An Emerging Reputational Risk

Offshore sourcing may not be high on your risk agenda - but it should be, warns Paul Morrison

Offshore sourcing is great for the bottom line, but it could be bad for your brand. As the momentum behind shipping services overseas continues to build, you may need to look beyond the obvious technical complexities, and prepare for the growing reputational challenge posed by the offshore exodus.

Entering the mainstream
The phenomenal growth of offshore services, such as IT development, call centres and back office processing, is a rare growth story in an otherwise stagnant world economy. Technology is enabling companies to provide services from overseas that were formerly tied to the home country. Led by companies in the financial services and IT sectors, many companies are now transferring jobs to countries such as India, The Philippines and Mexico, where labour costs can be reduced by 50% to 80%.

'Offshoring' has had a rather long gestation period. Firms such as Citigroup and GE have been doing it for nearly 20 years. But it is now entering a new phase: offshore is becoming mainstream business strategy. The stampede is under way.

Familiar risks
Offshore poses an extensive range of strategic and operational challenges. Which functions should be transferred offshore? How can quality of service be maintained? What are the business continuity issues? How should outsourcing relationships be structured? What is the best location?

Management attention is dominated by technical, introspective risks that focus on 'how we can ensure that offshore works as planned' Such problems are complex, and important. But after the technical issues are addressed, a more important risk remains. As offshore becomes commonplace, it is also entering the consciousness of workers, unions, consumers and governments.

The anatomy of a debate
Put simply, offshoring represents a radical restructuring of corporate activity, and not all stakeholders are happy with it. They are raising new questions: Does your company care about our country or community? What about your commitment to employees? How many more jobs are threatened? Do you care about the future security and competitiveness of this country? Are you exploiting cheap labour? Do I still want to buy your product?

These questions are being asked of many companies already. Companies such as BT, Prudential, Boeing and Microsoft, have had a taste of offshore opposition. In each case, offshore is being portrayed as a destructive, insensitive short-term strategy. And each shows that it is a complex issue, because it has the potential to create adverse reactions at many levels. The criticisms may be exaggerated, or blind to commercial imperatives, but the risk of reputation damage is real.

Employees and unions
Offshore jobs are seen to entail onshore redundancies. Offshore sourcing is currently only applicable to a limited range of IT, call centre and back office activities, but it nonetheless causes anxiety to thousands of workers. Even where there is no direct link between retrenchment in the UK, and new facilities overseas, the connection is being made. For Peter Morris of the Communication Workers Union (CWU), "the fear is that any job done via a computer can be done in India... or anywhere".

Forrester Research predicts that American employers alone will relocate 3.3 million white-collar jobs and $136bn in wages to low-cost countries by 2015. This is the equivalent of more than 750 US jobs moving offshore every day. The implication seems clear: offshore outsourcing could seriously damage your job prospects. US companies appear to be slightly further down the offshore road than those in the UK, but equivalent predictions are being made regarding British firms.

The potential scale of this offshore displacement is alarming unions such as Amicus, Unifi and the CWU in the UK and the Communication Workers of America (CWA) in the USA. The CWU set up a campaign against BT's plans to open a 2,000 head call centre in Bangalore, while simultaneously carrying out cuts in UK facilities. Amicus claims to have forced Prudential to limit similar offshore proposals. Bank of America, Boeing, Microsoft and many others have faced similar pressure.

These early skirmishes indicate the scope for a protracted struggle. Jeannie Drake says the CWU is "determined to exploit every avenue to stop work moving to India ... we are committed to fight as long as it takes to stop this dangerous development." The potential for determined opposition and negative publicity has recently been underlined by the announcement that Amicus, CWU and Unifi will campaign together to raise the profile of offshore 'before the outflow of jobs becomes a flood.'

In addition to the threat of strikes and negative publicity, offshore sourcing is also capable of damaging workers' morale, even where they are unaffected by redundancies. By contributing to a general climate of job insecurity, it can damage productivity and lead to the desertion of key employees. Services are people businesses, and maintaining strong 'people credentials' could be compromised by a poorly considered offshore strategy.

Media and NGO publicity
As the unions are well aware, the media are crucial to spreading opposition. The past six months have seen a growing interest in offshore sourcing, attested by numerous articles (for example, the Sunday Times 'Great Indian takeaway', 8 June 2003), and radio and TV programmes (for example CNN 'Exporting America' 22 May 2003). Attention has mostly focused on the impact on employment, but the media are also picking up other angles of the debate.

For example, there is the raising of strategic concerns over the erosion of the national competitiveness of key industries, or the loss of intellectual leadership, or even over the undermining of national security. In a recent article, CIO magazine suggested that offshoring to India was a major security risk for the war against terror. Such concerns may appear sensationalist, but they feed the public debate and the potential for reputation damage.

Another concern is the exploitation of cheap labour. Offshore sourcing can be seen as a positive trend for developing countries. Although wages may be low by UK standards (a typical Indian IT worker might earn £3,000 a year, compared to £45,000 in the UK), they are very attractive locally. Modern call centres and back office functions require quality working conditions, far removed from the sweatshops of previous controversies.

Yet the potential for malpractice (or the perception of malpractice) remains. Despite the best efforts of leading multinationals, CSR experts are still failing to prevent stories about exploitation in manufacturing, more than a decade after the initial publicity. The same could happen in the world of offshore activities. Although NGOs have not yet fully engaged in the offshore debate, many such groups could join the ranks of the critics as the prevalence of offshore increases .

As companies such as Starbucks, Nike or Shell have learned, media criticism of overseas activities can lead to consumer activism, reduced sales and negative brand associations. Companies will not want customers to be confronted with images of redundancies at home, or allegations of the exploitation of foreign workers. Offshore strategies may make financial sense, but they may clash with brand associations such as tradition, trust and integrity.

As yet consumers have not been major participants in the offshore debate. But if labour groups, NGOs and the media continue to raise the profile of offshore issues, consumer activism could turn the offshore debate from a reputational risk, into real reputational damage.

Organisations with high-profile brands have most to lose from such a backlash. The risk of reputational damage is particularly high for companies that have built up strong national or local credentials. BT's offshore plans resulted in it being labelled 'British Delhicom,' and Bank of America has been branded 'un-American' because of proposals to move IT development offshore. Equally, companies positioned as trusted local institutions could be damaged by negative perceptions of offshore sourcing. A UK bank has highlighted the contrast of local image with global practice by attacking the credibility of competitors that use call centres in India.

Governments, driven by a number of political factors, could also play a major role in the offshore debate. Call centre work is concentrated in some of the most deprived parts of the UK, often areas with acute employment problems such as the urban centres of the North East or Northern Ireland. In the UK, call centres alone provide over 500,000 jobs, or 2% of the workforce. There are clear political issues here.

Additionally, as offshore services become more sophisticated, white collar jobs, such as accountancy, design and development will also migrate overseas. For the first time influential middle class voters will be threatened by global competition. Offshore has the potential to become an issue for a diverse range of voters.

Pressure is already building for restrictions on the offshore exodus. In the US, a New Jersey Senator is promoting a bill to ban the offshore relocation of public contract work. Immigration laws that allow foreign workers to compete 'on-shore' with local IT staff are also being challenged in the UK and US.

Making the case for offshore
A strong backlash could have dramatic implications for companies. Negative perceptions could spread. Reputational risk could inhibit companies from adopting offshore strategies, or legislative change could restrict offshore options. At a time when pressure for cost reduction is seen as crucial to survival, a failure to get the most out of offshoring could have serious commercial consequences. Given the variety and complexity of stakeholder motivation, what can companies do? How can offshore reputational risk be managed?:

  • manage reputational risk for the long term. Safeguarding reputation is a long term task. Like offshore sourcing itself, management of offshore reputation risk is a journey, not a simple transaction. There are no quick fixes.
  • Learn from previous controversies. Offshore sourcing shares many characteristics with the manufacturing controversies of the 1990s. This provides companies with a rich case history of inept reputation management.
  • Be pre-emptive. The old adage that prevention is better than cure applies to public controversies. Executives who do not see the offshore backlash as an issue at the moment miss the point. The debate has not yet reached a critical stage, so risk managers should take the opportunity to shift its terms before the chance for intellectual leadership is lost.
  • Understand the issues. Effective reputation management depends on knowing who the key stakeholders are, and on identifying the issues that concern them. This understanding can then be factored into decision making and implementation, and key problems can be treated with sensitivity.
  • Ensure CSR compliance. Offshore facilities or third parties must meet ethical expectations, and this means ensuring that corporate values and codes of conduct are rigorously implemented.
  • Coordinate your efforts. Most organisations are poorly structured to deal with complex reputational issues that cross functional silos such as strategy, communications, CSR, risk management and operations. All internal parties need to be aligned to avoid inaction or turf wars.
  • Communicate intelligently. Many global companies appear to have policies of denial ('offshore is not an issue') or pretence ('we do not get involved in offshore sourcing'). While such approaches may minimise criticism in the short term, companies need to assert an honest and robust position on their plans if they are to avoid festering offshore opposition.

    The battle lines for the offshore debate are already drawn. For many large companies offshore will become a centrepiece of corporate. For many workers, customers and commentators, offshore is a focal point for a range of grievances. Company leaders need to recognise the scope for conflict, and ensure they are not left behind.

    Financial services go offshore
    A Deloitte Research survey published earlier this year shows that the world's 100 largest financial services companies expect to transfer an estimated $356bn of their operations and two million jobs offshore over the next five years in efforts to reduce their costs significantly. The survey found that financial institutions expect to reduce costs by nearly $1.4bn each by 2008 by sending work to low-cost centres such as India from developed economies in North America, Europe and Asia.

    The shift of operations offshore is already under way. Thirty percent of the respondents currently have existing offshore operations and that percentage is expected to climb to 75% within two years, according to the survey. It suggests that the firms achieve 39% cost savings from moving operations to low-cost centres where salaries and other costs are much lower.

    The study draws four principal conclusions:

  • The offshore trend is driving a radical shift in the structure of the global financial services industry, and this transformation is just beginning.
  • Financial institutions that can utilise their existing offshore facilities expect significant future savings, because they leverage offshore scale and scope; the challenge is achieving economies of scale.
  • Firms aspiring to move offshore should move quickly to capture the benefits of doing so, but the challenge is building capabilities quickly and prudently.
  • Firms who do not move offshore risk being left behind, because companies moving offshore estimate future cost savings at about 45%.