The McKinsey Global Institute (MGI) has just released a major new study on The Emerging Global Labor Market, focusing on the dynamics of supply and demand for offshore talent in services. Typical of MGI, the study dives deep into specific industry sectors (in this case, eight sectors - IT services, retail banking, packaged software, retail, insurance, pharma, health care and auto) and, building upon this analysis, extrapolates to a broader perspective. It is a must read for anyone interested in the evolution of offshoring activity.
This study is already starting to receive media attention. The Financial Times gave it a front page story headlined "Foreign threat to service jobs 'overblown'".
It's this kind of story that gives me concern. The MGI study covers a lot of ground - it offers a detailed assessment of the relative levels of offshore employment in 28 low wage-rate countries and 8 mid- and high-wage countries in 2003, the size and composition of offshore labor pools, estimates of the "theoretical maximum" of service jobs that could be moved offshore, and projections regarding the likely level of offshore employment by 2008.
So what does the media focus on? The bottom line number - how many jobs are likely to move offshore to low wage rate countries by 2008? And yet this is where the MGI report is the weakest.
The MGI projections are reassuring (if you hold a service job in a high wage rate country). By 2008, MGI projects that there will be 4.1 million service jobs offshore - that may sound like a lot, until you put it into context - it represents only 1.2 percent of service jobs in high wage rate countries.
How does MGI arrive at these numbers? Well, the approach is certainly less rigorous than their estimates of current offshore employment or available labor pools. By necessity it would have to be, since we are dealing with choices that thousands of firms are going to have to make over the next five years in a rapidly changing global economic environment subject to a host of political uncertainties along the way. MGI built its reputation on rigorous analyses of current and historical economic activity - it has only recently ventured into the far riskier business of projecting future economic activity.
MGI certainly does a heroic job in generating these estimates, but its challenge is highlighted by its observation that the pace of adoption is limited more by company-specific barriers than by regulatory barriers. Company specific barrier are much more difficult to aggregate and quantify than assessing the impact of laws that may prevent certain forms of offshoring. I could not find a detailed discussion of the methodology used by MGI to generate its projections of job movement, but some of the sources appear a bit problematic. For example, the MGI report cites interviews with 83 HR managers of multinational corporations, HR agencies primarily supplying MNCs and heads of remote centers suggesting that even if offshore job candidates had appropriate academic qualifications, 87% of the candidates would be rejected for reasons like poor language skills or cultural differences. OK, but are HR managers of MNCs and their HR agencies even the right people to be talking to? What if the jobs are outsourced as well as offshored? What about talking to the hiring managers of third party outsourcing service providers? What about looking at the extraordinary growth of private training centers in cities like Bangalore that are working to upgrade the talent of young people to make them more attractive for offshore service jobs?
I have a concern that the MGI research does not fully capture the dynamic changes that are going on in major offshore locations in terms of talent development or the growth of competitive pressures that will make MNCs more willing to undertake significant offshoring and outsourcing initiatives. Corporate perceptions and practices can change rapidly as more experience with offshoring accumulates and as pressure for performance mounts. The MGI report may therefore have significantly under-estimated the magnitude of the job movement ahead.
Of course, none of these concerns should detract from the importance of this study. To my knowledge, this is the most substantial effort to quantify the impact of offshore job movement. It will likely remain for a long time as the benchmark against which all other studies and estimates will be measured.
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