And more on the joys of globalization:
from today's WSJ
BUSINESS EUROPE
From London to Bombay
By CHRIS GENTLE
The story of much of Europe in the years after World War II was one of rapid economic growth. That growth raised living standards and helped make Europe one of the world's richest regions. But it also devastated traditional manufacturing and raw-materials industries as rising costs of labor drove those jobs offshore and into the developing world.
The result is seen all around us, in the service-oriented economies of the West. That transition was not painless for those who saw their jobs migrate overseas, but those who predicted catastrophe from the transition were proved wrong. In general economic growth was adequate to replace those jobs with higher-productivity, better paying ones, and Europe is better off for it.
This much is well known. But less well appreciated is the extent to which the revolution is about to repeat itself, as some of the same service-sector jobs are following their manufacturing predecessors overseas. In European financial services, shrinking revenue growth and fierce competition make it imperative that companies find ways to cut costs. This is driving a trend to move a growing range of key business processes to low-cost offshore jurisdictions. The trend started with information-technology functions, but it won't end there. Our survey of some of the world's largest financial-services firms indicate that many of them expect to transfer an increasingly wide array of functions -- including accounting and finance, operations, processing and administration, contact support and call-center operations.
For CEOs and governments alike this raises difficult policy issues. The movement of jobs from Europe to the Indian Ocean rim is likely to strip many thousands of financial-services workers of employment. And if the financial services industry can move those functions offshore, others will follow. This need not spell economic catastrophe, any more than the shift from a manufacturing-based to a service-sector economy did before it. But it is a trend that both businessmen and policy makers must be aware of.
Neither corporations nor governments can fight the powerful wage arbitrage forcing the investment banks, retail banks, life insurers and asset managers of Europe to move business processes to countries such as India. What they can do is seek to manage that transition sensitively and skillfully.
The scale of this employment migration is likely to be huge. We estimate that potentially 15% of all developed-world financial services jobs will move to low-cost centers in the next five years. With 13 million people employed in financial services in the world's mature industrial economies, that equates to a potential movement of up to two million jobs -- of which we estimate as many as 730,000 will come from Europe.
According to our survey, the world's 100 largest financial-services companies are likely to transfer an estimated $356 billion of cost offshore over the next five years. These institutions could potentially reduce costs by nearly $1.4 billion each by 2008 by transferring processes to low-cost centers like India from developed economies in North America, Europe and Asia.
Our survey also showed how the shift is accelerating in both scale and breadth. Thirty percent of institutions that participated currently have offshore operations. That percentage is expected to climb to 75% within two years.
The chief beneficiaries of this shift are Indian cities such as Bombay and Bangalore. Buoyed by a combination of low cost, English language skills and highly educated workers, they are claiming a considerable share of the relocated jobs. But there is also fierce competition from other countries around the Indian Ocean rim from South Africa to Australia.
What all this means is that, in addition to finding work for those currently unemployed -- some 8% of the work force in the euro zone -- and those entering the work force, there are potentially millions of service-sector jobs of all descriptions that will need to be replaced in the coming years. If European countries do not find ways to spur growth and improve competitiveness, it could lose jobs at a far faster pace than currently foreseen.
In the worst case, such a huge migration of jobs could increase unemployment in towns and cities with high numbers of financial workers. This would in turn have a knock-on effect on the local economy, as wages are withdrawn and the local population has less money to spend. Such a scenario is likely to be played out to greatest effect in the City of London -- Europe's largest financial center.
From a corporate perspective, we have already glimpsed the dangers. As the European country with the largest number of financial-services jobs, the U.K. has seen the greatest debate to date. Amicus, the U.K. trade union that represents financial-services workers, has threatened two U.K. life-insurance companies planning to move processing functions to India with strike action. No U.K. life insurance company has ever before been threatened with strike action. Further, there was a furor when the CEO of one global bank remarked in the U.K. press that Indian call-center staff were not only cheaper but better workers than their counterparts in the U.K.
In Continental Europe, the situation is potentially more explosive. European business culture is far more paternalistic than Anglo-Saxon business culture. The presence of workers' representatives on supervisory boards ensures that companies are run in the interests of not only their shareholders but also their workers. It takes a far-sighted supervisory board to recommend that significant percentages of jobs should be transferred to a low-cost country.
CEOs have no option but to seek consensus when moving jobs offshore. And yet companies that fail to act in the face of the inevitable will only worsen their own condition competitively and financially, potentially storing up pain further down the road.
Rather than attempt to plug the dike, which will be no more effective than earlier attempts to stanch the flow of manufacturing jobs overseas, government needs to focus on how to adapt local economies to inevitable job losses. No financial center will escape. Even London, which is home to some of the most skilled financial professionals in the world, could see tens of thousands of support staff relocated.
The financial centers most at risk are the regional towns and cities that rely on call centers and other administrative centers for employment. A decade or so ago, financial services companies placed their administrative centers in such towns because costs were lower than those of the major cities. Now improved technology and cheap telecommunications are allowing costs to be ratcheted down again.
Failure to tackle these policy issues in a positive manner could make an unavoidable transition both contentious and difficult. CEOs must be sensitive to their European workers' needs. At the same time, governments should not seek to place obstacles in the way of such market-driven trends. Nothing less than the competitiveness of Europe is at stake.
Mr. Gentle is European research director of Deloitte Consulting and Deloitte & Touche, based in London. Deloitte has just published its survey, "The Cusp of a Revolution: How offshoring will transform the financial services industry," from which the data in this piece is drawn.
Updated May 19, 2003
So what is the new higher value added work that First Worlders are to do to maintain that higher standard of living? LOL. The HS graduate part of the US labor force has seen static to declining standards of living since 1973. Watch the political joy as this moves up the economic and occupational ladder. Is the sole measure of wealth lowest prices and highest profits? Do income distriution and social cohesion matter? If not is your answer influenced by how safe you think YOUR job is and how much you have in the bank? It is not going to matter to me personally. I am in my mid-50's and will in all probability die before I exhaust my asset base. However the strength of the US was never cheap prices. It was a wage scale protected by distance, a continental size market and tarrifs such that a working man could achieve reasonable prosperity. Actions have consequences. The masters of transnational finance capitalism care only for their short-term profits. Theirs, not ours.
posted by scott 12:48 PM