Offshore adds to UK IT jobs gloom

Phil Codling, Ovum Holway Analyst

Offshore is big news. BT has become the latest European company to provoke alarm in the media by revealing that it’s shifting more jobs offshore. Its plans, as announced on 7 March 2003, mean the company will be able to trim its UK call centre workforce from 16,000 to 14,000. Meanwhile, it’ll create 2,000 jobs in India at two new sites in Delhi and Bangalore. Given that labour costs for call centre operatives in India are around a tenth of those in the UK, BT’s decision is not hard to fathom. Nor, of course, will this be the last time we hear such news.

At Ovum Holway, we’ve been looking at the effects of the whole offshore phenomenon on the software and IT services market, and have recently published our findings in The Offshore Services Report 2003. We’ve found that a group of offshore-centric players – led by India’s TCS, Wipro and Infosys – are growing fast in the UK market and have their sights set on opportunities elsewhere in Europe.

We’ve also found that many of the leading IT services players – from EDS and IBM to Xansa and LogicaCMG – have big plans for their offshore capabilities. They see more and more work being carried out and delivered from not just India but a whole range of locations including South Africa, Eastern Europe, Vietnam, Mexico, the Philippines and many more. Access to cheaper IT skills is the key driver.

All this is, we regret to say, bad news for employment prospects in the IT industry in Europe. Based on our analysis, we forecast that a total of 20,000-25,000 jobs in the UK software and services industry alone will be lost over the coming four years as a direct result of work moving offshore. The effects will be felt most by the UK’s 300,000 software professionals, particularly those in lower level jobs in software/application development and integration.

Job losses are a highly political issue and there is mounting resistance to these developments in many countries. For example, a state senator in New Jersey has attempted to introduce a bill that would prevent the offshoring of business processes by public bodies in the state. Indian firm Infosys also faced resistance from local officials in Australia when setting up its operations in the country in 2002.

Meanwhile, trade unions in the UK have shown their opposition to job losses and, following their success in holding up the Prudential’s offshore plans last year, are gearing up for a fight with BT.

We believe governments too will take action to stem the offshore flow. Firstly, we can expect to see further tightening of work visa regulations in the UK and across Europe. This won’t substantially inhibit the flow of work to offshore-based workers but it will force the offshore firms to hire (or, very possibly, acquire) more local people. Until now, they’ve largely relied on bringing over workers from India when projects require onsite or onshore labour.

Secondly, we expect the government sector to remain cautious towards contracting work that involves significant offshore elements. But nonetheless, if the economics of overseas delivery are right – as they have proved to be already for the UK National Health Service on certain projects – even the public sector will buy into offshore services.

In the end, the globalisation juggernaut is not for turning. These are long-term trends, and governments and unions will find it difficult to stem the tide. So the IT services industry of 15-20 years from now will look very different to what we find today. A few, very large, global suppliers will dominate the market. And while each will employ local people to sell to and service clients on the ground, a large proportion of the actual work (perhaps even more than half) will be undertaken by networks of resources spread around the world.

Related Ovum Research

The Offshore Services Report 2003 – An Ovum Report

Holway@Ovum – An Ovum Advisory Service

Multisourcing and the end of the mega deal – Ovum Comments (Archive)

Market Strategies – Ovum Consulting