Monday, February 16, 2004

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Europe and outsourcing

How is Europe dealing with outsourcing? This article provides an interesting clue:

IBM Corp. cornered an outsourcing contract with Dutch life assurance and pensions business Delta Lloyd Group on Monday. The seven-year deal is worth - 200 million (US$255 million), according to IBM....

European companies are increasingly turning IT operations over to large U.S. corporations such as IBM and its competitors Hewlett-Packard Co. (HP) and Electronic Data Systems Corp.

"It is an interesting time in the outsourcing industry, where you have massive companies, like IBM, that dwarf their customers," said Kirk Smith, of U.K. IT services provider LogicaCMG PLC. European companies are feeling the pull of U.S. and U.K. business models that require businesses to control the level of costs, playing into the strengths of outsourcing deals, according to Smith.

"Companies in Europe realize they have to exist in a global economy, and in doing so are turning to outsourcing," he said. "The large companies like IBM and HP are appealing because they are well-known brands with a global reach." Across Europe, businesses are outsourcing departments from IT to human resources as well as finance and accounting. "It's now really getting to the heart of business," Smith said.

Last month, Nokia Corp., the world's largest mobile phone maker, announced it had granted IBM a five-year global IT outsourcing deal valued at - 200 million. IBM will handle Nokia's IT Helpdesk operations as well as manage and develop the Espoo, Finland, company's desktop IT environment.

[Sure, that's what European firms are doing. But the European Union is cheesed off, right?--ed. Not according to this report:

A European Union delegation said Monday outsourcing was beneficial for the world economy and added it understood India's concerns about objections in western nations to shifting jobs overseas.

"It's something that is good for you (India) and good for our service industries," EU's External Relations Commissioner Christopher Patten told reporters in New Delhi.

"We have no problems with outsourcing. We are very understanding of India's concerns on the issue."...

Patten said the EU believed western outsourcing of jobs to countries like India, Mexico and China, where labour costs are lower and goods can be produced more cheaply, was an "an aspect of a more liberal world economy."

UPDATE: This trend of European outsourcing to the United States is consistent with this editorial by Michael Walden from two weeks ago. The highlights:

While outsourcing has captured current attention, it is not a new phenomenon. If the term is defined as jobs operated by U.S. companies in foreign countries, the current total is 10 million positions, or 7 percent of domestic U.S. employment. Further, there's been an upward trend in the number of outsourced jobs since the mid-1990s, when trade barriers were significantly reduced following the signing of the NAFTA and GATT agreements.

What is less well publicized and understood is that "insourcing" also occurs in our economy. Insourcing happens when foreign companies establish jobs in the United States.

The latest statistics show insourcing accounts for over 6.5 million jobs nationwide. Although this is less than the number of outsourced jobs, the gap has actually narrowed in the past quarter century. That is, there's been a recent trend of foreign companies adding jobs in the U.S. faster than U.S companies have increased jobs in foreign countries....

The scorecard on job outsourcing versus job insourcing has actually moved in the favor of the U.S. in recent decades, and policy-makers must consider both when evaluating the worldwide movement of jobs.

posted by Dan on 02.16.04 at 02:35 PM


Chris Patten was the last colonial governor of Hong Kong before the Red Chinese took over. This might explain his free trade views. However, are we sure that Patten truly speaks for all of the Old Europeans? I have serious doubts. This would be very good news, if accurate. Shucks, I might even have to say something nice about the Old Europeans. It might ruin my day!

posted by: David Thomson on 02.16.04 at 02:35 PM [permalink]

From the article, it's not clear how much of this is pure outsourcing (getting another company to take over a function) vs outsourcing combined with offshoring (also having the function done in another country).

posted by: David Foster on 02.16.04 at 02:35 PM [permalink]

Two propaganda articles proving exactly nothing. Is young Doctor Drezner clasping at straws in his elitist delusions?

I especially liked the off-the-wall definition of outsourcing by that North Carolina state employee. Just come up with your own definition and the problem goes away.

posted by: Mik on 02.16.04 at 02:35 PM [permalink]

Two points:

(1) The quoted articles show that the politicians and financiers in Europe love offshoring (no surprise there). It says nothing about the opinions of the average European on the street. I'll bet that a similar article could be written about American offshoring, but it would totally overlook the grassroots opposition to this destructive activity.

(2) If the Europeans are indeed more open to outsourcing than Americans, perhaps it is due to the fact that they have more protections for the laid-off worker. Unemployment benefits are typically more generous than in America, and healthcare is not tied to employment, so the laid-off worker need not face the double whammy of unemployment and no health coverage. I'm not saying we should adopt these programs here, but it is almost certain that their existence helps to make the loss of jobs overseas more palatable.

posted by: Firebug on 02.16.04 at 02:35 PM [permalink]

Dan is again correct. The Europeans are at least as far along in outsourcing (and offshoring) as we are. In general, the UK is furthest along, but there is plenty of outsourcing done by the French, also the Dutch. Much of the BPO work is done in Poland, some also in Slovakia and Hungary.

The poster "Firebug" is partially correct: offshore outsourcing is not nearly the issue in France as it is here because of social policy and benefits to some extent. The other side of the coin is that many French workers would prefer to work less or not at all, and collect a relatively small check from the state, than to scramble to preserve a job and a slightly larger check.

posted by: tombo on 02.16.04 at 02:35 PM [permalink]

The are some methodological questions to clear up here, aren't there?

"Jobs created by US companies in other countries" could include jobs held by American nationals, could they not? They could also include jobs that are outsourced because that is the only way they can physically exist; an American company owning Canadian timber that is exported to the United States has to create jobs in Canada (unless, I suppose, it uses extremely long chainsaws to cut the trees down). Finally, they could include the somewhat murky category of jobs with employers that have been acquired by American companies. Acquisition need not change the number of jobs at all, but it would affect this metric. All three conditions would necessarily apply to jobs defined here as "insourced," created in the United States by foreign-owned companies.

I'm not necessarily making a policy argument here, only a suggestion that the metric Walden is using requires some refinement before it can be considered on-point with respect to outsourcing.

posted by: Zathras on 02.16.04 at 02:35 PM [permalink]

You're confused, Dan, about the difference between outsourcing and offshoring.

If a European company outsources a function to IBM, it doesn't imply that the work is moving to the US. What may happen is that the employees simply become IBM employees.

Something tells me that IBM isn't going to be hiring a bunch of Finnish speakers to staff a helpdesk operation in Boca Raton.

Chances are, the Nokia jobs are staying in Finland, not moving overseas.

Companies have been outsourcing things like janitorial service and security for quite a while. The jobs, and often the personnel, stay the same. It should be obvious that these jobs, while outsourced, aren't sent overseas.

posted by: Jon H on 02.16.04 at 02:35 PM [permalink]

The current Märklin toy train catalog makes a big splash about how they are NOT outsourcing, but have kept 90% of their "value-add" within Germany.

Reading articles by so-called financial "pundits" does not necessarily or perhaps even often give an accurate view of public sentiment in that country.

The difference between outsourcing and off-shoring that was pointed out in this thread is extremely important.

posted by: Larry Miller on 02.16.04 at 02:35 PM [permalink]

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