Global sourcing trends

Reasons behind Massive Job Cuts in Outsourcing

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Over the last two years, there have been number of reported cases of massive job cuts.

Trimming of non-performers due to closing of delivery centers of global outsourcing firms, withdrawing services from overly ‘sensitive’ locations, and from the influx of robotics and automation within the service industry are a few. Historically, it is known that outsourcing vendors have a large bench, out of which many are non-performers or whose skills have not been upgraded. The impact of this on the bottom-line has become more visible only recently.

The most recent and shocking incidents in the outsourcing space were the massive layoffs carried out by IBM (14,000) and Tata Consultancy Services (5,000) last year. These are two of the BPO industry’s largest service providers & market leaders. Often times, social media and news reports reveal distorted numbers which are over-stated. Although the figures may seem exaggerated, what is important is the underlying issue of the actual loss of jobs at a massive scale. The fact remains that the services industry is undergoing a massive discontinuity and is in need of considerable reskilling to meet customer demands. One way of looking at the current wave of layoffs is that even if companies decide to remove only the bottom 5-10% of the workforce, even a 5% termination of bottom- or non-performers could easily amount to annual 7,500 to 10,000 job cuts for large industry players like IBM or TCS.

When IT companies consider downsizing, one of the main reasons is to increase utilization percentages. Captives or Global In-House Centers tend to return jobs to the home country due to the wage arbitrage differential no longer being attractive. For example, wages for call center agents in India have gone up at an average of 8-10% year on year in the past decade, when compared to mature markets, which have seen a maximum wage increase of 2%.

Job cuts at companies as big as Microsoft, IBM, HP Enterprise, and TCS are not signs of the companies suffering, as these companies are not seen to be leaving the services space anywhere in the near-term. Instead, job cuts arise due to substantial restructuring of their organizational frameworks, resulting in laying off of employees who do not have the adequate skills for the new digital services markets, especially since services segments are now diminishing as customers switch to digital services and new consumption-based models.

Another reason for companies shutting down operations is the political, environmental, or economic factor existing at a location. For example, recently, Russia has started seeing a wave of mass layoffs stemming from the plummeting economy. The country is in dire need to rethink where and how fast it spends its reserves. The Russian ruble has lost half of its value against the dollar since 2015 due to falling oil prices and Western sanctions attributing to the Ukraine crisis, making it extremely difficult for Russia to borrow funds from Western capital markets. Especially as the US election is nearing, sanctions are expected only to get tighter in terms of doing business and setting up shop at sensitive locations.

On the other hand, as companies move to robotics and automation to increase productivity and efficiency in the services sector, it is expected to lead to the loss of jobs of thousands of call center workers worldwide. Analysts believe that that by 2020, service providers and BPO companies may no longer exist due to large-scale replacement of call center and process workers by virtual autobots.

Service industry organizations understand that the services market is changing fundamentally.

Services and technology are shifting from being an efficiency and cost play to one generating revenue and growth for customers. These companies are simply taking necessary steps to ensure they stay relevant and retain their leadership positions as the market evolves and customers demand new skills to address their needs. As downsizing can have an impact on good performers, those that the company and clients want to retain; their needs must be understood and should be incorporated into the downsizing plan. Otherwise, the downsizing may result in voluntary attrition of people who are valuable assets to the firm.

Although investment towards newer technologies will be beneficial to customers of major players in the IT-BPO space in the long run, the imminent job cuts and layoffs can be worrying. Such notices come with plausible concern for clients as it means losing key people from their existing projects. This could threaten their assignments and cause some level of delay in delivery as well. Business leaders using third-party resources should ask their existing and/or future service providers what steps they are taking to ensure relevance and necessary talent to deliver services in new business models and new technologies.

As and when the layoffs take place, ensure that key people are not removed from existing processes and pay careful attention to the quality of resources being subtracted from engagements. Business leaders must include key personnel clauses into new contracts or renewals to ensure smooth delivery even in the event of engagement team turnover.

An effective supplier risk management program such as Supply WisdomSM can help manage this type of situation effectively. Contact us for more information or to get started with a free trial.