GaWC Research Bulletin 303

This Research Bulletin has been published in Regions, (274), Summer 2009, 11-13.

Please refer to the published version when quoting the paper.

(Z)

Outsourcing and Offshoring in Business Services - New Dynamics, New Territorial Opportunities?

K. Pain^*

Introduction

The 2008 financial crisis has demonstrated the degree to which the global economy has become integrated. The fall-out from the late summer crash has impacted on businesses world-wide in most sectors of the so-called ‘real’ economy. Electronic communications and widespread relaxation of cross-border trade regulations have allowed the growth of the highly complex networks of business relations which make C21st cities and regions across the world increasingly economically interconnected yet, at the same time, as currently witnessed, exposed to risk in any one part of the system. The outsourcing and offshoring of financial and other business services are key processes constructing the local-global interconnections which now underpin regional and national economies, but do current events underline the dangers of an over-dependence on these intangible knowledge-based services?

The importance of business services

The current recession will be interpreted by many as evidence of the foolhardiness of policy in developed countries, including EU Lisbon strategy, which has promoted the expansion of the advanced service economy whilst industrial activity has withered.¹ However it can be argued alternatively that the far-reaching implications of the present crisis demonstrate that high value-added knowledge-intensive business services have come to be the vital backbone of the wider economy.

Access to finance capital, accounting, legal services, insurance, marketing, advanced logistics etc., are now critical for the management of global production and supply chains of primary as well as manufactured commodities - energy, food, apparel, technology, etc. As globalization has extended and deepened, the service sector has become increasingly ingrown into most economic activities and industries, affecting all types of work, dictating the value that is added to labour and the sustainability of employment. Advanced knowledge-based services can thus now be seen as affecting the livelihood and quality of life of people everywhere, making network connectors - outsourcing and offshoring of financial and business services - important subjects for study.

Outsourcing and offshoring - changing dynamics

The Globalization and World Cities (GaWC) research group at Loughborough University has studied the dynamics of global business service networks for almost a decade. Its research has focused on the measurement of the world-wide connectivities conferred on cities by the global network relations of firms that service businesses through them, http://www.lboro.ac.uk/gawc. The 2003-06 ‘POLYNET’ study funded by the EU INTERREG IIIB programme, adapted GaWC network analysis to investigate the functional connectivities that such services confer on eight densely urbanized North West European regions (Hall and Pain, 2006). These studies point to a shifting geography of the service economy in which outsourcing and offshoring are key facilitators of change.

Whereas the terms outsourcing and offshoring have generally been associated with lower-value ‘business process’ (BP) services - routinized and digitized ‘back-office’ activities as opposed to ‘front-office’ high-value, specialized functions – the research findings indicate that emergent global business models are becoming more complex, involving multiple dynamic on- and off-shore supplier relations. Furthermore the drivers of operational change have less to do with cost saving and more to do with the need to increase scope and acquire skills across relevant specialist fields. Established preconceptions about the rationale behind outsourcing and offshoring relationships are becoming less relevant.

Emerging business models

The decentralization of production in business services clearly has a precedent in the manufacturing sector. Development theory has traditionally emphasized the unequal relations associated with the emergence of a world economy in which industrial capital has exploited cheap labour and weaker regulation in ‘developing world’ locations. Similarly in the service sector, the erosion of cost savings that were once possible ‘onshore’ by exploiting regional labour and land price variations within developed nations has been a spur to offshore and outsource back-office activity to distant locations, Mumbai, India, being the late C20th much quoted example.

But interviews with European global business leaders show that decentralization is not a one-way dynamic – service functions evolve and change with innovation, necessitating the development of flexible ‘sourcing’ and ‘shoring’ strategies.

Progress towards a single market has triggered increased EU competition in financial and business services, putting pressure on domestic firms to scale-up to remain competitive locally; global ambitions have increased, spurring many firms to join cross-border business networks. Larger entities must specialize and, at the same time, diversify in order to survive in larger borderless markets, hence there is a need to focus on core competencies and businesses yet also draw on a range of specialisms. Collaborative relationships with external providers allow the development of production strategies that are flexible and agile.

The variety of models for ‘second sourcing’ and ‘multi-source’ outsourcing and off-shoring of ‘non-core’ services which has arisen indicates that the need for specialist labour, competencies and quality is now taking precedence over low pay conditions as a strategic driver. Back office activities are mobile within and between organizations and on/offshore locations, as illustrated by the onshore-offshore ‘blended’ models used by global management consultancies. These developments suggest that the location of activity is beginning to reflect a new division of labour based on the availability of knowledge, skills and talent as opposed to cheap labour.

