m Co

Enterprise Strategy

im pl t en y ar ch ar se Re

Job Losses from Offshoring and Productivity Improvements Far Outpace Gains from Economic Growth
Management Issue

Projected slowdown in services offshoring after 2014 poses challenge to India and other low-cost destinations

By Michel Janssen, Erik Dorr and Martijn Geerling

Executive Summary
Manufacturing offshoring and reshoring to reach equilibrium by 2014
The Hackett Group recently conducted a study on global manufacturing sourcing strategies. The study results indicated that manufacturing industries are nearing a state of equilibrium, with some capacity moving out of developed economies into low-cost geographies, and some moving in the reverse direction (reshoring). Most movement today is occurring between low-cost geographies (Fig. A). More in-depth analysis of the study results will be released in coming weeks.
FIG. A Movement of manufacturing capacity between regions, 2012-14*
Percent of manufacturing capacity impacted Between high-cost countries Between low-cost countries From high-cost to low-cost countries "Reshoring" (i.e., from low-cost to high-cost countries)

The first signs of modest growth are returning to developed economies, resulting in new jobs in corporate business services functions (finance, human resources, IT and procurement) domestically. However, the transformation of global operating models for these support services, which started well before the recession, continues to eliminate jobs (through productivity improvements) or move them to low-cost geographies. As a result, rather than increasing, the total number of business services jobs located in North America and Europe will actually continue to shrink. According to new research by The Hackett Group, only about 4.5 million of the 8.2 million business services jobs located in North America and Europe at the start of 2002 will still exist in 2016. Companies in these regions are quickly changing their global operating models to remain competitive. By 2016, the number of potentially offshorable jobs will have been reduced to one million. This decline has far-reaching implications for India, China and Eastern Europe, which will need to develop alternative sources of demand in order to maintain growth in the offshoring/outsourcing business services industries that have energized their economies.

Transforming Business Services Delivery: The Journey Continues

The movement of jobs from developed into low-cost geographies is an increasingly sensitive political issue. Understandably, the recession and subsequent jobless recovery have drawn even more attention to this phenomenon. From the executive suite perspective, movement of jobs around the globe is an integral element of the execution of business strategies that increasingly involve globalization of the operating model of the business. Research by The Hackett Group has covered the globalization trend extensively (see Related Hackett Research section). In contrast with the continued movement of service jobs offshore, the movement of manufacturing jobs appears to have reached an equilibrium with reshoring (see ). 0 5 sidebar 10 15 However, 20 25 manufacturing job movement is driven by a different set of forces than business services jobs, and analysis of the former rarely includes the latter. This research focuses on jobs in business services in finance, IT, procurement and human resources. In these pages, we assess the past, current and projected state
Page 1
CR_ES0041

9% 24% 23% 19% * projected

Source: Supply Chain Optimization Study, The Hackett Group, 2012

2012 The Hackett Group, Inc.; All Rights Reserved.

of these jobs in the North American and European economies. To uncover new insights about productivity gains, outsourcing and offshoring of the delivery of business services, we analyzed our proprietary benchmarking and study data about the processes, organization, technology, governance and other aspects of business services in large global companies in combination with IMF data on historical and projected economic growth rates in North America and Europe1 and financial reports filed by publicly traded companies. Jobs in business services have been moving out of developed economies for the past decade (Fig. 1). The large job losses of 2008-2009 were of course a direct result of the economic crisis. The numbers projected for 2013-2016 indicate a slowing of job cuts, at least in absolute numbers. The main reason is that, through the compounded impact of years of cutbacks in business services jobs, the absolute number of these jobs has declined steadily since about 2002. As a result, the same productivity improvement percentages represented a much larger number of absolute job losses in 2002 than in 2012.
FIG. 1 Net G&A job losses (in 000s)*, 2002-16
350 150 -50 -250 -450 -650 -850 2002 2003 2004 2005 2006 2007 2008 -733 2009 2010 2011 2012* 2013* 2014* 2015* 2016* -235 -198

