The knowledge based economy: what can the UK do to avoid losing out to the Far East?

Playing to UK Strengths

With the trend to offshore IT services forecast to accelerate, the UK's IT industry needs to take action to retain its position on the global stage. By focusing on what UK PLC is good at the industry has the ability to go on from strength to strength.

In a series of articles to accompany the new BCS offshoring report we take a closer look at the phenomenon that is offshoring and how UK PLC is fighting back and using increasing globalization to its advantage.

This report summarizes the views expressed at a BCS Thought Leadership (16th January 2006) on how the UK can avoid losing out to the Far East. Two speakers introduced the theme with short talks after which 30 participants discussed the matter in three groups. Participants were from industry, universities, and government bodies. The speakers were Dr Richard Sykes, Chair of Intellect's Outsourcing Group and formerly ICI Group Vice President IT and Professor Mari Sako of the Said Business School, Oxford.

At the end of the evening, held at the Royal Society in London, each table reported back to the gathering. The discussion had a very positive feel to it, highlighting that the UK is currently in a strong position. Various ways of sustaining that advantage were suggested but no definitive solution found.

What is the UK up against?

The UK needs a knowledge-based economy because its manufacturing base is declining. This is a view that has been promoted by leading industry figures, such as Sir Digby Jones, CBI Director General, who predicted in 2003 that there would be no unskilled jobs in the UK 10 years hence. His implication was that Britain must survive on highly skilled, knowledge-based professional work.

However, a participant pointed out that knowledge work now not only dominates domestic activities of OECD (Organization for Economic Co-ordination and Development) countries but also international activity involving emerging economies such as China and India. Competition for such work is therefore strong.

Given that Chinese and Indian companies can massively undercut UK costs, it is not surprising, nor disputed that the trend to offshore IT services, particularly to India and China, is gathering pace.

One participant had heard from some BCS members that they are feeling the pinch through job losses due to offshoring. The media also regularly reports on UK jobs being offshored to countries such as India by companies such as BT, National Rail Enquiries, Norwich Union, Reuters, Morgan Stanley, IBM, and Accenture.

Most of the services provided by India and China currently are still at fairly low grade, such as simpler coding work, but participants agreed that as time goes on India and China will move up the value chain. An attendee pointed to what had happened to the Japanese car and Taiwanese electronics industry.

Both countries began by manufacturing entry level products and have now moved to becoming brand owners. Ben Q, a Taiwanese company has just taken over Siemens Mobile, for example. The timescale for moving up the value chain for services is expected to be much shorter than for manufacturing thanks to the use of up-to-date ICT technologies.

As well as IT services moving abroad, some more general business services that are IT-enabled, such as risk pricing and stock market recommendations, are also being offshored.

One participant highlighted that the UK cannot expect to have an advantage over other countries through education and intelligence. Indian workers are already just as educated as the UK's and the sheer size of India's investment in education is concerning.

Reports have suggested (but have also been disputed) that India is training 350,000 engineers per year, China 600,000, compared to just 70,000 in the USA. What is undisputed is that salaries in China and India are much lower than in the UK. The average salary of a software developer in India was quoted as $11,400 per annum, about one-fifth of their counterparts in the UK.

Another point given in India and China's favour in cornering the services market is that they have less to lose than the UK. Wealthy countries tend to be more risk-averse, which can compromise their inclination to become involved in high risk innovation.

Innovators in the EU also have a problem in terms of higher costs and lower rewards than in countries such as the USA. The diversity of the EU and its member states' regulations tend to make the potential market smaller and raise the cost of development work as applications need to be adapted to different markets.

The UK is starting from a position of strength

The UK is, however, currently in a strong position, an assertion which participants backed up with several examples. It has the seventh largest economy in the world and the fourth in terms of services.

In terms of trade surplus for computing and information services, the UK ranked fifth in the world in 2003 behind India, Ireland, the USA and Germany, according to the World Trade Organization (WTO). The UK's trade surplus was $4.1 billion.

If the UK's exports are expanded to include IT-enabled services they add up to £20 billion per annum. Britain's trade surplus of business services is bigger in absolute terms than that of the US, even though its economy is ten times smaller. What's more, the UK's surplus is growing over time.

One reason that the UK is excelling in IT services, according to one participant, is because proximity to customers still matters in the business services industry. Many of the important client firms for business services - in financial services, consultancies, consumer products, and energy - are located in the UK.

Proximity to customers is important because there are some services, such as parts of healthcare and strategy consulting, which require face-to-face contact, despite the intensive use of ICT that is making services look more like manufacturing.

As consumption often happens at the point of production, this means knowledge-based services are less tradeable across borders than manufactured products, according to one participant. She said that business services currently account for only one-fifth of global trade.

The UK also has the advantage of a highly mobile workforce, which is prepared to relocate to where the business services are based, mainly in London and the south-east. Furthermore, IT professionals are migrating to the UK, helping support the industry. 

