How to save labour costs and remain profitable in the New Normal.

It’s too early to confirm, but many economic analysts forecast that Covid-19 could see major economies face the toughest recession since the 1930s. Company announcements of major job losses continue despite many Governments’ stimulus and job creation plans. Organisations are searching for ways to immediately save costs due to the chronic loss of earnings for the first half-year.

Cutting headcount is the most obvious way to save costs. This is an unpalatable truth and has a huge human cost to those impacted. It’s clear, that the loss of talent could be critical to the stability and future growth of the company. What if there was another way to make major cost savings, but still access niche or key talent to continue that five-year business strategy you adopted before ‘coronavirus’ entered the business vernacular?

Talent arbitrage is seeking out and utilising talent in other countries where the labour cost to the company is significantly lower. We’ll look at three of the most popular:

  • Offshoring – involves moving some of your business operations to another country where there is Government financial aid with setting up your premises, favourable tariffs and lower wage costs. A great longstanding example of this is American Express who opened their Finance Center East (FC-East) in New Delhi in 1994. It’s one of their biggest business functions where they employ thousands of people in financial roles.
  • Outsourcing – this relates to passing on those internal functions to a third-party. While an international outsourcing operation, will also lower your capital costs, the transition can be quicker, as the physical setting up of an operation in that country isn’t required. Product development is crucial to a company such as Proctor & Gamble (P&G); where they need to be first-to-market. P&G outsourced some of their research and development which resulted in a 60% increase in productivity.
  • Gig economy – this involves tasks and projects than can be performed by people who are not on the payroll but are independent workers. It can be anything from a simple task such as data entry, up to complex projects such as algorithms for an AI programme. A report by Mastercard stated the digital Gig Economy generated $204 billion in gross volume in 2018 and is forecasting $455B by 2023. CXC have worked with a number of large global enterprises to provide them with access to talent in Poland, Romania, Czech Republic , Slovakia and Hungary. They all have lower labour costs when compared to UK, Ireland or the USA.

Taking advantage of lower labour costs
As an illustration, the graph below, courtesy of Eurostat, shows EU Member States’ hourly labour costs in 2019.  We can see the disparity, ranging from €6.00 to €44.70. It’s also worth noting, for comparison purposes; in the US, the cost was €17.09.

Estimated hourly labour costs graph
Estimated hourly labour costs graph 2019

Talent pools
Hourly labour costs are a good starting point for considering another country for talent arbitrage, but the talent pool is equally as important. If you were interested in outsourcing tech jobs, which countries provide a high percentage of highly educated python developers? As an example, Amsterdam is one of the tech hubs of Europe. According to Glassdoor a junior python developer is on an average salary of €31,000 versus €47,000 in the UK. If the finance department was a consideration for outsourcing, how about Romania? In 2005 they adopted IFRS and in 2008 the ACA qualification was launched. A financial accountant has an average salary of €30,000 according to Glassdoor, in comparison with €46,000 in the UK. Dependent on the skillset and the country, you have the potential to save thousands per head.

Talent-Arbitrage-title-image

Challenges

Of course, it’s not simply a case of leading your strategy according to the lowest cost of labour, there are other key factors to take into consideration. Here at CXC we have worked with large organisations on talent arbitrage opportunities across a variety of sectors, in many countries. Below are some of the common challenges. 

No legal entity in that country
If you were considering setting up a subsidiary in an EU country, you have the regulation from each specific country and also the minefield that is the UK’s exit from the EU. The process involved in 12 months’ time may be very different than in 36 months’ time. We have representatives across Europe who are experts in countries’ legalities and are very well versed in the Brexit developments and the subsequent implications. Does your organisation breach any establishment rules or is it better served working with a third party to manage your workers ‘in-country’?

Access to talent
Whether you are considering offshoring or outsourcing certain functions within your business to another country, you need to know that you have access to a constant pipeline of highly qualified or capable talent for that particular process. Which countries should you consider for manufacturing, customer service or finance? What are the employment laws? Should you use payroll staff or contractors? How do you vet them? We consult with many large businesses around what their talent strategy should look like. It’s what we do best.

Compliance
Modern day sourcing of contingent staff comes from a myriad of channels: hiring directly, outsourcing or going through the plethora of online gig platforms. The regulations vary according to the country and the classification of the contingent worker, and they keep changing. Does that potential contractor have the correct ‘right to work’ status? In addition, the payment of those workers presents its own issues; local tax and social security for direct contractors or third-party payments, including online payment for gig workers; are the processes compliant?  

Data & IP Protection
Recently, we had the media storm over the Twitter accounts of major public figures and corporations being hacked. However, there have been data breaches with Microsoft, Amazon, Marriot and easyJet earlier in the year. Cyber-attacks are becoming more and more common. How do you protect your data and your IP when you have dozens, hundreds or maybe thousands of contingency staff working from home in a country you have no legal entity? CXC have designed processes and our legal agreements to ensure that companies IP and Data are protected when seeking to engage talent remotely.

IP Protection (Large)
IP Protection

Cultural and societal differences
The EU may be one entity, but there are still vast cultural differences between countries and within certain nations, that are essential to know if you plan on doing business there and accessing talent. CXC representatives are local and have spent many years understanding and respecting the local landscape. 

Tentative steps

In January 2020 the European economy thought it had the mother of all challenges on its hands navigating Brexit, then along came a global virus which has left the UK’s relations with Europe in its shadow. We’re in the most unknown territory we’ve been for 75 years. This multiplies the risk of talent arbitrage exponentially. That being said, your business cannot stagnate while Brexit and Covid-19 present their multitude of issues. Consider a contingent workforce strategy. Less cost, less risk and faster to implement. We’ve been operating in the contingent workforce management industry since 1992. Dependent on your needs we can advise on locations across the EU for accessing the very best talent in all industries, and how to stay compliant. Best of all, we can manage the entire process, by becoming your HR partner for contingency staff using start-of-the-art technology.

If you’d like to take a forward step in future-proofing your business, get in touch.

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