-126

-178

-159

-204 -287 -401 -294 -285

-168

-155

-141

-136

*projected

JOBS CREATED DUE TO ECONOMIC GROWTH

JOBS LOST DUE TO PRODUCTIVITY INCREASES

JOBS LOST DUE TO OFFSHORING

*at companies with over US$1 billion in 2011 revenue

FIG. 2 Jobs lost/created*, 2002-16**

Finance IT Procurement HR

Source: IMF World Economic Outlook data, Hackett proprietary data and publicly available company data

-42% -54%

-36%

-33%

20%

20 10 0 The effect of this shrinking FTE (full-time equivalent) job base is particularly sig-10 nificant in IT, which has experienced the largest number of losses as a percentage of -20 -30 the baseline number at the start of 2002 (Fig. 2). Alhough job losses due to offshor-40 ing and productivity improvements were higher in 2002-2007, greater economic -50 growth during this period offset more of the losses than what is projected for 2012 -60

and beyond.
-25% -39% Productivity Offshoring improvements Economic growth

* projected 2012-16 ** expressed as a percentage of 2001 baseline

Source: IMF World Economic Outlook data, Hackett proprietary data and publicly available company data

Since the early 2000s, offshoring has been a major contributor to the decline in highcost business services jobs in Europe and North America. The numbers are stabilizing at about 150,000 jobs moved offshore per year. More than anything, it is the prospect of continued, sluggish economic growth that is causing the popular and political backlash against globalization. Under normal economic circumstances, continuous
1

IMF World Economic Outlook

2012 The Hackett Group, Inc.; All Rights Reserved.

Page 2
CR_ES0041

A net decline of 45% of total business services jobs between 2002 and 2016
Hackett estimates that, at the end of 2001, North American and Europebased companies with over US$1 billion in 2010 revenues employed about 8.2 million people in business services positions. (The total number of companies included in this analysis is 4,700.) Between 2002 and 2016, 3.7 million of these jobs will have been eliminated through a combination of productivity improvements (3.2 million, or 39%) and offshoring (2.1 million/25%), partially offset by 1.6 milion jobs (20%) created through economic growth (see Fig. 2 on previous page). This represents a net decline of 45% over a 15-year period.

productivity improvement combined with economic growth would be considered a healthy pattern. Of course, the other side of the coin is the creation of a proportional number of jobs in the primary offshore destination geographies, led by India. Considering the decline in total business services jobs, the stable absolute number indicates only a small increase in the percentage of jobs moving offshore each year. Hackett research indicates that by 2016 the total cumulative number of offshored jobs will reach 60%- 65% of the total number of jobs with the potential to be offshored. Further analysis by business function shows that IT departments not only experienced the largest decline (as a percentage of the 2001 baseline number of jobs), but also bore the brunt of the reductions in absolute terms. It is important to understand that the lost IT positions strictly reflect jobs at companies with over US$1 billion in revenue. These cutbacks aside, as companies embed technology into an expanding range of products, new IT jobs in their product development organizations are being created. Finally, the IT industry (hardware, software and telecommunication) itself continues to grow, creating additional demand for IT workers. As a result, the picture of the IT job market is not nearly as bleak as suggested by the 15-year trend implied in Fig. 3. Instead, companies went from making technology to buying it, and from a sourcing model that changed from insourced to outsourced. This trend is irreversible; the rapid adoption of on-demand technology provisioning models such as software-as-a-service (Saas) is only accelerating the pace.
10 5 -171 -99 -29 -294 2 -76 -168 -10 -113 -23 -287 -334 -91 -28 -285 -68 -67 -61 -60 -59 -58 -65 -7 -7 -8 -13 -13 -136 -14 -155 -14 -141 -168

FIG. 3 Net business-services job losses (in 000s)*, by function, 2001-16**

2 -31 -152 -43 -9 -235 -26 -127 -39 -198 -87 -31 -6 -126 -9 -29 -105 -27 -91 -45 -106 -39 -14 -204 -204 -36 -58 -401 -103 -233

-161

-37 -7 -35 -6 -159 -178

-69 -96 -733 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 FINANCE 2013 IT 2014 2015 2016 HR

* at companies with over $US1 billion in revenue in 2011 ** projected for 2012-16
Source: IMF World Economic Outlook data, Hackett proprietary data and publicly available company data

