Services resist offshoring:

really?
“Services resist offshoring”: common sense or reality?
26/10/2018 The people from Cocolabs

If you need a new haircut or if your pet is sick and needs to see a vet, you wouldn’t book someone living thousands of miles away –not even five– would you? At least, not if you can help it. This article discusses whether services are protected from offshoring or, on the contrary, subject to globalization.

1. Introduction

Have you ever doubted whether what you believe exists, actually exists? Take the street you live in for instance: it’s there and it always will be there. You believe so. Because each time you open your front door, it’s there. Naturally, you assume this will never change.

One morning though, you open your front door. The street isn’t there. What now? You’re struck by what José Ortega y Gasset calls “a violent and extremely clear surprise”.

Same goes for services: common sense has it that they can’t be delocalized. That they’re the last bastion against offshoring.

Surprise! The globalization of services has already taken place.

2. Services are being globalized, too

In a previous piece, we’ve worked on the definition of services. By services we mean, “the production of an essentially intangible benefit”.

This article is based on three key notions that many find confusing and almost synonymous: globalization, offshoring and onshoring. Indeed, all these concepts point out towards the same phenomenon. That is: the decision to reduce costs by relocating production plants and contracting services companies in lower-wage countries.

In this section, we’ll demonstrate that common sense is belied by reality. Most services are subject to offshoring, notwithstanding pockets of resistance.

2.1 Preambule: defining concepts

Globalization

In our context, “globalization” refers to the “Globalization of economy”.

According to the Global Policy Forum, it is the phenomenon that “sweeps away regulation […]. As it creates new markets and wealth, it also causes widespread suffering, disorder and unrest”. In French, negatively connoted, the term “globalization” (the suppression of borders for the circulation of products) is opposed to “mondialisation” (the suppression of frontiers to foster the circulation of humans).

On a more neutral note, globalization is perceived as an issue, with its pros and cons. According to Forbes’ Michael Collins, it lacks:

  • Leadership
  • Balanced Trade.
  • Trade agreement.
  • Enforcing the rules.

In this study, we employ the term impartially. However, many studies cited here tend to point out the negative effects on labor.

Offshoring

In general terms, “offshoring” is:

  • Related in most contexts to “outsourcing”, as opposed to onshore.
  • The business decision to shift processes offshore in order to reduce production costs. (Aron and Singh)

In the service industry, “offshoring” is:

  • The transnational dispersion of service activities that companies previously performed in their home country, including captive (internal) and outsourced (external) delivery modes.

Reshoring

“Reshoring” is the repatriation of processes or services. It is a relatively recent trend.

Companies are becoming aware that cost reduction actually has a price. They’re now reshoring knowledge-intensive services. These are critical to a firm’s creation of value. They require distinctive skills and complementary resources for their successful execution.

The general public perceives repatriation of these processes and services –or “reshoring”– as “poetic justice” (Postma, Agarwal and Mohal).

2.2 The globalization of services

On both B2B and B2C levels, services cannot escape globalization, as liberalism favors globalization.

  • In high-income countries, services represent over 70% of the economy, of which they are an ever-growing part.
  • Services represent up to 70% of a company’s cost.
  • To increase competitivity, companies aim to reduce cost. A natural target appears to be service procurement.

Services include a wide spectrum of activity. They are therefore difficult to standardize. It’s still not possible, as a matter of fact, to find official standards that define services.

For “local” services –that is, services that are performed in relation to an individual person or group of individuals– offshoring is much harder. Sure, you can take online guitar lessons but you cannot book an appointment with a piano tuner if the distance is too great. Consumer and producer cannot be separated. This is why a local service cannot be performed away from its consumer.

Before distinguishing local services from global services there is another factor we will highlight in the next section: the digitalization of services in relation to offshoring, or what some experts call “the platform economy”.

2.3 Services offshoring and marketplaces. The example of Information System (IS) businesses and the emergence of the “platform economy”

The “platform economy” is a term coined by the European Trade Union Institute (ETUI), to understand how B2B online service marketplaces are using offshoring and the impact on the labor force. Many businesses have offshored these resources, only to later realize that this is perhaps not the best strategy. The example of offshoring in the IS sector is a good basis to analyze the role of online marketplaces in the outsourcing of services.

An example: offshoring and the Information Systems (IS)

Offshoring has changed how IS firms manage their processes and how they create value. According to Thoren Tambo and Martin Olsen, offshoring is a “global marketplace for professional services”. It is a well-defined process of placing business processes in low wage countries. The main characteristic is that the creation process is not situated in a given geographical center, but scattered in several hubs.

