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Overseas outsourcing short-sighted

John Ridge, Information Age

14/10/2003 11:53:16

The sooner it is considered as infrastructure and treated as such, then the better off the Australian ICT industry will be, and the more strong will be the basis of the Australian economy.

By outsourcing overseas, organisations, both public and private, are making a very short-term, short-sighted decision based purely on reducing costs, and not based on cost effectiveness, broader economic and social considerations, or longer-term considerations. By choosing to outsource overseas, we reduce the demands for those certain skills locally, and the need to produce people with those skills.

Therefore we start a vicious downwards spiral of no longer needing to train people to have those skills, and no longer requiring academics to teach those skills etc. We raise the bar significantly against the possible option of bringing those functions and skills back on-shore on in-house in the future, and increase our dependence on the source of the skills.

We leave ourselves vulnerable to the “supermarket syndrome” whereby initial low prices are used to buy market share, drive out the local competition, and when a market dominance position is achieved, then prices rise and there is no longer an alternative source of supply.

There are social implications and social equity issues involved in this as well. Sometimes, people make the ill-informed comment in relation to this matter that “Australia should outsource the low value-add jobs and focus on the high value-add jobs”. I believe there are major ethical and social implications in such an attitude.

If we export the “low value-add” jobs what do we then do with the low value-add people? Aren’t the so called low value-add workers of today not the real knowledge workers of tomorrow?

Society is a continuum of people with differing levels of education, experience and skills, and requirements from their jobs. In order to adequately address and service that continuum we need a corresponding continuum of jobs requiring the same varying levels of education, experience and skills.

The approach of keeping high value-add jobs and outsourcing lower level roles is a dangerous concept. Australia’s population encompasses a broad spectrum of skills and capabilities and we must provide a corresponding range of jobs to match those abilities.

If we only cater for the highly educated, we risk condemning a large segment of the workforce to long-term unemployment, with the associated welfare costs, risks and social issues. The cost saving of sending work offshore must be balanced with the social cost of losing jobs within Australia.

Given the multiplying benefits of keeping jobs within the country, there might be an argument in the Government offering organisations incentives to bring outsourced jobs back to Australia, or bring offshore operations back home.

An equally worrying but slightly different aspect to this phenomenon is the “short-term” importation of foreign nationals by some contracting organisations to undertake contract work in Australia. I believe the rules that are in place to govern this practice are currently being flouted by some of these organisations. In the current employment climate I cannot understand why approval for one such foreign contractor should be approved, let alone the 10,000 or so who are currently in Australia. Most of these people are not being paid market rates for their work, or their rights and entitlements, and are generally being taken advantage of.

What will be the impact of this continued and growing trend?

The Australian ICT deficit is very large and growing; over the last decade it grew at an average of 8.34 per cent per annum, and if it continues at this rate by 2010 it will have reached an annual figure deficit of $27.3 billion. It currently accounts for 65 per cent of the current account deficit.

Australian exports of ICT goods and services were $5.4 billion in 2001-02, 150 per cent of Australian export of wool. ICT Imports account for 13 per cent of total national import debts, twice the figure for motor vehicles. Total ICT exports increased 5.7 per cent per annum between 1993-94 and 2001-02. ICT services exports grew 7.4 per cent per annum during this period.

While much government spin is put on Australia as a user of ICT and its ranking as fourth in the OECD list of countries, that needs to be put into some perspective.

In 2000, international comparisons put Australia’s trade performance as follows :

• Australia ranked 23rd of the 29 OECD countries in terms of the contribution of ICT equipment to total merchandise exports; • Australia ranked 23rd of the 29 OECD countries in terms of the ratio of ICT equipment exports to GDP, with exports equivalent to just 0.32 per cent of Australia’s GDP compared with the OECD average of 2.2 per cent; • Australia ranked 24th among the 29 OECD countries in terms of its export/import ratio, with Australia’s ratio less than 0.2 compared with Finland’s 1.9 and the OECD average of 0.9; • Australia ranked 23rd of 29 OECD countries in terms of its Revealed Comparative Advantage (RCA) in ICT equipment with an RCA of 0.19. Disturbingly, this is down from 0.34 in 1995, one of the most rapid declines in ICT equipment production advantage experienced by an OECD country; and • Australia ranked 26th among 29 OECD countries in terms of the per capita cost of its ICT equipment trade deficit. Australia’s deficit on trade in ICT equipment cost US$365 per head of population, compared to the OECD average of $US38 per head of population. This is particularly significant in light of the fact that several countries enjoyed a strong surplus, including Ireland, ($US2388), Finland ($921), Sweden ($419), Korea ($384) and Japan ($263).

More than any other market sector, our governments represent the best single opportunity to impact the trade deficit, representing over 40 per cent of the buying power for ICT goods and services. To my mind, this means they must shoulder at least 40 per cent of the responsibility for the deficit and 40 per cent of the responsibility in addressing the situation.

