Onshoring, Offshoring, UK, IT, India

Underpaid and over here: is low cost Indian labor hollowing out the UK IT sector?

23 Dec 2005 | (Thinking Point)

The UK workplace goes global

A few years ago, UK workers worried about their employers offshoring their jobs to low-cost locations like India. The people affected by this were mainly call centre staff or administrative staff. Anyone in a ‘value added’ role, which generally meant one that you couldn’t train for in a matter of days or weeks, such as IT specialists, was ‘safe’ from the threat of offshoring.

Well, not any more. Rising numbers of UK organizations are using offshore centers to cut their technology spending, and the figures are trending inexorably upwards. And in the latest development, ‘offshore’ no longer means a 12 hour flight and 5 time zones away. ‘Offshore’ staff could soon be coming to a desk near you.

Numbers quoted recently in the news media indicate that 85% of the 22,000 work permits granted in the last year were to Indian nationals employed in the IT sector.  This represents a 10-fold increase over the last 10 years (2004 – 22,000 vs 1827 in 1995) in the number of foreign IT professionals taking up work in the UK under skilled migrant visas. 

Filling a skills gap?

The influx is largely explained by recruitment industry spokespersons as a response to the need for specialist IT skills in the UK.  This implies that the estimated 30,000 unemployed IT workers of UK origin have simply failed to keep up with employers’ changing skills requirements.  In other words it suggests that older workers in particular are not prepared to move with the times.

Other recruiters point to the large number of government and public sector projects which have pushed up demand for lower priced IT skills.  According to pay monitoring firm PayScale, an experienced software programmer in India receives an average annual salary of £6,600 compared to around £33,000 in the UK.

In addition, representatives of Indian software development companies operating in the UK point to the logic of having a technician who has worked on the development of a system in India come over to the UK to oversee its deployment. 

Cost is the decider

This trend, dubbed ‘onshore offshoring’, is borne out by the rapidly growing UK presence of major Indian outsourcers. Firms like Wipro and Infosys have growing British and Indian national workforces in the UK, and the recent £500m purchase of Pearl’s closed book life and pensions business by India’s TCS in Peterborough has been seen as a landmark in ‘onshore’ investment.

One Indian outsourcer currently has around 2,500 employees in the UK, of whom approximately 2,000 are Indian nationals on assignment from a few weeks to several years.  They are paid Indian salaries, with travel, accommodation and living allowances. 

Cost is rarely if ever quoted as a reason for bringing in Indian workers, although when challenged most interviewees admit that cost is an element in the decision. In this and similar cases, there may well be a skills gap driving the decision to bring people over from India, but the main impetus is economics.  A person with specialist software (SAP) skills whose normal UK charge-out rate to clients  would be around £650 a day could be provided to the client for about £350 all in.

What do UK organizations get out of this arrangement?

Organizations which are adopting this model gain a number of benefits:

• Lower people costs
• A solution to skills shortages
• Flexible resource pool – the people can go home when they’re no longer needed
• Knowledge of systems which have been built offshore
• More direct control over “offshore” resources in the UK than if they were in offices in India

But what are the possible disadvantages for UK organizations? Aside from issues regarding cultural and business awareness, the disadvantages of hiring foreign workers on short terms contracts are potentially the same as with UK contractors:

• You are developing the skills of someone else’s employees, who can then take their knowledge elsewhere, including to your competitors
• The business knowledge your short term resources have acquired is lost when they leave and you have to start all over again with someone new
• Operational risk may increase because of lack of continuity of personnel, mistakes made by inexperienced staff and amount of management time absorbed by having to undo errors and redo work.

Reaction in the UK

Reaction to the work permit figures has been fairly muted, possibly because this so-called labor arbitrage has been going on for some years, starting with the run up to Y2k.

Perhaps also the lack of agitation reflects an acceptance that the phenomenon of the “onshore offshore” Indian IT worker is not going to go away, however much UK workers would like it to.  Recent experience in the US, which has been ahead of the UK in charting the onshore offshore development, is not entirely encouraging to interventionists.  An attempt by the US government drastically to limit the number of work permits available to foreigners resulted in a U-turn by the authorities when it became clear that US companies needed the foreign resources. 

Perhaps the muted UK response is based on the acceptance that the UK itself has been offshoring its own expertise for decades.   UK companies for years have exported highly skilled workers to other countries and circumvented work permit regulations by positioning them as “consultants” traveling for “business meetings” and short term “project work”. 

It seems that ‘onshore offshoring’ is here to stay, as an integral part of the evolving global sourcing model.  Customers and shareholders of UK organizations, not to mention public sector ‘stakeholders’ want to keep costs down, and using lower-cost foreign labor is one way to do this.  As long as UK organizations adopting the model stay within the law and do not expose themselves to unacceptable (mainly operational) risk further down the line, the hiring of willing foreign nationals to meet their IT needs will be a valid policy. 

The global playing field is leveling out…and it’s a very chilly place.  And, of course, it could get chillier.  Today: IT workers.  Tomorrow: low cost Indian administrators working in the UK?  Accountants?  Civil servants? Scientists?  

By Elizabeth Gordon-Pugh, senior manager and business process outsourcing specialist at Alsbridge Europe, the premier consulting firm providing unbiased advice on Outsourcing, Shared Services and Offshoring.  Elizabeth can be contacted on +44.20 7242 0666 or at elizabeth.gordon-pugh@alsbridge.com.

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