Locational outcomes

The changes are impacting on territories at two scales because the increasingly extensive, complex and fluid relations between business entities still have an important geographical dimension. As functional relations between firms are becoming more intertwined, so are the relations between places.

At a global scale, comparison between GaWC service connectivity data for the years 2000, 2004 and 2008, shows a dramatic re-ordering of city connectivities across the world and the striking ascendancy of Chinese cities Shanghai (Figure 1) and Beijing over this eight year period (Taylor et al., 2008). Within Europe, the POLYNET study has shown that high global service connectivity in London is a creating a complex ‘mega-city region’ economic development structure which is functionally interconnected through global business service networks (Pain, 2008).

In spite of the now ubiquitous use of electronic communications such as email, which have been critical for the decentralization of activity, close proximity for face-to-face contact and knowledge transfer is still essential. The concentration of firms and supporting infrastructures, from skilled labour to IT, in clustered global locations remains vital for transnational business and is impacting on an expanding area surrounding such clusters as their international connectivity increases (Pain, 2006).

New territorial opportunities

China’s ‘Open Door’ policy and the reversal of strategy to limit urban concentration has had a dramatic effect on the global service connectivity of its major business cities and their mega-city regions. The impact of Chinese reform illustrates the potential for service sector expansion that can be unlocked in world regions undergoing post-Communist economic and political transition. In the case of Eastern Europe, cultural and linguistic compatibility and proximity to the strongly globally-connected EU ‘Central Zone’ are likely to be a bonus but the Chinese case points to the need for cultural change at an institutional level to boost Europe-wide business service connectivity.

In the POLYNET research a concentration of global functions was identified in only one city in each of the eight North West European regions studied including classic polycentric regions, such as the RhineRuhr Germany, which contain multiple centres of a similar size and urban structure. Polycentric regions exhibit an apparent equivalence of proximate urban centres as regional business locations, yet they are primate with respect to global business services. Figure 2 shows that South East England is primate at a regional scale of business operations compared to RhineRuhr but at a global scale an expanding polycentric structure surrounding London is interlinking many much smaller centres across an extensive area (Taylor and Pain, 2007). Table 1 and Figure 3 show that the percentage gap between RhineRuhr’s polycentricity at the regional and at the global scales is three times that of South East England.

REFERENCES

Hall, P. and Pain, K. (2006) (eds) The Polycentric Metropolis: Learning from mega-city regions in Europe, Earthscan, London.

Pain, K. (2006) ''Policy Challenges of Functional Polycentricity in a Global Mega-City Region: South East England'', Built Environment, Vol. 32 No. 2, pp 194-205.

Pain, K. (2008) "Examining Core-Periphery Relationships in a Global Mega-City Region - The Case of London and South East England", Regional Studies, Vol. 42 No. 8, pp 1161-1172.

Taylor, P.J. and Pain, K. (2007) ''Polycentric Mega-city regions: Exploratory Research from Western Europe'', in P. Todorovich (ed) The Healdsburg Research Seminar on Megaregions, Lincoln Institute of Land Policy and Regional Plan Association, The Healdsburg Research Seminar on Megaregions, Healdsburg, USA.

Taylor , P.J., Pengfei, N., Derudder, B., Fegyong, Lv., Hoyler, M., Jin, H., Pain, K.,Witlox, F., Xiolan, Y. (2008)Connecting Cities Sydney: World City Network 2008: A new major analysis of world globalization. 9 th World Congress of Metropolis Conference, Sydney, Australia, 23 October 2008.

NOTES

^* Kathy Pain, Globalization & World Cities Research Group, Department of Geography, Loughborough University, Epinal Way, Loughborough LE11 3TU, UK. Email: K.Pain@lboro.ac.uk

1. For OECD and EU data see:http://titania.sourceoecd.org/vl=9790542/cl=17/nw=1/rpsv/factbook/; http://ec.europa.eu/regional_policy/sources/docoffic/official/reports/p141_en.htm.

Table 1: Global and regional scale polycentricity by region

Note: Polycentricity is measured by the average % of the 5 non-leading cities.

Source: Adapted from Taylor and Pain, 2007 (data extracted from Hall and Pain 2006).

Figure 1: Globally connected Shanghai, 2008

Figure 2: The difference between RhineRuhr and South East England regional scale polycentricity

Source: Adapted from Taylor and Pain, 2007 (data extracted from Hall and Pain 2006).

Figure 3: RhineRuhr and South East England difference in regional and global scale polycentricity

Source: Adapted from Taylor and Pain, 2007 (data extracted from Hall and Pain 2006).