PROCUREMENT

2012 The Hackett Group, Inc.; All Rights Reserved.

Page 3
CR_ES0041

Understanding the Drivers of Business Services Delivery Rationalization

The previous section presented the macro view of the decline in traditional North American and European back-office jobs resulting from productivity gains and offshoring. Next, we turn our attention to the initiatives by individual companies that underlie this trend. The most powerful by far in the early 2000s was the consolidation of routine, transactional business-support activities into shared services centers. More recently, companies have expanded the portfolio of services offered by these organizations to include higher-value, knowledge-centric processes. Multifunction service centers have overtaken the previous model of singlefunction entities, allowing further leverage of skills. Hacketts 2011 study of these Global Business Services (GBS) organizations (as this next-generation approach to shared services is known) revealed that some companies now execute over 50% of their transactional business services work in a GBS organization. Notably, the percentage of knowledge-centric activities performed in the GBS is not far behind(Fig. 4). The evolution and expansion of GBS organizations is the driving force behind the productivity gains being anticipated.
FIG. 4 Percentage of FTEs residing in Global Business Services (GBS) organization
58% 47% 45% 45% 30% 20% 9% 3% Captive GBS 7% n/a Captive GBS Transactional FINANCE HR IT PROCUREMENT 13% n/a Outsourced GBS 19% 13% 46% 44%

Outsourced GBS

Knowledge-centric

Source: Global Business Services Performance Study, The Hackett Group, 2011

GBS organizations, like the companies they serve, function best if they move work to wherever it can be done most efficiently and effectively. (This is the global in Global Business Services.) The result is that GBS organizations are themselves also expanding their global footprint, moving substantial numbers of jobs to lowcost geographies. Thus, the rise of GBS organizations accounts for much of the rise in offshoring of business services jobs. A 2011 Hackett study of globalization trends showed that companies are planning to accelerate the movement of work into low-cost geographies across the entire spectrum of services (Fig. 5).2 The study data offers a micro-level explanation of the macro trend outlined in the first part of this research. (For more in-depth analysis of the evolution of GBS organizations, see the Related Hackett Research section.)
2

 t is important to note that the study participants were companies that already have a presence in low-cost geograI phies. Therefore, the absolute numbers shown in Fig. 5 are higher than those representing the amount of globalization of business services by all companies.

2012 The Hackett Group, Inc.; All Rights Reserved.

Page 4
CR_ES0041

FIG. 5 Percentage of FTEs located in a low-cost geography

IT - Knowledge-centric1 26% 37% 36% 50% 13% 18% 18% 34% 17% 30% 24% 43% 13% 30% 22% 40% 15% 24% 23% 40% 43% 64% 26% 47% CURRENT
Source: Business Services Globalization Study, The Hackett Group, 2011

1 Infrastructure development, application development and implementation, planning and strategy, function management

IT - Operational

HR - Knowledge-centric 2

2 Stafng services, workforce development services, labor relations, organizational effectiveness services, total rewards planning and function management

HR - Time and attendance, data management and reporting

HR - Total rewards administration

HR - Payroll administration

Procurement: Knowledge-centric 3

3 Sourcing execution, supply data management, compliance management, supplier management and development, sourcing strategy and analysis, customer management

Procurement - PO processing, scheduling, receipt processing

Finance - Knowledge-centric 4

4 Tax management, compliance management, planning and performance management, business analysis, function management

Finance - General accounting and external reporting

Finance - Cash disbursements

Finance - Revenue cycle

IN 2-3 YEARS

A second driver behind the disappearance of business services jobs in developed economies is the broad-based globalization of all aspects of typical company operating models. As product/service lines, go-to-market strategies and supply chains become more global, the portfolio of business services required to support these global operations must become more global as well. The result is that it is no longer natural or even appropriate for the center of business services delivery to remain in the traditional domestic market. If, for example, India evolves into the optimal location for a global application-development competency center, the Indian IT organization progresses from an offshore arm providing capacity to the North American or European-headquartered organization into the global IT center itself. The same transition could take place for elements of the procurement, finance and HR services portfolio. This explains the ongoing movement of business services capacity away from developed economies.
2012 The Hackett Group, Inc.; All Rights Reserved.

