Service Contract
CHAPTER 7: THE QUANTITATIVE IMPACT OF GLOBALISATION Introduction Introduction
The increasing reliance on offshoring has an inevitable impact on EU ICT skills, both in terms of employment and demand for ICT graduates. However, the key question is how big is this impact? What are the main drivers of this impact? For example, how is it influenced by the main economic and IT trends, and/or by the main policies studied in this report? To respond to these questions, IDC has built a forecast model drawing from a blend of both proprietary and external sources. The model covers the total EU and details six EU countries (Italy, France, Germany, Poland, Spain, and the UK) for the period 2012-2020, estimating the main impacts of globalisation in terms of jobs moved and jobs lost. The model builds upon a detailed set of assumptions, covering the interaction of main trends including macroeconomic/geopolitics, IT market trends, IT innovation trends, offshoring trends, and the potential impact of main policies clustered in 3 main policy areas with a specific focus on e- skills: education and training policies and initiatives, labour market policies and initiatives, and growth and innovation policies and initiatives for the digital economy.
We have developed a set of assumptions and hypotheses for what we believe to be the most realistic foresight scenario, which we called “Cautious Growth”. The estimate of demand of ICT jobs for the period 2014 to 2020 were elaborated by IDC for the Monitor project end of 2013, and have been revised and updated in early 2014 for this project. The estimates of jobs moved and lost due to offshoring were developed specifically for this project. We have also developed two alternative foresight scenarios (“Innovation wins” and “Stagnation”) which test the potential variation of the model forecasts in terms of ICT jobs offshored and lost up to 2020. These results are presented in the next sections.
Approach of the model
The approach to the model can be described in three major steps:
Step 1, aiming to assess the number of jobs moved from EU to offshoring locations
Step 2, determining the share of jobs lost in the EU
Step 3, analysing the impact on the number of ICT employees and ICT graduates by country
Considering external services, internal services, and software/ICT R&D services, Step 1 calculates the number of jobs moved, based on the following inputs:
Estimates and forecasts up to 2020 on the demand for ICT skills, with specific reference to ICT practitioners by area (Applications, Infrastructure, Other), as published in the Monitor project
Estimates and forecasts of external IT spending, with a focus on software and IT services by area (Applications, Infrastructure and Other), as resulting from IDC forecast research
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Estimates and forecasts of internal IT spending, based on IDC research and existing IDC primary research inputs
Estimates and forecasts of offshoring services spending in EU countries split by Applications, Infrastructure and Other, based on IDC services research
Estimates and forecasts of worldwide R&D services spending by region, and the share which is offshored, as published by IDC US
The percentage of ICT R&D on total R&D, as published by Eurostat
From an external IT services perspective, the model calculates the elasticity of ICT practitioners' demand to external IT services spending and applies it to offshoring services spending, considering though different levels of labour cost in EU countries versus offshoring locations and the incidence of intra-EU offshoring on total offshoring. The approach is similar for internal IT services spending, but a further correction factor is applied, based on the assumption that internal ICT staff are more often redeployed inside companies' IT organisations compared to external functions. Estimates of external and internal skills moved related to services also include custom application software development, which is a services category rather than a software category in IDC definitions. From a software/ICT R&D perspective, the model calculates spending on internal and external R&D offshoring services up to 2020 and applies average employee costs to estimate the number of jobs moved in this area. The share attributable to software and ICT R&D is estimated leveraging Eurostat available data on the share of ICT R&D on total R&D.
Resulting data for step 1 represent the number of jobs moved from EU countries to offshoring locations for:
Applications: including Custom Applications Development, Application Management, Hosted Application Management, Software Deploy and Support, and System Integration contracts where the main purpose is implementation of application solutions
Infrastructure: including Information Systems Outsourcing, Network and Desktop Outsourcing, Network Consulting and Integration Services, Hosted Infrastructure Services, Hardware Deploy and Support, and System Integration contracts where the main purpose is implementation of hardware or network solutions
Innovation: including software R&D, and ICT Product Engineering
Other: including pure IT and business consulting engagements, IT education and training services, and IT management skills that are not specifically attached to applications or infrastructure, including enterprise architects, vendor management skills, data scientists and the emerging role of "chief digital officer"
Jobs moved don’t necessarily mean jobs lost in the EU. Various studies and research have shown that the majority of employees are redeployed rather than let go when activities are offshored (see Chapter Six- The Impact of Globalisation on ICT Delivery: Offshoring and Global Sourcing).