Companies are gradually becoming aware of the downfalls of such practices. Developing countries are strengthening their legislation in a way that is not favorable to these firms. For instance, by demanding knowledge transfer. Cultural and time gap also impact global efficiency and inter-team communication between onshore and offshore teams negatively.

Using global services require global thinking. This is an opportunity for companies to rephrase systems in a more transnational perspective. “The language of technology becomes global; education, methods, business process apprehension, services benchmarking, and technology quality are uniformed and thus should be easier to act globally” (Tambo and Olsen).

Service marketplaces and offshoring: the platform economy

Platforms are a type of websites that allow for parties to come together. In the service industry, such online platforms are known as marketplaces. The ETUI sees in the emergence of online marketplaces a symptom of a larger phenomenon which they call, “the platform economy”.

The emergence of service marketplaces is one of the most interesting developments of internet. As the ETUI Policy Brief points out, the service marketplaces are not collaborative in essence nor are they part of the “sharing economy”. Most of them seek to make profit.

Here are the main characteristics of service marketplaces. These characteristics widely account for the success of the platform economy.

  • Platforms provide an algorithm that allows for an effective matching of labor providers and users.
  • Technology brings down transaction costs to the extent that platforms can also facilitate micro-transactions.
  • Platforms provide services to reduce or manage risks involved in market transactions.
  • They insure some quality standard by implementing monitoring and rating systems.

According to the ETUI chart, the platform economy is widespread in all EU members:

platform economy is widespread in all EU members

3. “Local” services vs. “globalized” services

The following table classifies services according to their “global” or “local” nature:

service classification

To sum up, we’re wrong to believe that services can’t be globalized. In fact, they “can no longer be seen as sheltered from global competition” (Oliver Wyman). The internet has accelerated an already-well rooted phenomenon. However, it depends on whether we’re talking about “globalized services” or “local services”.

4. Conclusion

This article is much more modest than a philosophical essay. We’re not on a speculative quest to find solutions to the “problems of our time”. We’re pointing out facts. No more, no less. Our time is marked by globalization. Firms are driven by cutting costs. Companies expenses for services are often seen as cost centers, not profit. The temptation to offshore these is, therefore, great.

Personal services it seems are the only pockets of resistance against offshoring. For now at least. Let’s not forget that offshoring goes in pair with automatization. Are you prepared to trust your head to a non-human hairdresser? Moreover, companies and firms are now increasingly confronted to the downsides of offshoring. Economists and other analysts have increasingly observed the opposite process: reshoring.

Resources

Aron, Ravi, and Jitendra V. Singh. “Getting Offshoring Right.” Harvard Business Review, no. December 2005, Dec. 2005. hbr.org,

Beck, Ulrich. The Brave New World of Work. John Wiley & Sons, 2014.

Cârstea, Vlad. Delocalizing the Japanese automotive industry and the Romanian market. Vol. 10, no. 4, p. 6.

Collins, Mike. “The Pros And Cons Of Globalization.” Forbes, Accessed 16 Nov. 2018.

Cârstea, Vlad, “Delocalization — the automotive industry’s answer to cost reduction”.

Drahokoupil, Jan, and Brian Fabo. “The Platform Economy and the Disruption of the Employment Relationship.” SSRN Electronic Journal, 2016. Crossref, doi:10.2139/ssrn.2809517.

Ortega y Gasset, José, Ideas-y-Creencias.Pdf.

Kapferer, Jean-Noël. Why Luxury Should Not Delocalize. p. 5.

Kawashima, Kumiko. “Service Outsourcing and Labour Mobility in a Digital Age: Transnational Linkages between Japan and Dalian, China.” Global Networks, vol. 17, no. 4, Oct. 2017, pp. 483–99. onlinelibrary.wiley.com, doi:10.1111/glob.12157.

Offshoring or Reshoring? A Dilemma for Service Activities — Paris Innovation Review. Accessed 15 Nov. 2018.

Globalization of Services — Oliver Wyman. Accessed 14 Nov. 2018.

Pisani, Niccolò, and Joan Enric Ricart. “Offshoring of Services: A Review of the Literature and Organizing Framework.” Management International Review, vol. 56, no. 3, June 2016, pp. 385–424. Springer Link, doi:10.1007/s11575–015–0270–7.

Postma, Jeff, et al. 7 Key Factors Driving the Offshoring of Services. p. 4.

Tambo, Torben, and Martin Olsen. Offshoring — the New Dilemma of IS Research. 2010. DataCite, doi:10.13140/2.1.1947.9368.

At Cocolabs we’re working on the standardization of services. We build custom service marketplaces. Each new project is an opportunity to further our reflection and refine our understanding of what is at stake: human interactions set in a given time and space dimension.

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