Page 5
CR_ES0041

Put slightly differently, the redesign of the value chain has forced companies to rethink business services delivery. The expansion of GBS organizations is certainly one aspect of this evolution, but the impact is much broader. The need to support a global operating model for the business translates into a need for global standards for information, process and technology platforms. Not only is this necessary to support the business, but essential if companies are to remain competitive.

Implications for Destination Geographies

While services industries in India, China and other low-cost geographies continue to grow, one important driver of this expansion North American and European companies moving business services work offshore will level off significantly during the next few years (Fig. 6).
FIG. 6 Productivity, growth and offshorable business-services jobs (in millions), 2001-16*
8.4 0.2 8.3 0.3 8.2 0.5 8.1 0.7 7.8 7.1 6.8 6.8 6.8 TOTAL (in millions) Lost to productivity improvements: 1.6 million 1.4 4.6 4.2 3.8 3.2 2.3 1.7 2.0 OFFSHORED 2.3 1.0 North America/ Europe-headquartered: 4.5 million Offshored: 2.3 million

Offshored: 0.2 million

1.0

4.7 North America/Europeheadquartered: 8.2 million

1.8 1.4 OFFSHORABLE REMAINING

3.5

3.4

3.5

3.6

3.6

3.4

3.3

3.4

3.5

NON-OFFSHORABLE REMAINING
Jobs baseline: 2001(year-end) 2002 2004 2006 2008 2010 2012 2014 2016

* projected for 2012-16

Source: IMF World Economic Outlook data, Hackett Group proprietary data and publicly available company data

There are several reasons for this. First, the number of business services jobs being offshored is rapidly declining because the majority of these jobs have been moved already. In addition, the lack of sufficient economic growth to offset the impact of productivity improvements is also taking a large bite out of the number of offshorable jobs. Many of the new jobs created through growth are less suitable for offshoring (e.g., controlling and analysis), whereas those eliminated through productivity improvement are largely of the offshorable variety (e.g., transaction processing). A decade from now, the landscape will look fundamentally different, as demand by Western companies for traditional offshore capacity will have largely dried up. To maintain growth of their business services industries, low-cost geographies need to replace this demand with:

2012 The Hackett Group, Inc.; All Rights Reserved.

Page 6
CR_ES0041

1. Domestic demand, including local industries and local operations of Western companies in low-cost countries. 2. Demand for new services beyond traditional finance, HR, procurement and IT back-office services. 3. Demand from technology providers (software, services and hardware), in particular in the information technology industries. In the more advanced low-cost destinations such as India, all three sources of demand are currently driving strong growth. In China, nurturing greater domestic demand will be of particular importance.

Focus: India
FIG. 7 New business services jobs moving to low-cost geographies, 2012-16
Total = 750,000 Rest of world China 10% 13% 38% India

India remains the destination of choice for most companies that have established GBS organizations or plan to do so. Hacketts 2011 Business Services Globalization research identified India as the number-one location for GBS centers: 74% of companies consider India to be a top potential destination for new capacity, followed by China at 55%. Nevertheless, Indias overall share in total business services capacity in low-cost destinations is expected to decline slightly, from 39% in 2011 to 38% in 2013. Combining anticipated growth by region with projections of business services jobs moving into low-cost geographies between 2012 and 2016 reveals that India will create fewer than 300,000 jobs from these traditional source of demand (Fig. 7). (Note that this does not include any demand from technology services providers; demand for business services outside of the areas of finance, HR, IT and procurement; or domestic demand.)

Other (AsiaPacic)

19% 20% Eastern Europe

Source: Business Services Globalization Study, The Hackett Group, 2011

Strategic Implications
Projections of continued elimination of business services work in developed economies will have major ramifications for developed and emerging economies alike. First, companies need to plan for a reduction in the size of their business services organizations in developed markets. In Europe, there may be legal hurdles to downsizing, while in the US, offshoring can be a public relations nightmare. Also, employee engagement tends to suffer when there are questions about job security. Companies need to rigorously adopt best practices for handling downsizings, including clear and open communication and reliance on natural attrition to the maximum extent. As the composition of the global labor force changes, strengthening talent management practices will be of paramount importance. Traditional talent management practices based on a top-down, command and control culture are ineffective for managing a global service delivery organization. Talent management practices must balance global process standards with local cultural differences.

