. As an innovative business process that can drive down costs and increase productivity, offshoring can lower the cost base of UK companies, making them more competitive in world markets. The paper also observed that 'it would be wrong to assume the offshoring is all one-way traffic', pointing to continued substantial inward investment flows into the UK which include an element of 'inward offshoring'. On the downside are the 'short-term, transitional job losses' resulting from offshoring, which can have a particular regional impact. Moreover, 'disproportionate negative employment consequences' could have implications for other government employment and labour market priorities.

In responding to these challenges, Patricia Hewitt, the trade and industry secretary, argued in her foreword to the consultation document that: 'What we must not do is fall into the temptation of protectionism. Attempting to prevent offshoring by putting up trade barriers would be costly and, in the long-run, ineffective.' Possible responses include looking at measures to improve competitiveness further, along with addressing shorter-term adjustment costs in particular regions should this prove necessary. Ms Hewitt reiterated the central premise of the government’s response, that there should be no resort to protectionist measures, at a high-level meeting of business leaders, trade union officials and policy experts at the beginning of February 2004.

Trade union reaction

Trade unions have responded to the threat of job loss posed by offshoring in several ways. The TUC, in its response to the government’s consultation exercise, argued that: 'Big-scale offshoring is not inevitable. Trade unions and employers working with public agencies can influence the pace and direction of change.' It went on to underline that: there are significant practical barriers to offshoring (which are often overlooked); technological change can work in both directions (resulting in some activities eventually returning to the UK); and considerations of service quality and workforce reliability were leading some employers to review offshoring decisions. Describing the response of UK trade unions as 'pragmatic and non-protectionist' it called on the government to formulate a national strategy that embraced a range of measures. Some measures, such as 'focused industrial and regional policies', would require government to take the lead. Others, such as additional support for training and upskilling, envisage a central role also for employers and trade unions. The TUC also urged support for the trade union movement’s efforts to promote core labour standards through international agreements and agencies. Some individual trade unions, including the CWU and the Transport and General Workers’ Union, have been calling for rather tougher measures against offshoring and leaders of these two unions have publicly aired some disagreement with the TUC general secretary in letters to the Financial Times (on 8 March 2004).

Some other unions have concluded innovative agreements with employers addressing the impact of offshoring on UK employment. For example, Unifi recently concluded an agreement with Barclays bank for managing employment security in the context of relocation of some activities (and therefore jobs) offshore. The agreement includes commitments to enhanced information at an earlier stage in offshoring decisions and early consultation with workers affected, as well as a series of measures aimed at avoiding compulsory redundancies. The same union concluded an agreement on 'the management of change arising from global resourcing' with HSBC bank in 2003, which set out a series of measures to mitigate the impact of the transfer of UK-based bank work to one of the group’s global resourcing (including processing) centres. Connect, the union that represents BT’s managerial and professional grades, concluded an agreement in 2003 committing the company to ensuring good treatment of workers by overseas suppliers as well as avoiding compulsory redundancy.

Commentary

The evidence so far on the impact of offshoring on service sector jobs points to its contingent nature, with the incidence and future scope depending on the configuration of several factors. These include the nature of the activities involved, the balance of advantage in terms of cost and service quality, available technologies (which continue to change), the availability of suitably qualified workforces in countries such as India, China and Malaysia at relatively low labour cost (which can also change) and the policy responses of government, employers and trade unions in the UK. Insofar as the 'worst-case' scenarios in terms of job losses seem unlikely to materialise, there are echoes of debates two decades ago around the so-called 'new international division of labour' under which manufacturing in advanced industrialised countries was held to be at widespread risk from the emergence of low-wage, cheap production locations in developing countries. In the event, the main impact tended to be concentrated in a few sectors characterised by labour-intensive production methods, such as clothing, footwear and electronics components. As for the policy response, the contrast with the USA is striking (US0311101F). The American trade union movement and influential forces in Congress are calling for a range of protectionist measures in response to job loss arising from offshoring. In Britain, by contrast, the government, employers and trade unions have all set their face against a protectionist course of action, in part reflecting the much more open nature of the UK’s economy. (Paul Marginson, IRRU)