In 2005, 22,000 foreign IT workers entered the UK, of whom 85% were from India, many of whom were on intra-company transfers.

Not only have workers moved but communities have also shown that they can reinvent themselves: Leeds was cited as an example of a former textile area that has re-invented itself to become a bastion of financial services.

Whatever its source, the current strength of the IT industry in the UK gives it an advantage in the privilege of engagement with its clients, one participant asserted. IT suppliers can draw on their customer's knowledge of their industries and learn from the work that it does for them. This gives the UK an edge.

Ways of sustaining the UK's advantage in providing IT services

A widely shared view among participants was that the UK must appreciate that offshoring is happening and embrace the trend, working on its relations with China and India. It must not put up boundaries but take a confident, outward looking stance. UK companies should be encouraged to focus on globalization.

Parts of the USA are becoming protectionist and the UK should not, perhaps could not, go that way, a participant proposed. In any case, with time participants expected that the boundaries between the UK and Europe would blur, and eventually with the rest of the world.

The UK must identify what it does well now, why that is the case, what is sustainable, and then build upon those activities. As long as the service industry survives in the UK, its IT suppliers have an advantage, asserted one participant, because of the proximity required.

The IT industry must work out which services to support to help the UK economy. These are likely to be services in which the UK excels, such as medicine and law.

The IT industry must also look to the future to which services are likely to work more closely with IT. One participant suggested that biology-related activities would be the next big growth area for IT-enabled services.

The UK must use its existing privilege of engagement with customers to learn and innovate, making the most of new opportunities. The ability to innovate is key for the UK sustainability, agreed participants. The UK tends to be good at research and development work and design, and should profit from this.

The biggest opportunity for the UK lies in the added value projects that are least well defined. Those that are most tightly defined can most easily be commoditized and are suitable for outsourcing.

The UK must find new products and opportunities and lead in their commoditization so that UK companies own these advantages. Commoditization of services will happen, and can be a good thing if the UK has the lead in that process, proposed one participant.

People are at the core of competitive advantage

It was suggested that it is necessary to concentrate on more than just technology because competitive advantage does not come from technology but people - their experience, skills and quality. Education and professionalism are not sufficient in themselves: people must be led and motivated.

Education, training and qualifications were themes that participants felt strongly could contribute to the UK's sustainability, but there were various and sometimes contradictory suggestions of what should be done. For example, some participants were in favour of promoting maths as a subject and some felt that universities should return their focus to education rather than training.

A counterpoint was that, rather than simply worry about the number of graduates in engineering and science; the UK government and professional bodies should concentrate more on repackaging skills and knowledge to adapt to the needs of the economy.

Another point made about subjects taught in university was that there is currently a disconnect between the way management and computer studies are taught, and the lack of appreciation of any level of detail by the former. The participant suggested there should be more coordination between the two subjects.

Many participants felt that learning must be ongoing with initiatives to encourage IT professionals to learn throughout their careers. They need to be able to learn to learn.

The emphasis should be placed on the ability to do this; there is a tendency to put too much weight on what qualifications that people have already, one participant said. As part of the learning programme, mentoring is important.

It was suggested that the UK should concentrate on the higher hierarchy of jobs to gain edge. One participant pointed out that this, and the service industry approach, provides jobs for graduates but would there be any for people at technician level?

Another, somewhat opposing view was that too many young people are now studying to degree level and the workforce is increasingly becoming over educated for the jobs available.

Participants suggested that foreign students should be encouraged to study in the UK and stay on afterwards to help keep the UK's IT service industry in the top hierarchy.

This would in turn make its service industry the best and give the country a critical advantage. To do this, and retain UK nationals here, the country must be seen as an attractive place to work.

Equally, the UK needs to be an attractive place for companies to be based. The government can help to create an environment that is not too constrained so that companies find it easy to do business here.

As technology-enabled industries have a much denser concentration in the south-east currently, ways of increasing their penetration in other areas of the UK could help keep momentum in sustaining the IT industry.  A related point made by a delegate was that clusters should be encouraged within the UK.

The UK's IT industry can also promote itself as one that protects its customer's trade knowledge, benefiting from some companies' reluctance to offshore because of IP concerns. The professional ethos of the workforce is another selling point for companies.

Professional societies and governments have a role in helping provide this in many countries, although, as one participant pointed out, Silicon Valley manages to promote a professional ethos without such measures.

In implementing many of the proposals for sustaining the UK's pre-eminence in the IT industry, the government and professional societies have a role to play in sustaining the UK's advantage. China was held up as an example by one delegate of how governmental planning and incentives had supported the growth of the IT industry there.

BCS has a part to play in promoting professionalism, and the UK government in creating the right environment for the wider IT-enabled service industry, supporting education and professional standards, and promoting attitudes.

In conclusion, the UK can use its current position of pre-eminence in the IT service industry to help sustain its position in the future. Innovation, learning, people and a nurturing environment could all contribute too, and can be supported and encouraged by governmental measures.

Helen Boddy May 06