European Affairs

Spring 2004

 

European Perspectives
Anger over Outsourcing Is Less Strong in Europe
By Peter Riddell

 

Much heat has been generated recently, on both sides of the Atlantic, over the mobility of jobs and labor. In the United States, there has been a strong political reaction against the phenomenon of “outsourcing” work to low-wage countries, which, if the scaremongers are to be believed, threaten to move tens of thousands of U.S. jobs to India or China. In Europe, the preoccupying concern has been that citizens from Central and Eastern Europe might flood westwards, taking either jobs or welfare payments.

Warm words of welcome for the enlargement of the European Union this spring were undermined by an array of temporary defensive measures by the 15 older EU member states against citizens of the ten new members. These measures range in severity from denying entitlement to social security to refusing access to the labor market.

But if both sides of the Atlantic are capable of job insecurity and even protectionism, why is it that the debate over outsourcing has not achieved the same intensity in Europe that it has in the United States? With perhaps a dash of insouciance, a recent paper on industrial policy produced by the European Commission's Enterprise department remarked: “A debate is under way in the United States on the economic impact of relocation in terms of jobs and productivity.”

The paper was in part a response to instructions from EU leaders, meeting last October, to come up with proposals “with a view to avoiding de-industrialization.” But the Commission's report questions its premise. “It is not possible to conclude that Europe is experiencing genuine de-industrialization,” it argues, although it does see problems of lower production and employment in certain traditional industrial sectors. The nuances of the paper suggest that a debate is under way in Europe, as in America, but that it is neither so widespread nor as politically-charged. At least, not yet.

"Not yet" is superficially the easiest way to explain the Transatlantic difference. It could be that the United States is simply a year or two ahead of the European Union in its approach to outsourcing. Europe will lag behind, just as it did in the heady days of the dotcom bubble.

Industry analysis of outsourcing suggests that it is a trend that has still to take off in Europe. Forrester Research entitled a November 2003 report on information technology services spending “Forecasting Europe's Outsourcing Stampede,” clearly putting growth in the future. Forrester admitted that earlier predictions of a recovery in spending during 2003 had been undermined by poor economic growth in Europe's major economies. It predicted a surge in pent-up demand in late 2004 and early 2005. As a share of European IT services spending, outsourcing would grow from 29 percent in 2002 to 43 percent in 2008.

Gartner Dataquest, in an analysis of market trends in outsourcing of business processes, forecasts a compound annual growth rate of 9.6 percent of outsourcing in Europe between 2002 and 2007. That would increase the value of outsourced services from $24.8 billion to $39.2 billion over the five-year period. Gartner says that the UK has been far ahead of the rest of Europe in outsourcing business processes, accounting for halfthe European market in 2002. Some tasks, such as payrolls, check processing and benefit administration, have long beencontracted out. Outsourcing is now being extended to processes like recruitment and procurement. Although Gartner forecasts strong growth in Italy, France and the Netherlands, it still envisages that in 2007 the UK will account for $19 billion of a $31 billion market in Western Europe for process management.

But timing is not the only difference between the European Union and the United States. There are good economic reasons to suppose that outsourcing will not have the same impact in Europe as in the United States. First, demand for services is greater in the United States and the price of services is higher. That means that the potential savings for business from outsourcing are bigger in the United States than in Europe.

Second, there are significant regional variations in employment costs. An outsourcing IT center in India might enjoy a significant advantage over employing people in Denmark, but there will be a much smaller advantage over wage costs in Portugal, Greece, Spain or even Italy. And there is a still smaller gap between wages in outsourcing centers in developing countries and the lower-wage economies of Eastern Europe.

Third, the costs of getting rid of existing employees are much greater in Europe than in the United States. If people are expensive to fire, then the cost savings achieved by outsourcing—switching work from the domestic labor force to India or China, for example—are correspondingly reduced. And in many European countries, it is not only expensive to fire workers, it is also more difficult than in America, as a result of job protection regulations negotiated over the years by powerful labor unions. “Germany is a much more protectionist environment [than Britain or the United States]. It's much more difficult to make an outsourcing deal in Germany,” says Andrew Parker of Forrester Research's Amsterdam research center.

On top of these cost-benefit calculations and legal hurdles, there are also cultural differences. Europeans do not have the same expectations of 24-hour, seven-days-a-week services as Americans. It is common in European countries for shops to close relatively early in the evening and not to open on Sundays. And if European customers do not share the same expectations of permanently available services, businesses in turn are not obliged to staff call-centers and provide support round the clock.

Outsourcing European services is also complicated by differing language requirements. Asia can offer thousands of proficient English-speakers, but the supply of those who can read or speak French, German or Italian is more limited. The language issue, says Mr. Parker, is “ever present.” Cultural affinities also influence outsourcing destinations. Nordic businesses in Denmark or Sweden might be readier to see work go to fellow-Baltic new EU member countries, such as Estonia and Latvia, or, outside the European Union, to Russia, than to contemplate a switch to Asia.

India's Wipro has certainly won significant contracts from several UK companies, but it is unclear whether it can sustain the same level of success in other European markets. Deutsche Bank has contracted work out to St. Petersburg and Moscow. Romania, which hopes to join the EU in 2007, is now talked about as a destination for outsourcing IT services. All of which suggests that the patternof relocation in Europe is more complicated than in America. It cannot necessarily be described as “anti-European,” in the way in which it is sometimes denounced as “anti-American” in the United States, particularly in a Presidential election year.

Then there is the issue of expectations. The idea of moving jobs from Western Europe to Eastern Europe is not a new idea. It has long been the case that multinationals would look elsewhere before employing large numbers of workers in Western Europe. If they do set up in Western Europe, they usually demand tax breaks and/or state aid to sweeten the pill. So EU leaders are perhaps more reconciled to external competition, whether from their Eastern neighbors or further a field.

Such considerations are familiar issues in European politics. It is not that Europe is happy to be losing jobs abroad, but the rumbling is more constrained. “Compared to the United States, it is simmering under the surface,” says Mr. Parker.

Occasionally, the discontent bubbles up. German Chancellor Gerhard Schroeder criticized the giant German multinational Siemens as “unpatriotic” after it decided to contract work out to Central and Eastern Europe. The French administration recently exhibited similar chauvinism when deterring the Swiss pharmaceutical company Novartis from interfering with a bid by the French company Sanofi for another French company Aventis. The government was trying to ensure that Aventis and its jobs stayed in France.

But such appeals to patriotism are often characterized here in Brussels as “un-European.” The principles of the European Union's single market, that people should be free to work, travel or set up business anywhere within its territories, have obliged national politicians to accept that jobs will disappear across national borders.

Whether they can prevent jobs traversing the external borders of the European Union has yet to be fully tested. But a straightforward appeal to national interest will probably not be enough. Instead European politicians might resort to more devious gambits, perhaps including recourse to the European Union's rules on data protection, in an attempt to stem the flow of jobs abroad. They will not get any help from the European Commission. As Frits Bolkestein, Commissioner for the Internal Market, has said: “Too many leaders of ‘old’ member states have become preoccupied with the phenomenon of ‘deindustrialisation’ or ‘off-shoring’ and ways of stopping it from happening. They are wrong on two counts. First, we cannot prevent ‘off-shoring’ from happening—to a certain degree, it is inevitable, even desirable. Second, the policy measures which they advocate to stop it are outdated and ineffective.”

Tim King is a business journalist reporting on EU affairs in Brussels.