The Emerging Global Labor Market: Pas de Panique!/Don't Panic!

The Emerging Global Labor Market: Don’t Panic! calls out leading research from McKinsey Global Institute on global development of many industries.

When the U.S. saw manufacturing companies move significant operations offshore during the 80s and 90s, most people were unhappy, but many understood that certain industries were maturing, facing global competition and price pressures. Consequently, they were forced to remain competitive through lower labor costs. However, as awareness of IT offshoring spread in the context of the Tech Bust in the early 2000s, it sent a chill of fear up and down the collective spine: “How could the high tech juggernaut be outsourced and offshored? Would this development prevent its recovery?” Noisy gnashing of teeth, protectionist legislation and demonstrations. The longer term question was:

• As “the world” graduates many more engineers, MBAs and scientists than does the U.S., will they threaten the employment of U.S. high value professionals?

That’s an excellent (and important) question. The McKinsey Global Institute (MGI)published a significant study in June 2005, The Emerging Global Labor Market, in which they reported results of an in-depth analysis of the supply and demand of offshore outsourcing. In short, they found that:

• Offshoring will create a “relatively small” global labor market that will threaten no sudden discontinuities in employment or wages
• Demand by “developed countries” (i.e. U.S., Europe, Japan) will push up wage rates in offshore hotspots, although these will remain significantly below wages in developed countries
• The global labor market is in its infancy and is inefficient; in some locations, demand outstrips supply, with the reverse being true in other places

The study focused its analysis through eight industry “lenses”: packaged software, IT services, banking, insurance, pharma, automotive, health care and retail. The basket of “developed countries,” which represented demand for offshore services, included: Canada, Germany, Ireland, Japan, the U.K. and the U.S. Countries supplying offshore services were: Brazil, China, the Czech Republic, Hungary, India, Malaysia, Mexico, the Philippines, Poland and Russia.

Other thoughts:

• Studying the numbers and reflecting on the development of B2B markets, this makes eminent sense. Many of the engineers and other professionals, although they have some of the core qualifications to accept offshoring assignments in theory, in practice many are disqualified due to language, cultural skills and logistical barriers (don’t want to move to an offshoring hub).
• B2B companies typically have relatively complex business processes because they are part of one or more value chains that demand specialized tacit knowledge. There will be an adoption period in which companies will experiment to learn what works and what doesn’t. We are in Gartner’s vaunted “Trough of Disillusionment” with offshore outsourcing, and the results of offshore project failures document the shortcomings (For two examples, see Deloitte’s Calling a Change in the Outsourcing Market and PwC’s Less than Half of Large U.S. and European Companies Say Outsourcing is Cost Effective).
• It was easy for developed countries to talk about globalization when they assumed that they would dominate important categories of business. In a knowledge economy, however, market position is founded less on strategic control of limited resources and more on collaborating with ever-changing partners to create value for shorter product and service life cycles. It confronts developed countries to question their traditional advantages and to figure out where they want to play.
• In this context, the findings of the MGI study show that they have some time!