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Offshoring trend set to reverse: study

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Economic and technology shifts are drying up demand by Western companies for traditional offshore capacity.

First, the good news: the offshoring of service jobs is projected to soon peak, and begin to reverse as a trend.

Now, the bad news: the decline in offshoring will be the result of fewer service jobs to go around.

That's the word from The Hackett Group, which just released new research that measures the movement of service jobs from North America and Europe to emerging markets over a 15-year period that started in the year 2002. In total, the conclusions are startling: 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.

IT departments in larger companies bore the brunt of the offshoring and overall decline in business service jobs, the report finds.

The report's authors, Michel Janssen, Erik Dorr and Martijn Geerling, studied employment patterns among 4,500 major companies during this period. They calculate that 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 million jobs (20%) created through economic growth. This represents a net decline of 45% over the 15-year period.

This also means a rapid shrinking of the amount of jobs being offshored. By 2016, the researchers estimate, number of potentially “offshorable” jobs will have been reduced to one million. "The number of business services jobs being offshored is rapidly declining because the majority of these jobs have been moved already," they note. "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 new jobs being created through economic growth, they observe, are less transaction-oriented (such as data processing or order-taking) and thus do not lend themselves easily to offshoring. More of the new jobs being generated in the current information-intensive economy require management and analysis skills, which typically need to reside close to core operations. Plus, there is a growing trend toward shared services within enterprises, which further increases productivity.

It's important to note that the Hackett Group study only takes into account employment patterns among the largest corporations. There is a surge in employment opportunities for both analysis and transaction-oriented jobs among a new breed of technology-enabled, lightweight business that is emerging, built around the Internet, mobile, cloud computing and big data. There may be fewer large companies with large workforces, and many more smaller entities served by only a few employees and networks of contractors.

At the same time, technologies are enabling a range of organizations -- from services to manufacturing -- to run more streamlined and automated, and thus may not require large offshore labor pools.

Still, The Hackett Group researchers predict that a major shift is now underway in labor markets: "A decade from now, the landscape will look fundamentally different, as demand by Western companies for traditional offshore capacity will have largely dried up."

Net losses of business service jobs are charted on a year-by-year basis. Note the painful spike seen in 2009, when the most recent recession struck:

  • 2002     -235,000
  • 2003     -198,000
  • 2004     -126,000
  • 2005     -178,000
  • 2006     -159,000
  • 2007     -204,000
  • 2008     -401,000
  • 2009     -733,000
  • 2010     -287,000
  • 2011     -294,000
  • 2012     -285,000
  • 2013    -168,000
  • 2014    -155,000
  • 2015    -141,000
  • 2016    -136,000

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Joe McKendrick

Contributing Editor

Joe McKendrick is an independent analyst who tracks the impact of information technology on management and markets. He is a co-author of the SOA Manifesto and has written for Forbes, ZDNet and Database Trends & Applications. He holds a degree from Temple University. He is based in Pennsylvania. Follow him on Twitter. Disclosure