Offshoring saves EU firms large amounts of money

Offshoring is an irreversible trend that already is expanding to include the core activities of Western service firms, an increasingly important driver of advanced economies in Europe and elsewhere, say Désirée M. van Gorp, director of the Nyenrode Institute for Competition at Nyenrode Business University in the Netherlands; and Pieter Klaas Jagersma, a professor of international business and export management at Nyenrode Business University and professor of strategy at Amsterdam Free University.

Last month, Nyenrode Business University published the results of a study that covered 542 service firms, both domestic and foreign, operating in the Netherlands. The firms represented the business services, financial, transport and telecommunications industries.

Based on this study, van Gorp and Jagersma concluded that service firms generally perceive offshoring as good for their business and profitable:

The majority were able to reach their strategic goals – such as improving turnover, profitability or growth – through offshoring.

A case in point is ABN Amro, which announced last year that it was offshoring €1.8 billion (about U.S. $2.2 billion) worth of IT activities, partly to low-cost countries.

The company expects a yearly cost reduction of €600 million (about U.S. $727 million).

Furthermore, van Gorp and Jagersma found that service firms will continue offshoring and in general plan to offshore more kinds of activities in the future – not just routine processes but their core activities. JP Morgan, for one, recently decided to move its processing of foreign exchange trades and of credit derivatives contracts, as well as other high-value tasks involving white-collar jobs, to India.

Instead of fearing these developments, Europe should focus on its strengths and give its industries the flexibility to move some operations offshore or make other decisions that will help them to stay competitive, say van Gorp and Jagersma.

Source: Désirée M. van Gorp and Pieter Klaas Jagersma, Away and Up, Up, Wall Street Journal, January 11, 2006; based upon: Désirée M. van Gorp, Pieter Klaas Jagersma, M. Ike'e, Offshoring in the service sector: A European perspective, Nyenrode Business University, October 2005.

For text (subscription required): http://online.wsj.com/article/SB113693289464643073.html

For more information on Nyenrode study: http://www.nyenrode.nl/centers/competition/publications_gorp.cfm

For more on Trade: http://www.ncpa.org/pd/trade/trade.html

FMF Policy Bulletin/ 24 January 2006