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Offshore and Immigrant Labor: A Protectionism Conundrum

According to the recently released KPMG 4Q16 survey, there is “measured but growing optimism” regarding global economic conditions in 2017.

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According to the recently released KPMG 4Q16 survey, there is “measured but growing optimism” regarding global economic conditions in 2017. Compared with last year, fewer respondents cited a weak economy or inadequate IT infrastructure as negative trends.                                                        

As we relayed in Part 1 of this series, however, there is still concern related to potential policy changes in the United States regarding immigration and trade protectionist issues, and how that will affect organizational use of offshore resources. Companies have been following this topic closely ever since the president-elect Donald Trump warned U.S. companies in December about moving operations out of the country, and had a watchful eye even back when Trump’s campaign speeches came out in support of protectionist policies related to international trade. Much of the talked focused on blue collar work such as manufacturing but the scope was over time widened to include white collar such as information technology work. While it remains unclear what is coming down the pike now that the president is in office, many wonder what changes could be in store for organizations using third-party services, particularly third-party offshore service providers.

From a talent recruitment perspective, it is a particularly pertinent question that companies need to address, says Stan Lepeak, Director and Head of Global Research and Thought Leadership at KPMG. Most organizations will need to ramp their onshore capabilities and efforts, which will be challenging, he explains: “It is possible and even likely that if they have been relying on offshore labor or third-party service provider labor, that they do not have their own domestic pipeline of labor, recruitment resources familiar with the market for needed labor, and perhaps a strong brand to appeal to the labor required,” he explains.

As a result, organizations may need to rely on third-party recruitment services (often expensive); contract labor as a stop-gap or even longer-term measure; or seek to use third-party services/outsourcing with the labor located domestically. Organizations that could potentially want to, or be forced to, bring offshore work onshore should be addressing these points immediately and preparing contingency plans, says Lepeak. 

Legitimate skills shortages also complicate the back-onshore equation, especially in certain areas of IT (such as data and analytics, cybersecurity and cognitive), outside of major metropolitan areas and for less “appealing” employers (e.g., utilities, public sector). “So, even with a solid recruiting engine and process, talent still could prove elusive to find,” Lepeak explains. 

At the same time, automation adoption will accelerate as organizations look to automate more work done offshore in lieu of the more complicated and expensive process of bringing work back and ramping up staffing levels domestically. Organizations today should be preparing for greater use of automation, says Lepeak – determining which activities are most suited for automation; learning the automation vendor and service provider landscape; planning for how to govern work performed by a mix of humans and bots; and determining if and where more advanced automation in the form of cognitive computing is applicable.

Contract issues coming into play 

When bringing work back onshore from offshore facilities, contract issues come into play as well. “With offshore work done in captive centers – owned by the client – the situation is less complicated, but organizations could still lose tax incentives that were based on certain volumes of work being done or staff levels,” Lepeak explains. There could also be issues and penalties with breaking real estate leases and terminating equipment leases. If the offshore property was owned there, would be a need to sell off as quickly as possible.

With offshore work performed by third parties, all of the above could hold true. In addition, depending on the volume of work brought back onshore, the organization might need to do an early termination of the entire contract, which would very likely trigger financial penalty clauses.  There could also be intellectual property ownership issues — not so much data, but methods to perform work, or any offerings jointly developed with the provider. “This is another situation where an organization might want to explore having the service provider automate more work in lieu of bring it back onshore, something likely occurring already, though this would likely also require at least a contract renegotiation, especially to ensure the benefits of automation in terms of lower costs at least partially flow to the organization,” says Lepeak.

Organizations that think they will potentially bring work back onshore should be scrutinizing all relevant contracts to determine their ability to do so, what changes may be required to contracts, and what are potential penalties that could be triggered.

Planning is complex in an age of uncertainty

Recruitment issues are part of a larger, complex planning process that organizations will have to contend with in an age of uncertainty with the new Trump administration. Essentially, it affects the ability of companies to make plans — so they will have to figure out how to remain as nimble as possible. 

“It certainly complicates the planning process,” says Lepeak. That being said, organizations need to move forward with planning and likely have multiple plans mapped to the various different potential scenarios of outcomes and the ultimate set of legislation and executive mandates that finally come out. 

“It is highly likely that the strong protectionist campaign and early administration rhetoric will not be fully enacted, but it is too early to tell,” he explains. “Organizations need to monitor administration and congressional communications closely, track any relevant legislation proposed as it makes its way through congress, and monitor the work major providers, industry players, and trade associations do to influence any changes.”

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