JH: Even if a company did want to offshore, wouldn’t it only apply to back office functions like HR, finance and IT?
KW: It’s a common misconception that only back office, manually intensive, repetitive or commodity tasks can, and should, be offshored. This hasn’t been true for at least a decade or more. Low-cost locations have their fair share of scientists, PhDs, medical doctors, veterinarians and other skilled professionals. This has allowed specialist services such as project management, pharmacovigilance, data management, biostatistics and testing to be provided to human pharma for years.
JH: But the savings from any functions or roles that have been offshored wouldn’t really be significant, would they?
KW: The differential (labor cost arbitrage) between the total annual compensation cost for a local employee in a high cost location (e.g. the US, western Europe, Japan, etc.) and an offshore worker is just too great to ignore.
Let’s do the arithmetic. Payroll typically comprises 70% of the cost base (excluding manufacturing) for any company. Let’s assume half of the roles can be offshored and labor cost arbitrage savings are 75%. That works out to a bottom line reduction of over 25% not including additional savings from the reduced need for office space and infrastructure.
JH: How easy is it to push through offshoring strategies? Don’t governments and employee unions oppose these sorts of plans? And can management risk a large number of experienced employees being made redundant and the rest continually worried about their job security?
KW: Despite public statements to ‘bring jobs home’, several federal and state governments around the world continue to outsource actively (to service providers whose offshore teams do the work) because it offers value-for-money to taxpayers.
Admittedly, governments set up ‘enterprise zones’, often in deprived areas within the country itself, offering tax breaks that reduce the labor cost arbitrage compared to offshoring. Unfortunately, these zones find it challenging to attract the volume and type of talent needed to be world class. Unions and the remaining workforce tend to accept offshoring when they recognise the alternative might be the closure of the entire business if their cost base remains non-competitive.