Gartner expects that the rapid adoption of offshore services and the resulting job losses among enterprises’ IT staff will create an unprecedented “human resources (HR) backlash” in the United States and Western Europe IT services marketplaces. Once again, extremely high levels of fear, uncertainty and doubt will dominate the HR issues concerned with outsourcing. Although the proportion of employees making a transition to external service providers (ESPs) will likely increase as the economy rebounds, this will be tempered by a growing perception that IT staff are dispensable and can be hired and fired at will.

Therefore, Gartner does not expect a return to the high levels of employee transfer that was seen in the late 1990s. In the short- to mid-term, there will be considerable rationalization in the outsourcing labor market as enterprises and ESPs adjust to the global sourcing model. Enterprises will need to pay greater attention to IT employee retention and HR transitioning policies to ensure that they retain the intellectual capital needed for competitive advantage purposes and to ensure that they do not compromise corporate culture and morale.

Outsourcing (whether IT or business process) has always raised critical and sensitive human resources (HR) issues for external service providers (ESPs) and enterprises. Perhaps the most-sensitive issue is the proportion of the enterprise’s staff that will make the transition to the ESP as part of a deal. The willingness of ESPs to guarantee employment has fluctuated considerably, and this will continue. The changing hiring practices of ESPs are influenced by an array of business and economic factors, technology trends and the scarcity of IT skills and personnel.

When the IT outsourcing market first emerged in the early 1990s, economic conditions were tough – much as they are now in late 2002. The initial growth of outsourcing was driven by cost-reduction objectives. Not surprisingly, outsourcing became synonymous with all of the negative repercussions and fears that are associated with downsizing as enterprises turned to outsourcing to alleviate their financial woes.

In the early days, it was normal for a few employees to make a transition to the ESP. Most of the remaining employees were laid off. In fact, the negative HR issues that were associated with outsourcing led to a period in the mid-1990s when ESPs devised new marketing labels for outsourcing such as out-tasking, co-sourcing and smart sourcing – anything but outsourcing. Downsizing still occurred, however. It was driven by the need to deliver cost savings to enterprises and to make deals profitable for ESPs. ESPs were blamed for the downsizing – but they were only responding to enterprises’ demands for cost savings.

Late 1990s Through Early 2000: Outsourcing Gains Acceptance as HR Issues Abate

During the second half of the 1990s, the marketplace’s sentiment toward outsourcing changed. Outsourcing as a business strategy gained widespread acceptance, business process outsourcing (BPO) gained traction and the strong economy enabled enterprises to focus on the business value of outsourcing. Slowly, the negative connotations of outsourcing were being dispelled – in large part because the HR issues became less of a concern.

As recently as 1999, outsourcing engagements were highly influenced by one simple, but very strong and dominant force – a resource-constrained IT labor market. This meant that ESPs saw outsourcing engagements as a prime opportunity to acquire IT skills (of all types and competency levels) from their clients. A compelling benefit for ESPs was the opportunity to retrain these staff and reassign them to support other clients in their burgeoning portfolio of outsourcing engagements. Not only did this ensure the transfer of intellectual capital to client environments, but ESPs had access to a captive IT labor pool from which they could hire, thus avoiding the costs of recruiting in a competitive external market.

Gartner research on employee transition during the high-tech boom of the late 1990s shows that many leading ESPs promised (almost unconditional) employment to all of an enterprise’s IT staff. In fact, this practice became an ESP differentiator and provided several benefits for ESPs, as well as for enterprises. Offering unconditional employment:

    Minimized fear, uncertainty and doubtImproved staff moralePreserved critical knowledge capital and ensured key staff were retainedCreated a built-in, and immediately “billable,” labor pool for ESPsOffered employees a challenging career path with associated training and career-development opportunities

Today: Growing Use of Offshore ESPs Raises New HR Issues

The pendulum has now swung back again and, as in the early 1990s, the focus of outsourcing in the current tough economy is on aggressive cost reduction. Although there are still skills shortages in the IT labor market, a new factor is coming into play – the growth of global sourcing.

