In June 2005, McKinsey & Company published what will surely become a classic of outsourcing-related research. This three-part report titled, “The Emerging Global Labor Market,” attempts to come up with data to “resolve conflicting arguments and reach a clearer understanding of offshoring’s potential impact on the global economy.”
As the introduction in Part 1 explains:
Our research sheds light on several key questions:
- What is the total number of jobs worldwide that can be globally resourced? How close will actual demand for offshoring from developed economies to emerging markets come to this potential total? How does the potential for offshoring and its degree of adoption differ among industries?
- What is the current supply of labor suitable to perform offshoring services in developing markets?
- How does supply and demand meet? Which countries will provide offshoring labor? Will different types of offshoring be attracted to different countries? How will offshoring affect employment and wages in developing and developed countries?
To answer these questions, the consulting firm poked into organizations — on the client and service provider side — in 36 countries.
The bottom line: McKinsey calculates that 18.3 million full-time jobs could be done by people located anywhere in the world in 2003. In 2008 that number grows to 160 million jobs — or 11% — of the projected 14.6 billion service jobs that will exist worldwide.
The eight industries where this applies encompass packaged software, IT services, banking, insurance, pharma, auto, healthcare and retail.
Yet companies aren’t offshoring to that extent. Retail and healthcare employ offshore labor the least. To date, according to McKinsey’s research, 565,000 service jobs exist in those eight sectors. By 2008, it expects that number to grow to 1.2 million. Packaged software and IT services will dominate, with 18% and 13%, respectively, of their high-wage employment sent offshore.
Why the gap? According to McKinsey, it’s not regulatory barriers beyond the companies’ control (such as labor market regulations in the home country that mandate high statutory severance awards); it’s “company-specific barriers” — “having processes unsuited to offshoring, managers’ attitude toward offshoring, or insufficient scale.”
The report includes an interesting chart that breaks down by industrial sector the drivers and inhibitors that push or dissuade companies to offshore. For example, the intensity of paper-based processes in healthcare is an inhibitor to offshoring. Product market regulations in the home country are a barrier to pharma companies. Intellectual property regulation in the producing country is an obstacle for packaged software firms. Some insurance firms still run “IT systems more than half a century old,” which restricts their ability to take IT work offshore.
Likewise, the report notes that companies that have been through a series of mergers and acquisitions “have business processes that are convoluted to allow easy separation into discrete groups of activities, some of which could be offshored.”
Management barriers typically focus on the inability of managers at local and national companies to manage across borders, because they have no experience in doing so. As a result, “they are unlikely to prioritize global resourcing ahead of alternative measures for reducing cost.”
Overall, McKinsey views offshoring as having “moderate impact” and a “generally slow pace.” The bright light it offers to workers displaced is that most “are college graduates and therefore likely to be more amenable to retraining than manufacturing workers.” Also, growth rates in the computer and data processing services sector, where offshoring dominates (in percentages if not by volume) “are higher than in the economy as a whole.”
I’m going to keep blogging about this mammoth report (Part 1 runs 345 pages) as I slog through it. To do your own slogging, register for your copy here: