On a recent trip to a conference in Europe, I realized just how much of a non-event global sourcing of services (offshore outsourcing) is to the Europeans. This conference, the World Economic Forum, has been held in Davos for the last 34 years and attracts statesmen, government officials, business leaders, trade union leaders and the media to what has become the leading thought platform for the global economy.
This year a significant amount of time was spent discussing India and China. India is getting this kind of attention at this conference for perhaps the first time, for both global services and its economic performance. Noticeably, a good number of the global services discussions were led by US economists, and American and Indian business executives. The Europeans were silent spectators for the most part. With the exception of the United Kingdom, it was as if global sourcing of services was a quaint business fad, with no relevance to them. Something that would go away with next year's fall line-up of new business trends.
Europe has a great tradition of innovation and excellence in business and commerce. There are globally competitive companies in European industries like banking, insurance, telecoms, automobiles and many others. But there is an odd mix of factors that make Europe less amenable to global sourcing of services.
Let's examine these factors and also what this could mean for the future competitiveness of European countries.
Labour inflexibility is probably the biggest hurdle to outsourcing of any kind, including offshore outsourcing. Leading European countries like Germany and France make layoffs difficult and expensive. Consequently, European companies are unable to restructure readily to address a changing business environment. This is a huge problem for Europe much beyond how it affects the outsourcing business. Restructuring is necessary for regeneration as part of the cycle of business. To delay restructuring is to delay regeneration. In a fast-paced business environment, European companies will not be able to compete globally without more flexibility in labour markets.
English is the language of global services today. India dominates this market today and is entirely English speaking. So is the Philippines. English is spoken in some industries like financial services in continental Europe. But to be able to work with, say, the manufacturing industry in Germany, local language skills are essential. Indian companies have to teach conversational German to their employees or hire locally in Germany or probably both. The problem is not insurmountable but it exists and it slows down the growth of global services.
Cultural openness is another factor hindering global services in Europe. The United States is perhaps the easiest major market for a foreigner to do business in. It is culturally diverse and in fact celebrates diversity. It has a natural advantage in that it is a land of immigrants. Almost everyone or their ancestors came to America from somewhere else in the world.
Europe, on the other hand, still makes it difficult for foreign companies and foreigners to be successful. Immigration laws make it expensive to operate for Indian companies. Tax laws, both corporate and personal are no better. If you get past all this, you still have to deal with corporate cultures with strong national identities and a subtle resistance to working with foreigners. This is changing and giving way to more openness, but at too slow a pace.
In all the factors described above, fragmentation adds an additional dimension of complexity. The language issues, the labour laws, tax laws are all different in the many countries in Western Europe. Hopefully, the European Union will streamline the regulatory side of things. But till then, an Indian services company is dealing with small country markets with their own rules, regulations and languages, not a pan-European market.
The UK, on the other hand, is a notable exception to the rule. It is more diverse, its labour markets are more flexible and language isn't a barrier. Not surprisingly, the UK is the second largest market for most Indian companies after the US. But it is still not as successful with global services as is the US.
What are the implications of Europe shutting itself off from global services? Global sourcing of services is like a revolutionary new technology. It is the 'killer app' of broadband undersea fibre. It is a whole new way of doing business. To keep this most significant business trend out of Europe is the same as condemning its businesses to corporate sloth and decay.
Today's markets are global in nature. As US companies in any industry start lowering their IT, backoffice and R&D costs by going to India or China, they will slowly but surely out-compete their European rivals. Their business processes will be more efficient, their product development cycles will be shorter, while their European counterparts cling to the past. It won't be pretty.
Truly speaking, Europe has not implemented any protectionist laws to keep global services out of Europe. They simply haven't had to. The existing laws are enough to keep it on the fringes of the economy. What they need to do is to embrace global services with open arms. Make changes to encourage it. Before it is too late.