9 January 2009
While private companies have been contracting out services overseas for the past decade, public sector bodies have shown little interest so far. The recession might change this, but vital issues need to be thought through first, warns John Tizard
When one country produces goods or services more efficiently and effectively than others, the natural economic progression is for it to supply those goods and services to the other countries. So said nineteenth-century political economist David Ricardo, and his comparative advantage theory still holds true today. Administrative and professional services are following manufacturing overseas, with technological advances enabling them to be located far away from customers and frontline staff.
But while parts of the private sector, especially financial services, have been steadily transferring ‘back office’ administration, IT development and customer services to India and other cheaper places, the public sector has shown significantly less interest.
In India, offshore ‘business process outsourcing’ is booming, focused mainly on banking, capital markets, insurance and technology. The industry has grown by more than 35% over the past five years, earning US$11bn in export revenues in 2008 alone. It has 1,200 providers and employs 700,000 people. India produces more than 2 million graduates a year and the quality of its education and training is increasing year on year, providing a ready labour force.
The industry’s main customers are in the UK and US, not least for language and cultural reasons. Others include the Philippines, China, Vietnam, Malaysia, Singapore, South Africa, Hungary and the Czech Republic. Companies claim that productivity is higher in India. For transactional processes, productivity gains of 30% plus have been reported.
However, attrition rates tend to be growing, especially for lower-skilled activities. It is reported that wage inflation, especially for skilled staff, is disproportionately increasing costs in some regions in India and the growth of competitive markets is leading to potential shortages of staff and/or high staff turnover.
Indian wage inflation remains an issue, with the annual average being in the region of 15% for the past few years. This is, of course, affecting overall pricing. But in India wages account for around 35%–40% of the cost base compared with more than 70% in the UK – and the base is much lower.
This has led some parts of the UK public sector to consider some process offshoring as well as IT development. The English NHS has transferred more than 30% of the work of NHS Shared Business Services – its joint venture with Steria – to India. This work includes finance and accounting, payroll and e-procurement services and is carried out from two locations: Noida, in New Delhi, and Pune, near Mumbai in western India. These sites were chosen because of the skills and talent available in each region. The NHS reports improvements in costs and productivity.
National Savings has also agreed that Siemens can transfer work from the UK to India, after reaching agreement with the Public and Commercial Services union. Under the deal, Siemens was able to offshore 240 jobs but there was a ‘no compulsory redundancy’ guarantee for the life of the contract. Staff who chose to leave as a result of the offshoring were offered a £1,500 payment for retraining. Siemens reaffirmed its commitment to the 2004 global sourcing agreement with PCS, including standards for staff employed on the contract or on future contracts outside the UK and the code of conduct for staff in the UK affected by offshoring.
Other cases of offshore provision in the public sector include elements of BBC TV Licence administration and some processing for the Criminal Records Bureau. There are few examples in local government.
In a sense, the development of offshore provision of UK public services has been by stealth rather than any strategic policy decision. This is a mistake and potentially could be dangerous for all parties. It will lead to great distrust between service users and the public sector, and between employees and the public sector. People will be suspicious that this is simply a cost-driven exercise at the expense of domestic jobs.
This is not a matter that should be left to individual providers, especially private sector providers. Any decision to include an element of offshoring should be a deliberate and transparent public sector client decision for which there is ultimately political accountability. Indeed, few private sector providers are likely to unilaterally take such a decision without their client’s agreement – although, of course, they might propose it. Such a decision will inevitably be political and not simply operational.
While it is likely that there will be more offshoring of elements of some public services by the UK and similar economies, this is unlikely to happen fast – especially at a time of rising domestic unemployment. However, financial pressures could make it more attractive. It is vital that any decision is based on more than short-term cost benefits for providers and clients. Current public sector offshore provision has been developed for a number of reasons: cost reduction; productivity improvement; access to skilled capacity to address immediate shortcomings (though these might have then turned into long-term commitments); and, in some cases, overnight processing – to ensure resilience and to take advantage of different time zones.
In some countries, this approach has been adopted to address industrial relations issues, which must be one of the least appropriate arguments for public sector offshoring. Such a move will work only when there is some consensus and a clear rationale.
The government should work with stakeholders to adopt realistic, ethical and strategic approaches. Together they need to develop the methodology to calculate the public value implications. This would take into account factors such as public service outcomes; costs of service production; the social and economic disadvantages when local jobs might be at risk; the impact on macroeconomic performance; and the implications for a national economy – both in importing and exporting countries – of an international trade in public services. Such analysis needs to take a long-term view, given global economic and demographic trends.
The government should also consider how these and other factors are built into the decision-making processes of individual public sector clients, which might, understandably, take a micro rather than a macro view. In local government and the wider public sector, some authorities and agencies have been willing to move processing activities to parts of the UK that might be many hundreds of miles from the client’s base. There are local authorities competing to receive such work. In the future, could these be competing with Indian state governments or other overseas jurisdictions – possibly lower-cost European states? There is a need for some overarching national or regional consideration that transcends an individual authority.
There are other issues that the government, other public sector clients and trade unions should be clear about. They need to ensure that employment practices and terms in the offshore services exceed International Labour Organisation standards and broadly reflect UK practices, with trade union rights. They must also ensure that human rights are taken into account when locations are selected and they must commit to support and retrain the affected UK workforces. And what about no compulsory redundancy agreements?
Then there is data security. Obviously, there is a need to ensure that the highest standards are met for public sector data, but there is no reason why offshoring should be any less secure. Other requirements include ensuring the right balance and connectivity between UK and offshore-based operations; guaranteed business sustainability and resilience processes in the recipient countries and provider companies; a model in which benefits would be shared by both workforces and the client, as well as the provider; and public acceptability.
In the future, more offshore provision might be inevitable and, in the right circumstances, beneficial for the UK’s public sector or elements of it. We have to move on from this happening by stealth or the pursuit of short-term cost reduction – and this will require public debate and national policy. Such debate will need to be informed by evidence-based analysis that addresses wider issues than cost and performance, including social, economic and political externalities, international economic trends, the needs and choices of service users and citizens, and national and international policy on international development and world trade. It must, of course, be subject to negotiation with staff and their unions. This is not a simple issue and it is vital it does not attract simplistic reactions, policies or practices.
