New research explodes offshoring myth

For many people, the term offshoring has become synonymous with exporting domestic job overseas. But in the UK, where business services jobs appear to be under threat, a new report suggests that fears are ungrounded. The truth is that far from losing out, the UK is a net beneficiary of offshoring in this key sector.

Offshoring: Myth and Reality - What the Global Trade in Business Services Means for the UK, produced by the Advanced Institute of Management Research (AIM) sets the record straight on the outsourcing and offshoring of business services. Written by a specially selected team of management scholars, the report published in Spring 2005 explores the recent trends in specialisation, outsourcing and offshoring of business services (see definitions below). Its findings contradict popular conceptions about offshoring.

Despite the impression given by UK job losses in business services, the report reveals that:

The UK is a net exporter of business services. It operates a trade surplus in business services. In other words the value of the business services the UK provides for other countries is greater than those they provide for the UK.

The increase in the business services industry in the UK has been beneficial for the UK economy. Business services have accounted for over 50 per cent of job growth in the UK over the last 20 years.

The external trade in business services that exists is tiny in comparison with the overall size of the business services market. So the threat to the UK business services industry from offshoring is relatively small.

The overall effect of the business services market is to improve the productivity of the UK. In business services the UK has substantially closed the productivity gap and even overtaken other G5 competitors such as the US, Germany and France.

The message is that, to date, offshoring has made a relatively small but positive impact on the UK business service industry, says Dr. Rachel Griffith, deputy director at the Institute of Fiscal Studies. To date most outsourcing and specialisation of business services has taken place within the UK economy. The proportion of growth attributable to the import and export of business services is so small that it will require a substantial increase before it has the potential to seriously affect the growth of the UK economy. On this evidence, the idea that offshoring is damaging an increasingly uncompetitive UK business services industry is a myth.

Although this is good news for the UK business services industry and the UK economy in general, the report notes that there is no room for complacency. The trend towards the specialisation of business services through insourcing, outsourcing and offshoring is well established and has important implications for UK businesses.

For UK companies involved in the business service industry the increase in the global business services market offers considerable opportunities. To take advantage of these opportunities, however, they will need to remain competitive on both cost and quality of services.

For businesses thinking of separating out business service functions, the report suggests that they should consider their options on a case-by-case basis. Offshoring will not always be the best option, or even the most cost effective. The alternatives of insourcing within the UK or outsourcing to UK based companies should be thoroughly evaluated. Some definitions

Outsourcing, offshoring, insourcing; It can all be very confusing. The report includes some helpful definitions.

SPECIALISATION: Where a firm moves an activity to a specialised production unit. This includes insourcing, outsourcing and offshoring.

INSOURCING: The production of the service is still owned and controlled by the firm.

OUTSOURCING: One step further than insourcing, outsourcing occurs when the firm uses a third party provider to carry out an activity. The company buys services externally rather than providing them in-house.

OFFSHORING: A type of specialisation where the production of the goods or service - whether it is making goods, or answering the telephone - is moved overseas. This may involve either insourcing or outsourcing.

BUSINESS SERVICES: Those services used by firms as part of their business, and by the government for public administration. Business services are subdivided into IT services -- hardware and software consultancy for example -- and IT enabled services -such as call-centres, or professional services.

The authors:
Ms Laura Abramovsky, Advanced Institute of Management Research, Institute for Fiscal Studies; Dr. Rachel Griffith, Advanced Institute of Management Research, Institute for Fiscal Studies; Professor Mari Sako, Advanced Institute of Management Research, Sad Business School, Oxford.