Increasingly, more-inexpensive offshore and near-shore labor sources are being tapped to meet enterprises’ IT needs. This shift will have a significant impact on IT employment in North America and Western Europe. Offshore outsourcing, by its nature, involves staff substitution – not staff transition. Traditional ESPs that previously offered full employment to the clients’ staff are now building their own offshore capabilities, and they routinely – even proactively – promote offshore alternatives as a way of reducing costs. In addition, continual advances in the automation of network and systems management are reducing the need for operations personnel and local IT facilities. All of these factors potentially reduce the scope for enterprises’ IT staff to make a transition to ESPs.

Other forces have also contributed to a sea of change in the outsourcing marketplace. These forces include the current difficult economic conditions, more competitors in the marketplace, a slowdown in the rollout of new technology, longer sales cycles, more-cautious buyers of outsourcing services and greater recognition of the risk of IT outsourcing deals (and to a lesser extent of BPO). Gone are the days – at least for now – of ESPs having more business than they can handle. These forces have adjusted both ESPs’ and enterprises’ approaches to HR issues – guaranteed employment for all of an enterprise’s IT staff is rarely an option because both parties have to carefully assess labor costs as part of cost-saving goals.

For a significant percentage of enterprises’, particularly those swift to hire in an economic upturn and swift to downsize in a decline, IT employees seem to be as dispensable as any other group of employees. The growing trend toward short-term staff contracts to meet specific business needs weakens the bond between employer and employee. The severity of the economic downturn has accelerated this trend, as has the slowdown in the emergence of compelling new technologies that will require implementation specialists. Instead of hiring permanent IT staff, enterprises see ESPs (whether offering IT or BPO services, or onshore or offshore) as a source of short-term, temporary labor.

The impact of these forces will differ according to the type of IT staff. Roles that are performed by those who work on service desks or transcription services (for example, interpreting voice or hand-written medical notes and transferring them to electronic media), or even in call centers can more easily be moved offshore. They are constrained only by the availability of language skills, communications costs and (in some countries and vertical sectors) cultural or legal barriers. However, hands-on support personnel are relatively immune to being displaced by offshore or near-shore deals. A more-serious threat to these employees is technology-enabled remote-support methodologies.


There is considerable business risk if downsizing results in the enterprise losing IT staff with crucial skills and expertise. Gartner warns enterprises that reactionary hiring and firing can have a long-term negative affect on their overall competitiveness. We recommend that enterprises and their ESPs jointly address and pay careful attention to the following HR issues concerned with employee transitioning.

Create an HR strategy: A carefully crafted and phased plan to address employee issues must be designed. Committed, objective resources to oversee the transition are critical.

Analyze the resources required: The enterprise and ESP must jointly evaluate every role and job responsibility to determine the following:

    Is it critical to retain the role in house? If not, determine if it is more suited to near-shore or offshore.What skills are required?What kind of career paths are available for transitioned staff?What are the retention issues (such as compensation and growth opportunities)?

Evaluate liabilities: Develop contingency plans and evaluate liabilities before, during and after the transition. Agree in advance who will be liable for what.

Create a communications plan: Internal and external communications must be carefully controlled, especially in terms of timing. Employees must receive continuous, open and honest information before, during and after the outsourcing decision has been made.

Listen to the views of staff: Both the enterprise and ESP should listen proactively to the views of transitioned staff and the ESP’s front-line staff. The best knowledge is gained from employees, and their personal experiences will validate what does and doesn’t work during the transition.

Address employees’ top-priority concerns first: Employees will want assurances about their benefits and salary. They will want to know that once the outsourcing contract commences, their paychecks will arrive and their insurance will continue. If relocation is a possibility, employees need to know their options and what assistance and opportunities are available.

Offer incentives to improve staff retention: Ensure that employees will stay on board during the transition by offering them meaningful incentives to achieve a successful transition.

Be sensitive to employees’ rights: Lawsuits have often resulted from blatant insensitivity to employees (for example, repeated switching of staff between service providers, inconsistencies in benefits, unfair discontinuation of benefits or subsequent termination that is poorly timed or mishandled).

Take a longer-term view: Once key employees leave, they cannot easily be replaced. During the life of an outsourcing relationship, the people performing specific roles will change, as will the skills needed for a role. The enterprise and ESP must continuously review the skills needed and take a long-term view to ensure that new people have the right skills to meet their needs.

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