The focus of step 2 is to determine the number of jobs lost in EU countries due to ICT offshoring. A 2007 survey-based study (Lewin and Couto, 2007) shows that only 26% of onshore employees were on average laid off as a consequence of an offshoring project. 41%
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were redeployed, 8% moved to the service provider, and 25% left by normal attrition. The study also shows that the more offshoring matures; the lower is the number of jobs lost. Based on this Empirical study and on the maturity level of offshoring in the different EU countries, IDC produced estimates of jobs lost over jobs moved in IT (Applications, Infrastructure, Other) versus innovation (R&D and Product Engineering).
The last step in the model, step 3, calculates the impact jobs lost have on ICT employment, as published in the Monitor project, and on demand for ICT graduates considering jobs lost that would have been available to ICT graduates if they had remained in the EU.
Key assumptions and hypotheses
The cautious growth scenario: brief description
The “Cautious Growth” scenario foresees the European Union following a moderate growth path in the next years up to 2020, confirming the modest economic recovery experienced so far in 2014, picking up some steam in the next years but with annual GDP growth under 2%
(about 1.7% on average until 2020). This growth is helped by a healthy combination of technical innovation, driven by the 3d platform technologies - cloud, social technologies, big data and mobile, and business transformation designing and developing new products and services based on IT innovation. Macroeconomic and IT investment trends interact positively and feed into each other. This drives an increase of EU demand for total ICT skills from 7.7 million in 2012 to 8.6 million in 2020, representing a 1.4% CAGR.
Figure 74: Forecast model assumptions: interaction of main trends (Source: IDC 2014).
The main assumptions behind the model in the Cautious Growth scenario are the following:
Macroeconomic Trends
IT Market Trends
IT Innovation Automation and Cloud
Offshoring Trends
Forecast Model –Impact of Globalization Main Outputs
Demand of ICT jobs 2014-2020 Estimate of ICT jobs lost Estimate of ICT graduate jobs lost
Labour Market Policies and Initiatives
Growth and Innovation Policies and Funding Instruments / ICT focus
Education and Training (E-Skills) Policies and Initiatives
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In terms of macroeconomic and financial trends:
No change to the EU market composition will happen and no country will exit the Euro zone
After a period of weakness, the EU economy will return to moderate growth in the 2014-2020 timeframe, with GDP growth expected to reach 1.4% in 2014 and, on average, 1.7% annually to 2020
After a difficult 2011 and 2012, unemployment will remain relatively stable starting 2014
Bank loans will remain the primary source of funds for SMEs. Lending conditions to SMEs will have somewhat improved in 2014-2020
Venture capital investments will also moderately improve
There will not be a prolonged stock market plunge, as observed in mid-2011, which deteriorated business confidence driving lower economic expectations across EU countries
There will be no factors/happenings/external shocks that may cause a big deviation from the long-term average of the EU business and consumer confidence indicators, for a persistently long time-frame
Political instability in the Middle East will remain fluid but will not have a strongly adverse impact on EU economic growth up to 2020
In terms of IT market trends:
EU IT spending will grow by 2.7% in 2014 and by 2.9% annually up to 2020. Capital spending on IT equipment has weakened since last year, which has helped create a certain level of pent-up demand for infrastructure hardware. Software spending has rebounded strongly over the past two years and EU businesses seem willing to continue with software investments, even while looking to cut back on other areas of their overall spending. Services markets have been steady but tepid by historical standards. Government austerity programs have included direct reductions in levels of IT services spending, and cannibalisation from the cloud is still a drag on overall growth
In terms of IT innovation, automation and cloud trends:
The software industry will continue to go through a major transformation, from basic architecture (service-oriented architecture [SOA]) and the way software is written (composite applications), to the way software is delivered (cloud), and even funded (advertising based). The disruption to pricing and delivery models in particular has been significant in 2013, and this will continue for the next few years. This transformation will take a decade to play out but will allow for a much faster and more dynamic delivery of software functionality
The impact of the new digital marketplace will be increasingly seen in software as a service, the integration of Internet and enterprise search and other functionality, the concept of "cloud computing," and competition for ad revenue among Microsoft,
