Job Exports: Europe's Turn
Norwich Union is as British as fish and chips. A unit of Aviva PLC, a London financial-services group, it's the country's No. 1 insurer, boasting a workforce of 30,000 spread across Britain. But hundreds of those people will lose their jobs in the next few months, and other vacant positions will go unfilled, as Norwich Union shifts 3,700 customer service and back-office jobs to India. "There's a big cost advantage,"says Simon Machell, Norwich Union's customer-service director. Indeed, the company's costs per employee in India average less than half the figure in Britain. And while many British university graduates shun call-center jobs, in India Norwich Union has been swamped with résumés from highly qualified Indian graduates.
Attention, European white-collar workers: Your job could be next. By 2008, Deloitte Research estimates, more than 800,000 financial-services and high-tech jobs will migrate from Western Europe to cheaper labor markets -- principally India, but also Eastern Europe, China, and even Africa and Latin America. Technology Partners International, a Texas firm that helps broker outsourcing contracts, says deals by European companies jumped from 16% of the worldwide total in 2002 to 26% last year. The volume of European deals this year, the firm predicts, could match those from the Americas.
The white-collar offshoring wave is hitting Britain and Ireland first because English-speaking workers can be easily replaced in India. But it's moving fast across the Continent. That's scary. Unlike in Britain, where a flexible economy could quickly create jobs, the Continent, with its rigid labor rules, is terrible at generating new employment for displaced workers. And lots of good jobs are going. With high value-added activities such as management and research and development moving abroad, "the transfer of jobs is taking on a whole new dimension," says Martin Wansleben, president of the German Industry & Trade Assn.
Wansleben and other business leaders say the trend is gathering speed because the economics are just too compelling. To stay competitive, big European companies have to keep pace with other multinationals further along the outsourcing path. "If you're competing against someone like Citigroup (C ), which has grown revenues three times faster than costs [through extensive outsourcing to India], you really don't have a choice," says Chris Gentle, European research director for Deloitte. "It's changing the operating model of European institutions."
With so many jobs at stake, politicians are starting to take notice, just as they have in the U.S., where offshoring is a hot issue in this year's Presidential campaign. On Mar. 21, German Chancellor Gerhard Schröder called multinationals that transfer jobs to lower-cost countries "unpatriotic." And after Royal Philips Electronics (PHG ), the Dutch consumer-electronics group, announced plans to eliminate 150 jobs in Ireland as it transfers its European accounting center to Poland, the opposition Fine Gael party criticized the government for failing to protect Irish workers. The job losses are a bitter pill for Ireland. During the 1990s, the country lured tens of thousands of call-center and back-office jobs from the U.S. But Ireland's average wages have risen since then and are now five times higher than those in Poland.
Organized labor is stirring, too. Amicus, Britain's largest private-sector union, has had leaflet campaigns at Norwich Union, while the Communications Workers' Union has staged protests at BT Group PLC (BTY ) over the transfer of about 700 customer service jobs to call centers in India.
UNION ACTIVISTS. So far, little protest has occurred on the Continent. But British labor activists enlisted Continental unions to persuade the European Parliament to hold public hearings on offshoring this spring. "We're not seeing the kind of backlash in Europe that we are seeing in the U.S.," says Sudip Banerjee, president of the enterprise-solutions division at India's Wipro Technologies, which gets $1 billion annually in outsourcing contracts. Wipro and Tata Consultancy Services, the two top Indian outsourcing vendors, fret that Continental unions could quickly turn up the heat -- endangering contracts with European companies that account for about 25% of their business.
Some European companies have been relocating jobs for years. Deutsche Bank (DB ) and France's Société Générale (SCGLY ) have longstanding software development operations in India, while British Airways PLC (BAB ) and Lufthansa run big customer service centers in India. Cap Gemini Ernst & Young, an IT services giant in Paris, diverts a growing share of clients' jobs to China and India.
Now, many of these offshore operations are expanding dramatically. German software giant SAP expects to increase the size of its Indian software lab in the next few months, to 1,300 workers. Philips, while eliminating 22,000 jobs in Western Europe and North America over the past two years, is hiring workers in India, China, and Eastern Europe. In a clear shot at critics, Philips CEO Gerard Kleisterlee told shareholders on Mar. 26 that the job shifts would continue, adding: "In a rapidly and radically changing world, Western Europe seems to be more preoccupied with maintaining the existing economic order than building another future."
While lower costs are the key lure, offshoring has other benefits. It's easier to staff call centers 24 hours a day in India than in many Western European countries. India's well-educated workforce is also a draw. Reuters Group PLC (RTRSY ) is transferring to that country about half of its data operations department, which analyzes data from corporate annual reports and other financial documents. "We are confident they will be able to do as good a job as people in the U.S. and the U.K.," says Justin Abel, global head of data operations.
There are pitfalls aplenty, though. Dell Inc. (DELL ) recently closed a call center in India after customers complained about poor service. In February, Capital One Financial Corp. (COF ), the U.S. credit-card company, terminated part of a telemarketing contract with a Wipro subsidiary after learning that Indian employees had promised more generous terms than the company actually offered. "In financial services, there is a considerable regulatory risk to offshoring," says Eamonn Rice, head of financial services for Ernst & Young International in Scotland. "Given the volume of customer-contacted jobs that are being shifted, it's almost inevitable that something will go wrong."
Still, competitive pressure will probably trump caution. And as bigger European companies send more jobs offshore, they're putting pressure on smaller suppliers to offer similar cost savings. That has been the case for Valtech, a management and technology consulting group in Paris whose clients include major European banks, insurance companies, and auto makers. In 2001, after its customers began clamoring for lower costs, Valtech entered a joint venture with an Indian consulting firm.
Last year, Valtech opened a development center in Bangalore, India, that now employs 200 people -- nearly one-fourth of Valtech's workforce. "The reality of the market today is simple: Companies, to remain competitive, have to spend less on their information technology systems," says Dan Deville, who heads Valtech's offshore operations. For white-collar workers in many European industries, that could prove a stark reality indeed.
By Carol Matlack in Paris, with Manjeet Kripalani in Bombay, David Fairlamb in Warsaw, Stanley Reed in London, Gail Edmondson in Frankfurt, and Andy Reinhardt in Paris