Labor Market Analysis for Offshoring and Onshoring
Outsourcing and the establishment of captive customer service operations offshore depend on labor markets to supply qualified talent at affordable rates. Without appropriate personnel, nothing is possible.
The globalization of information technology (IT) and IT-enabled services (ITeS) is leading to the globalization of labor markets. Labor market analysis is an important but often neglected ingredient for successfully globalizing production and service operations.
If a production or service operation is shifted to a new location where a critical skill set is in short supply or provided inconsistently and unreliably, then the entire enterprise could be put at risk. Figuring out whether all human resource components are available or can be made available is a critical task that should be conducted prior to choosing among competing global destinations, regardless of whether an outsourcing or captive, offshore subsidiary implementation model is being utilized.
The process of assessing labor supplies and compensation rates for specific skill sets used to be referred to as "manpower planning." Its projection horizons often extended out to periods of ten and twenty years.
Manpower planning emphasizes school-based training versus firm-based training, manpower needs versus labor supply and demand, and fixed wage rates versus flexible and adjustable pay rate scenarios. Labor market analysis methods emphasize the opposite.
Labor market analysis overtook manpower planning methods in the early 1990s. Labor market analysis methods recognize an increased role for private sector firms in correcting short-term labor market distortions. Assessment horizons used in labor market analysis usually cover periods of five and 10 years into the future.
Labor market analysis methods are not just used internationally. North American operators of onshore IT and ITeS facilities need to pay attention to labor market trends or their facilities may cease to function properly.
In the U.S., commercial call centers in third tier cities often have a six-year lifespan. After six years, their technology becomes obsolete and recruitment and retention of qualified personnel becomes more difficult and expensive, particularly in smaller labor markets that are favored as low-cost onshore destinations.
Three percent of the U.S. workforce is employed in a call center environment. An initial driver for going offshore was not labor arbitrage but rather the availability of qualified personnel. The labor market analysis method presented here and in the next article in this series can be applied overseas and in the U.S. to forecast labor availability and costs. It can be argued that clients of outsourcing services should be familiar with labor market conditions in the domestic and overseas outsourcing destinations -- or risk disruptions in service quality, expansion capability, service availability and service prices.
Government agencies and academic institutions need to pay attention to labor market issues, particularly in terms of monitoring the availability of workers with skills that will be in demand over the next 5-10 years. Governments in India, the Philippines and Pakistan have either been slow or ineffective at conducting labor market analysis and acting on the results, despite the importance of IT and ITeS firms in those nations' economies.
Government solutions for skill shortages may create new problems. This can be seen in the government of India's efforts to quickly triple university outputs of computer science graduates in that country, as described in Offshore Labor Markets Impact IT Outsourcing. Those efforts have led to an increasing incidence of university class sizes in excess of 100 students. Large class sizes are a short term fix designed to produce greater numbers of graduates, but may lead to larger numbers of graduates being unsuitable for hiring by firms in the private sector.
Buyers of outsourcing services offshore may be under the impression that labor supply issues are a vendor's responsibility. Such neglect can lead to quality problems and security breaches, as in the case of the theft of funds from Citibank customers in the U.S. by agents at an Indian outsourcing facility in 2005.
Personnel Shortages Launched Offshoring Boom
The beginning of the IT and ITeS offshoring boom to Asia was driven by a lack of personnel with requisite skill sets in the West, not merely by lower labor costs.
The initial outsourcing drive for shifting IT services work to India was fueled in part by surplus talent in critical skill areas such as older software languages such as COBOL and FORTRAN for Y2K work. As with the opening in 2000 of the first commercial call centers in India serving the North American market, little labor market analysis was needed.
Now a broad range of skill sets and labor categories have become globally mobile between and within developing and higher income countries worldwide. The simple process of assessing the availability of English-speaking call center workers or computer technicians with Oracle, Cisco and Microsoft certifications has been replaced by a host of considerations relating to labor supplies for a wide range of business process outsourcing (BPO) and knowledge process outsourcing (KPO) activities.
The results of labor market analysis can be used to help determine compensation rates. Compensation can be set below market rates, at market rates, or above market rates.
Low rates work best where labor markets are flush with qualified applicants. However, paying rates below those used by nearby employers risks making it difficult to recruit and retain good employees.
Paying above-market rates can be an attractive solution in developing countries where offshore operations are highly profitable or where clients are being billed for services at prices close to what they might pay in North America. However, paying premium wages does not guarantee that the best candidates are being recruited and retained. Appropriate recruiting and screening procedures are needed for that purpose.
Paying premium wages can cause difficulties for a firm that finds it must cut costs and reduce or cap wages. Wage reductions or caps can be damaging to morale, even when the revised wage rates remain above market levels.
Wage rates for generalist call center employees in South Asia are cataloged in an earlier article on how to start a call center in India. Pay rates for specialists can exceed the rates quoted in that earlier article. For example, optimal pay rates for physicians in Kolkata who answer inbound calls for Western insurance, pharmaceutical and healthcare firms are US$10 to $12 per hour.
Labor market analysis tools can be used to determine appropriate payment levels for performance bonuses. A mistake that I've made in India is setting up performance incentive programs at levels that were too high by local standards.
High bonus payment rates can have a corrupting effect in a call center, with supervisors and managers tempted to spend time as agents. Internal turnover can be aggravated if agents from other programs shift over to programs where bonus payments enable them to increase their earnings by even $25 per month.
Excessively high incentive payments for call center agents responsible for booking purchases by customers can encourage agents to submit fraudulent orders. An outsourcing client may not be aware of how agents are being compensated until incidences of fraud appear.
The next article in this series will present a step-by-step methodology for conducting a labor market analysis. The analysis method is applicable for outsourcing situations and for establishing captive facilities.
Anthony Mitchell , an E-Commerce Times columnist, has been involved with the Indian IT industry since 1987, specializing through InternationalStaff.net in offshore process migration, call center program management, turnkey software development and help desk management.