Workforce in Motion Putting the Right People in the Right Places

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By Hugh Bucknall

When it comes to deploying their workforce around the world, companies face an unprecedented array of challenging choices. Making the wrong choices can undermine competitiveness, so it’s critical to understand the major and emerging “trade routes” for talent and how to analyze labor-deployment decisions systematically.

When it comes to deploying their workforces, companies face an unprecedented array of choices and challenges. Is it better to put headquarters in Chicago or Seattle? Open a regional office in Shanghai or Sydney? Build manufacturing plants in Eastern Europe or Asia? What are the people-related benefits and risks of operating a call center in Bangalore as opposed to Austin or Swindon?

These choices are made possible because trade and economic barriers have fallen and demographic shifts, combined with technological advances, have opened up vast new labor markets around the world. The expansion of workforce deployment options now provides attractive new business opportunities – not just for reducing labor costs, but also for improving productivity, enhancing quality, boosting customer responsiveness, entering new markets, and strengthening talent and capabilities. But a company that makes the wrong choice about where to locate could undermine its competitiveness.

One large European consumer products company that we worked with recently decided against combining two of its U.S. divisions at a single site even though the consolidation would have lowered costs. Analysis revealed that the move would have caused the loss of key employees with deep knowledge of and strong relationships with key retailers, ultimately resulting in revenue losses that would have more than offset the cost savings. If the company had based its decision on cost alone, it could have done significant damage to its businesses. Moreover, the two divisions had very different cultures, and merging them would likely have eroded their ability to innovate.

Companies have long had to make difficult decisions about situating plants and offices in distant locales and shifting employees among various countries and continents. What’s different is that the scope and impact of those decisions have been magnified dramatically in recent years. Indeed, the very idea of a “home country” is dissolving for many companies; their organizations, like their markets, are becoming truly global.

Rather than rely on expatriates to staff overseas operations, companies today can draw on many sources of labor around the world. At the same time, we are seeing the emergence of a small number of highly skilled “citizens of the world” who are happy to relocate wherever their rewards will be greatest. Optimizing the global workforce has become a major challenge for senior management. It requires knowledge of the new labor landscape, which underpins a clear understanding of how global workforce deployment best serves your business model. This leads to a smart, pragmatic approach to making specific decisions about where to locate key processes and people, which can then be supported by practical actions on the ground that are consistent with local practice to capture the benefits and create sustainable value.

Global labor deployment is a subject that often generates heated debate. Outsourcing in-house activities to vendors has raised fears in some quarters of irreversible job losses and economic decline. But for most companies, that debate obscures a larger truth: How they allocate their own employees around the world is more important than how subcontractors deploy their people.

Thus, the terms offshoring (relocating business processes, including production and manufacturing, to a country other than your own) and nearshoring (relocating business processes within close geographical proximity) refer to the set of decisions companies need to make about where to allocate their own workforce. The goal is to distribute people in such a way as to maximize the overall performance of the organization over both the long and short term.

The functions and processes that can be candidates for offshoring have proliferated over the past decade as a result of advances in computing and communications infrastructure. In addition, demographic, sociopolitical, educational, and regulatory changes have expanded the potential locations for deploying labor. Decades ago, offshoring was primarily restricted to manufacturing processes as companies sought to capitalize on lower cost labor for basic fabrication and assembly. With the rise of the Internet, routine customer service activities, such as telephone support, online support, and numerous IT functions – from application development to maintenance to help-desk support – have become candidates for remote deployment (see exhibit 1).

As the supply of new labor markets has grown, so too has demand for them. Developed countries in North America, Europe, and the Pacific Rim with relatively low birth rates and aging internal workforces face growing labor shortages. Meanwhile, the International Labour Organization estimates that China and India will account for 40% of the world’s workforce by 2010.

Such imbalances in supply and demand create huge discrepancies in labor costs, making labor arbitrage between different regions an attractive proposition for companies and countries on both sides of the divide (see exhibit 2).

While some generalizations can be made about this labor movement, different industries have moved at different speeds in responding to the new opportunities and pressures. Companies in financial services and information technology have been aggressive. Many in utilities, retailing, and travel have been more cautious. In the United Kingdom, financial services institutions and technology firms currently account for 30% and 15%, respectively, of offshoring activity, while retailers and utilities account for just 8% and 6%, respectively, according to a 2004 Forrester Research study. In general, however, the trend is clear: More companies are already offshoring or developing plans to do so. Those that move too slowly may get left behind in the race for talent and cost competitiveness, and may also miss opportunities in emerging markets for consumer growth.

