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Business Globalization: Offshoring

In tight labor markets where companies do not find critical talent at home, companies might lobby governments for more liberal immigration policies to attract foreign talent. Such open door policies are an easier sell in the United States, Canada, and Australia - countries created from scratch by immigrants - than in more culturally homogenous societies, such as Europe and Japan. That's not to say European companies aren't trying to change the status quo. They've begun lobbying governments for more foreign workers, despite the rising political backlash against migrants. “We have full employment here [in the Netherlands], and companies can't find workers," complains venture capitalist Roel Pieper, a former executive at Royal Philips Electronics and Compaq Computer Corp. “Yet politicians want to close the door."

If companies have little luck bringing qualified labor to their home markets, the alternative is to outsource functions to key emerging markets. A.T. Kearney's Offshore Location Attractiveness Index demonstrates that countries such as India, Malaysia, the Czech Republic, Brazil, and the Philippines offer a combination of low costs, qualified labor, and solid business environments that makes offshoring particularly appealing. The world's top 100 financial institutions alone could save nearly $140 billion (U.S.) per year through 2008 by moving various operations abroad. Offshore workers can provide such diverse services as back office support, call centers, help desks, and research and development. Outsourcing also helps promote economic growth in emerging countries, which in turn become expanding markets for Western goods and services.

Thanks to improved infrastructure, advancing Internet technologies, and increasing vendor sophistication, companies ranging from small physician groups to Fortune 100 companies like Aetna and UnitedHealth Group are already taking advantage of “brain arbitrage" and exploiting the cost differences between skilled professionals in countries around the world. In the United States alone, healthcare administration costs such as medical transcription, medical coding, and billing are estimated to be as high as $350 billion (U.S.). Moving IT and business processes offshore to countries such as India has saved an average 30 to 40 percent. Wipro Technologies in India is even offering clinical process outsourcing, whereby Indian radiologists analyze medical scans conducted in overseas hospitals and report back with their diagnoses.

The strategic advantages of offshoring, coupled with the demographic changes affecting the domestic labor supply, suggest that the current trend of corporate outsourcing may just be the beginning. In the future, offshoring may become even more prevalent in advanced economies as the aging workforce retires, middle managers move up, and younger workers are lacking. Some corporations may recruit a majority of their employees from an abundant pool of young, skilled men and women overseas.

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