While we can’t mandate what happens in the private sector, governments are in a position to make a unilateral decision about their level of Australian-produced ICT consumption and to actively encourage greater support for local suppliers.

Part of the problem in the past has been that our governments appear to only consider the direct cost of their purchasing patterns without regard for the flow-on effect throughout the economy. This is short-sighted and costs our economy dearly.

There have been a number of different studies done by a number of organisations, all of which have arrived at similar results. According to ISO Limited, for every $1 million of successful new or retained manufacturing business, the following effects flow through the economy: • 18 full-time jobs are created; • $1.262 million is value added to the economy; • $211,700 of welfare benefits are saved; and • $317,900 is generated in tax revenue.

A study by Access Economics, “The contribution of Merck Sharp & Dohme to the Australian Economy”, found that every dollar expended by MSD’s operations in Sydney during the year 2000 increased output elsewhere in the Australian economy by $1.86.

The research also determined that for every direct employee at MSD Sydney, an additional 4.3 jobs were created elsewhere in the economy.

According to the Australian Bureau of Statistics Input-Output tables, business services (including ICT services) on average have an output multiplier of 1.51, a value multiplier of 1.46 and create 25 jobs for every $1 million in output.

Figures are also given for communications services, which has an output multiplier of 1.49, a value multiplier of 1.41 and creates 17 jobs for every $1 million output, and electronic equipment manufacturing, which has an output multiplier of 1.41, a value added multiplier of 1.08 and creates 13 jobs for every $1 million output.

These figures make it very clear that investing to develop local facilities offers enormous potential for payback and growth right throughout the whole economy.

Both governments and industry need to take a long hard look at the implications of their ICT purchasing decisions. Outsourcing ICT projects to India or other overseas countries literally robs Australia of millions of dollars in economic value above and beyond the actual cost of the projects themselves.

Governments are always talking about ways to create more jobs, both at a state or federal level. What better way than by keeping their existing ICT jobs in Australia?

If that money stayed in Australia, it not only creates more jobs and reduces the drain on government social security coffers, but it can be used to buy other goods and services, pay taxes and generally contribute to the economy.

If you factor in these economic flow-on effects, governments can easily afford to pay a premium of at least 30 per cent on ICT projects just to keep them in the country or in their state.

Australia’s ICT-related services imports cost almost $3 billion in 2001-02, up from $1.9 billion in 1993-94, while services exports were worth almost $2.3 billion in 2001-02, up from $1.3 billion in 1993-94.

This resulted in a deficit on trade in ICT related services of $725 million, which represents a significant deterioration in Australia’s ICT services trade performance over recent years.

In terms of the imports breakdown, communications services cost almost $1.5 billion in 2001-02, up from $971 million in 1993-94; audiovisual and related services cost $712 million, up from $444 million; computer and information services cost $449 million, up from $195 million; and software royalties and license fees cost an estimated $367 million, up from $275 million.

Imports of ICT services increased six per cent per annum between 1993-94 and 2001-02, with strong growth in database services, which grew 33 per cent per annum while consultancy and implementation services imports grew 12.5 per cent per annum over the period.

ICT services exports comprised communications services worth $975 million in 2001-02, up from $780 million in 1993-94, computer and information services worth $949 million, software royalties and licence fees worth $258 million, and audiovisual and related services worth $80 million.

Exports of ICT services grew 7.4 per cent per annum over the period from 1993-94 to 2001-02 with strong growth recorded in database services, albeit from a low base, and consultancy and implementation services, which grew 19 per cent per annum.

Long term and rapidly growing surpluses on trade in ICT consulting and implementation services stand out as the sole bright spot among what is otherwise rather depressing trade data.

Computer consultancy and implementation services were the best performing of the ICT-related services, having traded in surplus throughout the period – rising from a surplus of $78 million in 1993-94 to $514 million in 2001-02.

The surplus on trade in consultancy and implementation services increased by almost 27 per cent per annum during that period, while the surplus on trade in all computer services has grown 31 per cent per annum.

In Australia’s case, this suggests that ICT consulting and implementation services may be an area of local comparative advantage. The challenge for Australian policy makers is to build on that advantage.

The growth in consulting services, while a clear opportunity that needs to be exploited, also brings with it a responsibility for practitioners to exercise high standards of professionalism.

Already, Australia is establishing itself as a leading providing of ICT consulting services throughout the Asia Pacific region, and that should be encouraged as a way of boosting our export earnings considering Australia’s consulting successes in China, Singapore and Malaysia, among others.

However, it’s important that consultants working for international clients operate with a high degree of professional practice and ethics, both to ensure consistent standards of excellence in terms of the work they deliver, and to ensure Australia’s reputation for ICT consulting standards remains unsullied.

By John Ridge, Immediate Past President, ACS