The content, premises and factors of the offshoring of business services

Author:Serghei Margulescu: Elena Margulescu
Pages:304-317

Serghei Margulescu. Professor, Ph.D., Faculty of Economic Sciences, “Nicolae Titulescu” University, Bucharest, (e-mail: margulescu@univnt.ro).

Elena Margulescu. Lecturer, Ph.D., Faculty of Economic Sciences, “Nicolae Titulescu” University, Bucharest (e-mail: margulescu@univnt.ro).

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Introduction

The outsourcing of the activities or functions resulting from the global segmentation of the value chain specific for the production and supply of any product or service, known simply under the name of outsourcing, involves the transfer of those activities or functions to other companies from that country or abroad, while offshoring involves the transfer of their production only abroad, either intra-firm, inside the subsidiaries of the mother-company abroad (captive offshoring), or extra-firm, to other firms (external offshoring).

Although internal outsourcing (to other firms in the same country) is widespread, because we are talking about globalization, we are referring to offshoring (captive or not captive).

Offshoring reflects, in essence, the resulting revolution from the services’ commercialization. Traditionally, most services were until recently non-marketable, in the sense that this required the buyers and sellers presence in the same place and at the same time. Unlike goods, they could not be traded between parties placed in different countries (medical services, fitness services, etc..). Other services do not require physical proximity of the parties, but instead they have to be delivered face-to-face due to technical or traditional constraints (sharing, storage, processing and transmission of information). These services were non-marketable because:

- certain types of information could not be stored

- others could be stored, but could not be transmitted quickly and economically across borders for processing,

- others were traditionally processed inside the company (accounting, data storage, design ),

- others, traditionally presumed face-to-face presence (medical, financial, legal consultantions).

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With the development and application of the new information and communication technologies (ICT), such barriers were more frequently demolished.

ICT enables the digitization, encoding and standardization of knowledge and, consequently, the production of a wide range of services which can be fragmented or modularized, the resulting components being relocatalbe, in order to obtain cost or quality advantages, economies of scale or another advantages. Thus, the arbitrage strategies of various factors on national and international level have become feasible in the sphere of services.

1. The content and premises of the services offshoring

There, too, is reason to believe that modularity in services is more complex than that from the manufacturing field. Also, new technologies often simplify the services’ "production", and in this way enhances their relocation. The chapter “export of services " from the external balance of payment of different countries experienced with this revolution in services, a significant restructuring of content.

Thus, the U.S. recorded the largest increases in imports of services and increasing share in global imports of services from 1% in 1992 to 13% in 2002. In the category "other private services”, the largest increases can be observed in the chapters “computer and data processing services" and "accounting services, auditing and recording data”. The total value of U.S. services imports in 2002 were of EUR 205 billion dollars (see Table nr.1).

Table nr.1

Import of certain categories of services in the U.S.A in 1992-2002


Type of service Average annual
growth rate,%
U.S. services imports
in 2002, million $
Computer and data
processing services
31 1057
Accounting, auditing and
records management services
17 1188
Research, development and
testing services
16 1040
Training services 14 361
Total business, professional
and testing services
13 10732
Total other private services 11 69436
Total private services 7 205234

Source: UNCTAD, World Investment Report 2004, The Shift Towards Services.

Regarding the reverse flows, those of export services of the groups “other business services "and" computer and information technology”, the highest increases were registered in the U.S., India, Ireland, England, Sweden, Spain, China and Israel (in this order).

Developing and emerging countries export a variety of services, among which include: 1. Cultural and audiovisual services: production and distribution of films and videos, radio and TV transmissions, audio, recreational services, cultural and sports news.

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  1. Business services: back-office processes, customers services, technical support. For example: indexing, input and data processing, electronic publications, translation of legislation, arbitration support, correspondence management, remote secretarial services, typing, telemarketing, design websites.

  2. Computer and computer related services, which include hardware and software installation, data processing, database services, computer and office equipment maintenance and repair.

  3. Higher education and training services, where content can be provided in audio/video or Internet format (distance learning, training and retraining, etc.)..

  4. Financial services covering insurance and insurance related services, banking and other financial services. The most common organizational forms are joint ventures and subsidiaries of transnational companies from developed countries.

  5. Health services include medical services, dental care, bodycare, paramedical, hospital and social services. For example, delivery of laboratory samples, diagnosis, consultation, X-ray or CT scan interpretations.

  6. Internet services: installation, content providing, audio-visual services, business services, computer services.

  7. Professional services: legal representation, accounting, auditing, taxes, fees, architectural and engineering services, accounting services, document management, personnel and IT services.

  8. Film animation in the context of new 2D and 3 D requirements.

By the training level required, services are classified as:

  1. basic qualification services (call centers, data entries and records, etc..)

    1. average qualification services (financial, accounting, programming, routine analysis, back-office services, etc..),

  2. highly qualified services (research - development, design, architecture, medical tests, education, training, etc..).

    Requirements for these services to be relocatable are:

    - to involveno face to face interaction

    - to have a high information content

    - the working process must be compatible with the distance transmission and the Internet

    - to involve large wage differences

    - installation barriers to be insignificant

    - social protection requirements to be modest.

    Factors that prevent compliance with these requirements and consequently prevent the offshoring of services are:

    - technological limitations (such services can not be digitized or separated from other activities)

    - need face to face interaction (marketing, delivery, etc.),

    - the need to be closw to customers (fashion, creativity, innovation, medicine, privacy, etc.)

    - occupational requirements, labor market restrictions, lack the necessary qualifications or knowledge of foreign languages,

    - law and intellectual property rights protection

    - risk aversion.

    As time passes, more and more of these barriers are overcome, or seem to be overcome, both in terms of technological developments and government policies.

    In many respects between the factors that determine the modularity and the globalization of production of goods and services there are many similarities, but some differences persist, such as:

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    - the offshoring of services is structurally simpler and faster in terms of resources, endowments and equipment necessary, than the offshoring of production,

    - the offshoring of services mainly affects white-collar workers, not the blue-collar workers from the manufacturing sector,

    - the offshoring of services potentially addresses to a larger number of companies in all areas,

    - the offshoring of services require less investments and links with local suppliers.

    The market of services offshoring was still in an early stage back in 2002, both in absolute size and in comparison to the outsourcing market1.

    For example, the offshoring market (external outsourcing) for IT services was estimated at U.S. $ 1.3 billion, which is less than 1% of the global outsourcing market for these services (data are not yet associated with the entire group "IT services", because they do not include the outsourcing of software development services and other IT services). But the growth forecast shows a U.S. $ 24 billion level for 2007, with an increase of offshoring in the total outsourcing from 1% in 2002 to 14% in 2007.

    The share of companies that rely on the offshoring of business services is growing, although in 2004 a study on the first 500 companies in Europe, conducted by UNCTAD in cooperation with Roland Berger Strategy Consultants (RBSC), found that only 39% of them experienced the offshoring of business services, equivalent to 20,000 jobs, but 44% of them were planning to increase it in coming years. In the U.S., the share of companies that adressed to the offshoring of services was 25% and 23% in Japan.

    Large transnational companies play the most important role in the phenomenon of services offshoring, both through captive offshoring, and through subcontracting to local suppliers. The captive offshoring can be implemented both for their own...

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