2012 The Hackett Group, Inc.; All Rights Reserved.

Page 7
CR_ES0041

Operations in emerging markets also must make preparations. There is an urgent need to elevate the capabilities of staff to be able to function in a globally connected organization. This transition may involve transfer of senior executives into these geographies, developing local leadership talent, and facilitating the adoption of company cultures and values. India, which has the longest history of providing business services in a global context, will be most affected by this transition.

Related Hackett Research

Business Services Globalization, Part 1: Accelerating the Pace, July 2011 Business Services Globalization, Part 2: Managing the Risks and Realizing the Value, July 2011 Business Services Globalization, Part 3: Globalization Practices, July 2011 Delivery of Business Services: The Case for a Leveraged Model, May 2011 New Data: 2.8 Million Business-Support Jobs Eliminated Since 2000; One Million More to Disappear by 2014, November 2010

2012 The Hackett Group, Inc.; All Rights Reserved.

Page 8
CR_ES0041

About The Hackett Group

The Hackett Group, a global strategic business advisory, operations consulting and finance strategy firm, is a leader in business best practices, business benchmarking, and transformation consulting services including strategy and operations, working capital management, and globalization advice. Utilizing business best practices and implementation insights from more than 5,000 business benchmarking engagements, executives use The Hackett Groups empirically-based approach to quickly define and implement initiatives to enable world-class performance. Through its REL group, The Hackett Group offers working capital management solutions focused on delivering significant cash flow improvements. Through its Archstone Consulting group, The Hackett Group offers Strategy consulting & Operations consulting services in the Consumer and Industrial Products, Pharmaceutical, Manufacturing and Financial Services industry sectors. Through its Hackett Technology Solutions group, The Hackett Group offers business application consulting services, including SAP implementation and Oracle implementation, that help maximize returns on IT investments. The Hackett Group has completed over 5,000 best practices benchmarking studies with 2,800 major corporations and government agencies, including 97% of the Dow Jones Industrials, 84% of the Fortune 100, 80% of the DAX 30 and 49% of the FTSE 100. Founded in 1991, The Hackett Group was acquired by Answerthink, Inc. in 1997. Answerthink was renamed The Hackett Group, Inc. in 2008. The Hackett Group has global offices in the United States, Europe and Asia/Pacific and is publicly traded on the NASDAQ as HCKT. Email: info@thehackettgroup.com Amsterdam: +31 36 535 00 82 Atlanta: +1 770 225 3600 Frankfurt am Main: +49 69 900 217 0 London: +44 20 7398 9100 Paris: +33 1 53 43 0400 Sydney: +61 2 9299 8830 Zurich: +41 43 813 3010 www.thehackettgroup.com
2012 The Hackett Group, Inc.; All Rights Reserved.

About the Advisors

Michel Janssen
Principal and Chief Research Officer

Mr. Janssen is responsible for developing The Hackett Groups core intellectual property, including thought leadership. He works with the companys Executive Advisory Council to understand the strategic impact of new and emerging trends on the business functions. He also heads Hacketts team of researchers and analysts in the US, Europe and India in the design and implementation of research studies; analysis of results; and production of resulting findings. Previously Mr. Janssen was president of Supplier Solutions for Everest Group and co-founded the Everest Research Institute. In addition, he provided strategic oversight for Everests Outsourcing Center, the worlds largest outsourcing community and vehicle for identifying early industry trends. He was also a senior director in Gartner Groups Strategic Sourcing practice and held numerous management positions with EDS.

Erik Dorr
Senior Research Director, Finance and EPM Executive Advisory Programs

Mr. Dorr started his professional career of over 20 years as an IT consultant, and then moved on to a CIO position at a large manufacturing company. Next, he worked as a research analyst covering enterprise business applications and technology strategy. Leveraging the extensive experience he gained working with financial organizations and optimizing financial processes, he was named to his present role in early 2010.

Martijn Geerling
Europe Practice Leader, Global Business Services

Mr. Geerling has over 10 years of consulting experience in business process redesign, shared services development, outsourcing and benchmarking. During this time he has worked with global companies delivering transformation engagements in finance and other business functions. Prior to joining The Hackett Group, he worked at KPMG Consulting assisting clients in finance function optimization and compliance management.

Page 9
CR_ES0041