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Google, and other vendors. The digital marketplace will affect content delivery, commerce, datacenter architectures, advertising, marketing, telecommunications, and social interactions
The shift towards 3rd platform technologies, including cloud, social, Big Data/analytics, mobility and the Internet of Things, will continue steadily. According to IDC, by 2020, when the ICT industry will generate nearly €4 trillion in spending worldwide, approximately 40% of the industry's revenue and almost the totality of its growth will be driven by third platform technologies. Today they represent just 22%
of ICT spending As regards offshoring:
IDC forecasts a 14.1% CAGR in offshoring spending to 2017. The EU accounts for some 85-90% of the total EMEA market
The United Kingdom will remain the largest consumer of offshore IT services in the EU for the foreseeable future. However, IDC end-user survey results indicate that acceptance of offshore-based IT services has grown hugely in the recent past, and that offshore-based services are now gaining widespread acceptance among enterprises (if not public bodies) not only in the UK but also in continental Europe. Supporting evidence of this is the strong revenue growth of the leading Indian offshore service providers in continental Europe
This rise in acceptability is driven by costs savings but also by the investments made by the offshore vendors to "localize" their operations in the EU by hiring (or acquiring) local consultants and opening delivery centres for example in Poland, Hungary, and the Czech Republic
Application-related activities will continue to dominate in terms of use of offshore facilities in the near future
Main assumptions about policy trends:
Concerning policy trends and how they factor in our scenarios, our assessment is based on the potential impact of the main policy strategies at the EC and national government level, as well as the potential impact of policy initiatives which provide funding or coordinate stakeholders actions about e-skills (for example public-private initiatives such as the Grand Coalition for Digital Jobs launched in 2013 by EC DG CNECT). Policies are not usually designed and implemented in isolation, but are part of general policy frameworks active at EU, national and regional/local level, with shared general objectives. There is always some overlapping, duplication of efforts, and failure, as well as uneven diffusion and deployment across Europe. What counts for our scenarios is the potential cumulative impact of these policies and initiatives and whether they will succeed in transforming the socio-economic environment and achieving their general objectives. For the sake of this study, we have used our expert assessment as a study team to leverage the evidence collected for this study to select the main policy clusters relevant for our scenarios, identify their shared objectives and estimate their potential impacts under the 3 designed scenarios. Lacking a quantitative assessment of the policy impacts, we have used a qualitative assessment of the level of effectiveness of the examined policies and initiatives, for example, to what extent they will be able to achieve their designed objectives and therefore impact the socio- economic system by removing bottlenecks and promoting desired positive impacts. To
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do so we specify for each policy cluster our assumptions about the type of impact they are expected to have and to what extent we expect them to be able to achieve them.
Concerning this “Cautious Growth” scenario we are relying on the following assumptions:
Education and Training policies and initiatives: This cluster includes the e-skills policies analysed in this report (see Chapter 9 of the Final Report e-skills policies in the EU) specifically aimed at reforming and modernising national educational systems (at primary, secondary and tertiary level) to improve ICT education and training and therefore improve the supply of e-skills. These policies address the inclusion of informatics as a core competence and the development of teacher training curricula that provide teachers with the skills to use ICT as a teaching and learning tool as well as the ability to teach informatics. Initiatives include for example the Opening up Education, a funding partnership launched by DG Education and Culture, aimed at increasing the quality of education and facilitating the transnational cooperation by going beyond pilots to have real impacts.
o In this scenario, our assumption is that these policies will have a moderate level of achievement of their objectives, gradually improving the supply of ICT skills in the medium-long term, with impacts starting to be felt at the end of the analysed period (from 2018 onwards). Initiatives aimed at improving enrolment in STEM courses or reforming primary and secondary schools will have an impact in a timeframe beyond the period of our scenarios.
