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June 19, 2005

Offshoring: Small or Large?

These numbers look pretty large to me--not in terms of effects on the unemployment rate, but in terms of the pace of structural change and the possible effect on wages:

FT.com / World - Anxiety over offshoring: By Peter Marsh: Debate about "Coffshoring" of service jobs to low-cost countries has reached fever pitch in the past few years.... A report from the McKinsey Global Institute... says the fears are overblown. Even though the supply of young people in low-wage economies with good educational qualifications is likely to increase substantially in the next decade, demand for employing them in their own nations in jobs transferred from rich countries is likely to be muted, the report says. On top of this, many young professionals in the 28 low-wage countries studied by the institute even though they may have university degrees lack the work-related experience and aptitude that foreign companies are looking for.

"A lot of developing countries are churning out new graduates but not giving enough thought to the practical skills they will need if they are to work for multinational companies," says Diana Farrell, director of the institute. The report indicates that even though many manufacturing jobs have migrated from rich countries to emerging economies over the past 10 years, due to cost-cutting pressure, the service sector is unlikely to see the same trend....

The degree to which individual jobs can be offshored depends on how "customer-facing" they are. In retailing... 3 per cent... in engineering and finance... 52 per cent and 31 per cent respectively. On the supply side, there is no doubt about the large number of potentially suitable candidates for service jobs done "remotely" in low-wage nations... 33m young professionals with degrees and up to seven years' work experience in fields such as engineering, finance and information technology in the 28 countries... compare[d] with just 15m in the rich countries....

The study says that in service support jobs covering fields such as administration only 2 per cent of all the notionally qualified people in the emerging economies will find work in multinationals in 2008. In analyst jobs and finance, the comparable figures are 3 per cent and 5 per cent respectively. However, the proportion is much higher in engineering, where it reaches 63 per cent.


McKinsey & Company - THE EMERGING GLOBAL MARKET: PART I %u2014 The Demand for Offshore Talent in Services, June 2005: Introduction: The background for the report examines the current debate on offshoring and the context for MGI's latest research effort....

Synthesis of Findings - Demand for Offshore Talent and Sector Cases: The number of service jobs offshored will remain modest compared to total employment in service activities in developed economies over the medium term. The gap between the current degree and the potential level is largely explained by internal barriers, most notably operational issues, management attitude to offshoring, and structural issues. External regulatory barriers play a small role overall. The potential for global resourcing varies depending on the industry.

The Demand for Offshore Talent in Automotive Services: The degree of adoption of offshoring in the services portion of the auto sector is low, with approximately 0.06 percent of developed world employment in the sector currently performed in low-wage countries. Although the potential for global resourcing in the sector is 11 percent, only 0.2 percent of developed world employment is projected to be performed in low-wage countries by 2008.

The Demand for Offshore Talent in Health Care: Overall, about 20,000 jobs in the health care sector will go offshore in 2008, representing 0.07 percent of developed world health care employment. The potential demand for remote labor in the sector, although low in percentage terms (8 percent), is still over 5 million jobs because of the large number of people employed in the sector.

The Demand for Offshore Talent in Insurance: Global resourcing in the insurance sector is still in its early stages. In contrast to a maximum current potential of 2.3 million jobs (19 percent of industry employment in 2008) that could be performed remotely, more than 20,000 jobs are performed offshore in low-wage countries. Offshoring will grow at 14 percent annually if the current trend continues, reaching 38,000 employees in 2008 (equal to 0.6 percent of industry employment in high-wage countries).

The Demand for Offshore Talent in IT Services: MGI projects total employment in the sector will reach 6.9 million in 2008, and 770,000 jobs (13 percent of sector employment in developed countries) will be performed offshore in low-wage countries, compared to 371,000 in 2003. In contrast, a maximum of 44 percent of all jobs in the sector could be potentially performed remotely, equivalent to 3 million employees.

The Demand for Offshore Talent in Packaged Software: The software sector will continue to see growth in offshoring, with an estimated 116,000 jobs (18 percent of sector employment in developed countries) projected to be performed by employees in low-wage countries by 2008, compared to 44,000 in 2003. Nearly half (49 percent) of the estimated 690,000 packaged software jobs in 2008 could be potentially performed remotely, the highest of the sectors MGI studied.

The Demand for Offshore Talent in Pharma Services: More than 10,000 employees in the pharma sector are globally resourced from low-wage locations today. This is expected to double to 21,000 employees in 2008 in response to declining profit margins and rising cost pressure in the sector. The potential for globally resourced labor in the sector is as high as 13 percent, indicating that 238,000 jobs could be performed remotely in 2008.

The Demand for Offshore Talent in Retail: The pace of adoption of offshoring in the large retail sector is projected to be slow relative to other industries, representing just 0.1 percent of retail employment in high-wage countries by 2008. Of the projected 156 million jobs in the retail sector in 2008, however, 3.2 percent of total sector employment in developed countries could be performed remotely, equivalent to 4.9 million employees.

The Demand for Offshore Talent in Retail Banking: Retail banking was one of the earliest sectors to adopt the global resourcing of services, and offshoring is projected to reach 2.4 percent of total sector employment in developed countries by 2008. The theoretical maximum for globally resourced labor in retail banking is 25 percent, translating into approximately 3.1 million jobs in 2008.

Posted by DeLong at June 19, 2005 10:27 PM