CWS 3.0: April 23, 2014

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Dismissing Labor Arbitrage? You May Be Missing Out

The term labor arbitrage describes when companies move some form of their operations — manufacturing or human capital — to other, cheaper, geographic locations. It can be when the people are moved to where work needs be done or work is moved to where the workers are. Savings realized through labor arbitrage come from many areas, such as labor, taxes or reduced environmental regulations.

Chances are your company is already dipping its toes into one or more of these areas with a significant amount of spend. According to a report recently released by Staffing Industry Analysts, there are three important ways companies now can look at or are already participating in labor arbitrage: Labor mobility initiatives, offshoring and the human cloud.

Labor mobility initiatives. Labor mobility in labor arbitrage terms is the crossing of borders to get the best available talent at the lowest cost. There are three important patterns of “intra-zone” migration, as identified in the report: the U.S., Europe and China. There are also recognized migration patterns for skilled and unskilled labor with different hubs. Whether a company decides it needs to export new talent to fulfill needs in another region or to import it to fulfill needs closer to home, it has a few options in sourcing the talent. Hire regular employees, hire contingent employees or outsource completely. Many global staffing firms now have a presence in worldwide markets and are able to provide solutions to labor arbitrage concerns on a contingent basis.

Offshoring. Another option to getting talent using labor arbitrage is offshoring. Business process outsourcing (BPO) along with research and analytics is one way companies have offshored. India continues to lead the pack in term of offshore destinations. While there has been some decline in this practice due to re-shoring, near-shoring or insourcing, providers still report increased business and demand driven by technology and business services.

Offshoring can be a cultural and political hot potato, especially with the occurrence of re-shoring, due to a host of issues, such as: market wage inflation, currency fluctuations, appropriate management skills, language barriers, quality problems, legal liabilities, poor communication, intellectual property risk and advances in robotics. It’s critical is to carefully consider what, where and how you offshore.

The human cloud. The human cloud is a more recent addition to the labor arbitrage triumvirate and is considered a significant disrupter in the talent marketplace. It can be more economical with very little upfront cost and brings the work to the talent with a minimal amount of administrative work. Staffing Industry Analysts’ Lexicon of Contingent Workforce-Related Terms defines the human cloud as an emerging set of work intermediation models that enable work arrangements of various kinds to be established and completed (including payment of workers) entirely through a digital/online platform. In many cases (though not always), the platform also supports “the enactment and management” of the work (to a lesser or greater degree). Job boards (like Monster) and social networks (like LinkedIn) do not fall within our definition of human cloud; while those two types of talent exchange platforms may support the sourcing and recruiting part of work arrangements being established, such platforms do not further enable or support work arrangements through to their completion (including payment of workers, tax filings, etc.).

The Lexicon goes on to define the human cloud’s three components:

Crowdsourcing — An online platform model that enables work assignments to get parsed out and performed (often as disaggregated “micro tasks”) by a far-flung “crowd” of independent workers who perform work at will.

Online Staffing — An online platform model that enables specific hirers and workers to enter into, complete and transact work arrangements. It is the oldest “human cloud” model (arising in the early 2000s).

Online Services — An online platform model that enables the delivery of certain specialized services (customer service, translation, writing, etc.) performed by a group of online workers organized/managed by the platform provider.

There is substantial growth forecasted for the human cloud with staffing providers and buyers beginning to increase their use of it. This is part of a larger trend in the labor arbitrage marketplace. While labor mobility initiatives and offshoring should not be minimized strategically, far more cost savings can be generated using human cloud solutions, especially for technology talent and work that can be done remotely.

The important thing to note is that savings realized through labor arbitrage can come in many ways: cheaper labor, tax savings, more favorable environmental regulations, less legal risk, administration or other factors. Using labor arbitrage successfully whether on the ground or in the cloud will pay off.