Labour market policies and initiatives. This includes the e-skills policies analysed in this report as “workplace policies” targeting the establishment of programmes for matching jobs to ICT professional competences, the establishment of national sector skills councils for ICT, and the creation and funding of multi-stakeholder partnerships directly benefiting the ICT sector. This includes for example the EC policies addressed to overcome the e-skills demand-supply gap, included in the 2012 Communication
“Towards a job-rich recovery”. Initiatives include for example the e-skills week annual initiatives run by DG Enterprise to raise awareness; the Grand Coalition for Digital Jobs launched in March 2013 under the framework of the Digital Agenda for Europe to better match demand and supply of e-skills. For practical reasons, we include here also the cluster of policies identified as “transversal” by this report, cutting across a number of domains with an impact on a range of areas such as education, the workplace, and the state of the information society at a national level on a whole, because they share the objective to overcome the shortcomings and mismatches of the e-skills labour market. Examples of transversal policies include the promotion of career opportunities in ICT, measures to achieve a positive gender balance, and encouraging the up-skilling and re-skilling of experienced ICT professionals.
o In this scenario, our assumption is that these policies will partially improve the demand-supply match in the short-medium term, thanks to the increase of internships, upskilling and retraining programs, and the promotion of mobility between national markets with excess demand and those with unemployment.
In addition, we expect EC initiatives to fight young unemployment such as the Youth on the Move package and the Youth Employment initiatives to have a marginal impact, because even though they are probably targeted to lower- skilled audiences they may mobilise some of the unemployed youth and start them on ICT-related training paths.
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Growth and innovation policies and initiatives for the development of the digital economy in Europe. This cluster of policies has an indirect impact on the e-skills market by driving the demand of ICT jobs and promoting virtuous cycles of growth, through IT-based innovation, contributing to a macroeconomic scenario favourable for employment growth. This includes the innovation and R&D policies aimed at the digital economy (Horizon 2020 ICT priority), as well as the specific digital policies such as the Digital Agenda for Europe, within the EU 2020 Growth strategy framework. This includes also the promotion of regional innovation strategies based on smart specialisation promoting the digital economy, supported by EC Cohesion funds and with the collaboration of DAE.
o In this scenario our assumption is that these policies will have a moderate success by contributing to the development of the digital economy in Europe, particularly promoting digital services, digital growth strategies and digital infrastructures growth, but without being enable to overcome completely the fragmentation of the EU market and with an uneven level of achievement across Europe. In the short term in fact the EU economies most affected by the economic crisis will still suffer from a low level of investments for IT innovation.
According to our model, these are the main estimates of the dynamics of ICT skills demand by country and for the overall EU:
EU demand for total ICT skills will grow from 7.7 million in 2012 to 8.6 million in 2020, representing a 1.4% CAGR (Table 15).
The UK is, and will remain, the country with the highest number of ICT skills demanded but will show a moderate annual growth of just 0.3%. Italy and Poland, which show relatively low levels of ICT skills in demand, will have more positive CAGRs (around 2.3%)
Table 14: Total ICT skills demanded (Source: IDC, 2013 for Monitor).
Demand for ICT skills is currently higher in the infrastructure area, which accounts for more than 36% of total demand. By 2020, following a CAGR of 2.6%, other skills will represent the majority of demand (34.4%). Demand for R&D-related skills will remain small relative to the other segments, but will show a significant CAGR of over 9%
The strong development in the "Other" skills category is driven by demand for the 3rd Platform technologies and the fact that a larger proportion of IT investments will come from outside the IT department from the line of business. While many of the skills needed for implementing and managing these technologies would fall under