Canadian IT Offshoring: Good for the Economy, Bad for Innovation

Canada’s relationship with offshoring has not always been a happy one, most recently hitting headlines thanks to Royal Bank of Canada (RBC), which faced fierce backlash in 2013 …

Canada global skills strategy

Canada’s relationship with offshoring has not always been a happy one, most recently hitting headlines thanks to Royal Bank of Canada (RBC), which faced fierce backlash in 2013 over an outsourcing arrangement involving the use of temporary foreign workers.

Economically speaking, the IT offshoring industry has been steadily increasing. According to a study by International Data Corporation (IDC), between the years of 2000 and 2014, IT offshoring contracts contributed around CAD$15 billion to the Canadian economy—great news for corporate Canada, but not so great for the country’s IT workforce and its potential as an innovation hub.

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Today, it is likely this rate of contribution is continuing, because many of the same contracts are still in play. “Before 2014, the cost savings and the positive economic impact was only getting larger because the base of contracts was getting larger,” said Mark Schrutt, Research Vice President at IDC Canada. “Since 2014, the base of contracts has probably not grown, but likely continues to drive those economic benefits towards corporate Canada. Even though we had projected a stronger offshore market over the next few years, most of that stems from what already exists.”

Cost Savings

Canadian offshoring
Mark Schrutt: “Canada now has to decide whether those 4,000+ jobs (lost) are too many or, in fact, if one more job lost to offshoring is too many.”

The economic value of offshoring was calculated based on the substantial cost savings made by Canadian firms, but Schrutt also determined that there was a negative outcome with regard to job losses, which had their own economic impact on the country. Even so, these losses represented only a very small fraction of the cost savings.

Between 2001 and 2013, Canadian businesses offshored an estimated CAD$16 billion worth of IT work, which, if performed locally, would have cost close to CAD$30 billion. The estimated cost savings were between 30% and 50% over this period, due to wage differences between Canadian cities and offshore locations.

By 2013, offshoring had created CAD$15 billion in cost savings for Canadian businesses, and IDC predicts that offshoring will drive additional cost savings of CAD$16 billion to CAD$21.6 billion up until 2019—a clear economic benefit for the country.

“While I did feel like there were some benefits to offshoring during the research, we were unable to determine any from a quantitative perspective, such as innovation, speed to market, and other benefits that offshore firms promote,” said Schrutt. Ultimately, the cost savings are due to lower wages, meaning job losses and a potentially negative effect on innovation.

Reduction in IT Jobs

IDC found that the Canadian IT offshore market in 2012 was valued at CAD$2.8 billion and was expected to grow by 18% in the following five years. It has also been predicted to add a further CAD$13 billion to Canada’s economy by the end of 2019. But, if these predictions come to pass, the country will shed an additional 4,400 jobs by 2018. “Canada has to decide now on whether those 4,000+ jobs are too many or, in fact, if one more job lost to offshoring is too many,” writes Schrutt.job-losses-IT-canada-idc

Canada’s unemployment rate is extremely low, at 1-2%, but that doesn’t mean there is no demand; in fact, demand for IT professionals is very high. Schrutt recalled that, in total, around 70,000 people had been displaced from their IT jobs because of offshoring by 2014, but most of them were still able to find new jobs. By the end of 2014, offshoring had led to 12,770 IT workers leaving the industry in Canada, either retiring, turning down offers, or working in other industries.

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Offshoring and its Effect on Canadian Education

The IT jobs deficit and Canada’s IT education programs are not inherently linked, but the country has a noticeable skills gap due to the lack of up-to-date and detailed labor market information, the continuous and rapid growth of the IT sector, declining enrollment in IT-related undergraduate programs, Canada’s aging population, and the federal government’s immigration policies.

According to Schrutt, in the last 20 to 30 years, there has been a dramatic decline in Canadian school students’ interest in IT careers at 7-8 years of age. He noted that not enough women are interested in IT as a career, which also leads to less kids enrolling in IT programs. “This is independent to the offshoring, but one could argue that if we had more people graduating from university, we could fill more of the jobs here in Canada,” he explained. “Also, even though a third of the IT workforce are immigrants, we should be taking in more.”

How will Canadian Innovation be Affected?

A longstanding debate between advocates and detractors of offshoring is whether the practice might hollow out the Canadian IT industry, ultimately leading to a less-than-ideal environment for innovation. While the economic benefits have been made clear, offshoring may actually inhibit innovation.

According to the report, many offshored roles are low-wage, junior positions in application maintenance and operations, but many argue that these juniors are on a path to become industry leaders, perhaps even branching off into their own businesses and contributing further to the industry, so it might pay to keep these positions readily available.

“The flip side of this argument is that, with an employment rate of less than 2% in IT, and a recognizable skills gap, Canada needs access to out-of-country IT resources to compete in today’s global economy, let alone in the future,” the report states. “In the end, the question of innovation remained unanswered, which is unsatisfying to IDC because of the importance of the debate around offshoring.”

Canada’s IT Outsourcing Future

“Since the reputational damage that RBC faced from its offshoring practices, Canada’s outsourcing growth hasn’t really recovered, and I don’t think it ever will,” said Schrutt. “The Canadian dollar has declined, so it’s more expensive to offshore; the economy as a whole has not been very strong, so, even though IT employment is up, there isn’t much being spent on IT; and finally the advancements of automation and robotics will eliminate the need for people in many cases, reducing the need to offshore.”

Ultimately, Canada must focus on innovation in order to turn its losses into gains, while also offsetting the reduced talent by increasing ICT enrollment in universities. Furthermore, an increased amount of investment into R&D, tech start-ups, and innovation hubs might contribute to the solution.

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