Global deployment decisions have a direct impact on a company’s cost structure, market responsiveness, risk profile, workforce capabilities, and even its brand. They often have a strong influence over future growth and profitability. As a result, it can be disruptive and costly to make deployment choices simply by following what other companies are doing on a piecemeal basis. A decision to offshore a particular function may make sense when viewed in isolation, but it could have unforeseen consequences on other critical areas of the business.

Note, too, that wage imbalances are not permanent, because arbitrage by its nature tends to decrease differentials over time. Workforce deployment decisions therefore need to account for likely trends in wage rates over the medium term. Immediate arbitrage savings may not be sustainable, and local labor regulations may make exiting almost impossible after the firm exhausts its opportunities. In addition, a country’s labor rates need to be weighed against its skills, infrastructure, technology, and overall productivity – all of which influence relative competitiveness.

Skill differences may be even more prominent than wage differentials, with certain critical skills showing particularly strong discrepancies in availability across borders. The growth in workers with engineering or science degrees has been flattening in the United States and Australia and has actually turned negative in Germany, Russia, Canada, Mexico, and Brazil. But other regions, including Scandinavia, Southern Europe, and Southern Asia, display relatively robust growth in the number of scientists and engineers. Gaining access to these crucial skills will require continuing shifts in the location of research and development, product development, and other technical operations.

Global workforce plans, therefore, should be integrated within a broader strategic business plan that balances short-run gains with long-run positioning, performance expectations, and profitability. Such plans – developed by the senior management team, with guidance and support from top human resources executives and staff – provide the framework for evaluating specific job-deployment decisions, ideally balancing several criteria, including: alignment with business model, cost, core capabilities, risk, market proximity, and culture.

To be effective, each decision must be based on reliable data and take into account not only costs and risks but also the long-run impact on market positioning, business processes, and talent requirements.

1. Business requirements analysis. To ensure that strategic considerations guide the location choice, this step entails setting evaluation criteria and weighting them according to their impact on overall company competitiveness and performance. Both the criteria and their relative weights often vary for each location decision and from employer to employer. Typically, factors involving local labor supply and cost get relatively high weightings. Other factors, such as hazard risk, education, transportation infrastructure, local purchasing power, and available economic incentives, may also get substantial weightings.

2. Multifactor location analysis. Once the selection criteria and weighting are in place, each potential location must be evaluated. Consider first the financial impact of shifting a job to a new location, in order to produce a reliable estimate of the effect on a company’s financials over time. Each choice will influence both profitability (by changing expenses and revenues) and capital management (by changing capital requirements and capital costs).

Second, assess the external factors influencing each location, according to the criteria and weightings established in step 1. External factors include the labor market (encompassing availability, quality, and costs), the business climate (the level of economic development, the level of openness, and the regulatory environment), and the community (the quality of roads, communications, and other infrastructure; the cost and quality of living; and the risk profile).

Third, make a quantified evaluation of overall business risk. The financial impact and the probability of various negative events, including currency fluctuations, business interruptions, and natural disasters, should be estimated to arrive at a concrete risk assessment for each location.

3. Focused site reviews. The multifactor analysis will yield a short list of high potential locations. Each of these can be assessed through in-person visits, further data gathering, and analysis. It’s particularly important to recognize the often profound differences in human resource policies and practices from one region or city to another and even from one industry to another within the same region or city.

One benefit of this analytical approach is that it imposes business discipline on a task that is too often influenced by anecdotal opinions and aggregated market trends. Companies sometimes have a tendency to base location decisions on their corporate heritage, on politics, or even on senior executives’ quality-of-life preferences. While such factors will not necessarily be ignored, they should not be allowed to skew decisions. In the long run, only business-driven location decisions based on hard facts will ensure a company’s superior performance.

Hugh Bucknall is a Singapore-based worldwide partner with Mercer Human Resource Consulting. He can be reached at .

Rick Guzzo, a Washington, D.C.-based worldwide partner with Mercer, contributed to this article. He can be reached at .