The Offshoring Paradox: Are Firms Unable or Unwilling to Retain Their Employees?

By Stephan Manning.

It is almost ironic. Some years ago many U.S. and European firms started offshoring IT, finance and accounting, software testing, engineering work and other services to India, China and other developing countries mainly to cut labor costs. Now, most of these firms struggle with retaining qualified workers abroad, after having cut thousands of jobs at home. According to various reports by the Offshoring Research Network, employee turnover remains one of the most persisting problems facing firms with offshore operations. Why is that? Well, many firms complain about ‘wage inflation’ in offshoring hotspots (see Plunkett 2014 report). But is that the whole story? Compared to Silicon Valley software engineers, most counterparts in Bangalore, India, still earn only 10-20% of salaries in the Bay area (see Payscale, article by Tam). So are firms unable or unwilling to retain workers offshore?

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Employee turnover is not a particularly new or difficult problem to understand. Solutions are pretty obvious. Pay more. Provide more interesting work. Offer attractive career paths. But these obvious solutions do not work as well offshore. And this is why:

Pay more. As firms started their offshoring journey to cut costs, the need to pay workers more to retain them contradicts the whole purpose of going abroad. The irony is that training replacements is often more costly long-term than retaining staff, especially for software development, engineering and other knowledge-intensive work. Not to even mention the risk of knowledge leakage about product designs and processes benefiting competitors. Yet many firms do not ‘see’ this paradox. While some costs – labor – are very visible, others – training – often remain hidden.

Provide more interesting work. If higher pay is not an option, giving more interesting tasks could be. For example, instead of having engineers test particular routines, they could be given more comprehensive product design, simulation and testing responsibility. But guess what: Many firms are unwilling to do that because more interesting work would involve more specific skills and knowledge which would get lost if workers eventually left the firm. As a result, offshore workers are given more routine tasks which are boring and a good reason to switch employers. And so the vicious circle begins.

Offer attractive career paths. How about giving the prospect of promotion within the firm? A good idea except that local offshore operations are typically very flat, with little opportunities to ‘move up’. Also, expat managers often occupy top positions – mostly for control reasons (and certainly not as a way to keep costs low!) On the other hand, providing an international career to offshore employees would threaten status positions and salary levels at home or require salaries and status opportunities to equalize. Only few firms are ready to do that.

So how can this situation be turned around? Three thoughts:

Broadening strategic objectives. My recent study “Mitigate, Tolerate, Or Relocate: Offshoring Challenges, Strategic Imperatives, and Resource Constraints” suggests that a strategic shift from cutting labor costs towards global productivity, sourcing stability and competitiveness will eventually pave the way for more sustainable solutions to employee turnover.

Ironically, this shift also benefits cost objectives. For example, whereas some firms still refrain from promoting offshore staff to managerial positions, others have realized that providing attractive local career paths lowers expatriate costs and attrition rates at the same time. As another example, while some firms continue to ignore the fear of job and status loss at home for global ‘cost-cutting’, others have realized that providing job security at home will prevent resistance and ease the management of globally distributed operations. Not least because home-based staff will be more willing to collaborate with offshore counterparts. This prevents delays, accelerates learning and increases efficiency.

Framing employee mobility as an opportunity. Whether employee turnover is a challenge or an opportunity is also a matter of perspective. Workers mobility across firms has been a reality in the U.S. and Western Europe for a long time. In fact, in the case of Silicon Valley, it has been recognized as one of the region’s strongest ‘assets’, since mobility may promote the spill-over of ideas and innovation, and as it makes Silicon Valley an attractive region to work and live in. And by the way: Salaries in Silicon Valley have increased quite substantially as well in recent decades. Yet, nobody complains about ‘wage inflation’. Maybe in some years, worker mobility in Bangalore will be seen in a similar light.

Learning from emerging economy service providers. And perhaps it’s not up to Western firms to shift their strategies and perspectives after all. Globalizing service providers from India, such as Tata, Infosys and Genpact, have become increasingly proficient in hiring and retaining technical talent, and in providing global career paths. Not surprisingly, India-based firms have been among the largest employers of H1B workers in the U.S. recently and will continue to become attractive employers globally. In light of the aggressive expansion of emerging economy firms, in ten years’ time, today’s struggle of Western companies to retain workers in developing countries may be no more than a funny anecdote in the recent history of a changing global economy.

Further references:

Manning, S. 2014. “Mitigate, Tolerate or Relocate? Offshoring Challenges, Strategic Imperatives and Resource Constraints”. Journal of World Business, 49 (4), Forthcoming.

Offshoring Research Network

Plunkett’s Outsourcing & Offshoring Industry Trends and Statistics 2014 

Photo: Reuters

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One thought on “The Offshoring Paradox: Are Firms Unable or Unwilling to Retain Their Employees?

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