For decades, global trade has thrived thanks to reduced tariffs and the promotion of free trade, largely shaped by the General Agreement on Tariffs and Trade (GATT) established in 1947, which evolved into the World Trade Organization (WTO) in 1995.
However, contemporary economic trends reveal a resurgence in mercantilism: a strategy from the 16th to 18th centuries focused on maximizing exports and minimizing imports through local resources and high tariffs on foreign goods.
BPO has enabled many companies in developed nations to cut costs by relocating services to regions with lower expenses.
In today’s economy, the emphasis is heavily on services. Business process outsourcing (BPO) has become a key player, with countries like the Philippines providing contact center services to leading global brands and a workforce of over a billion globally engaged in BPO roles, according to PwC.
This sector plays a critical role across industries, helping to significantly lower operational costs. Any introduction of tariffs or trade barriers, like we have seen introduced, raised, and contested, could substantially disrupt this landscape.
Impact of Rising Costs
BPO has enabled many companies in developed nations to cut costs by relocating services to regions with lower expenses. Moreover, BPO has also helped these businesses enhance their productivity and profitability by allowing them to focus their resources on refining core competencies and boosting brand visibility with customers.
However, if cross-border service trade encounters higher taxes or compliance challenges, companies may experience increased costs.
This could lead them to pass these expenses onto consumers, contributing to inflation, or to accelerate the automation of processes, thus reducing new hires. For small businesses, which often operate with tight margins, maintaining profitability could become increasingly difficult.
Growth of Onshore BPO
Countries that traditionally outsource BPO work often have significant regional cost disparities. For example, the cost of living in New York City is significantly higher than in Memphis, Tennessee. Similarly, living costs vary widely within London. This disparity may encourage the following developments:
- More BPO and customer experience (CX) specialists could establish facilities in lower-cost regions in the countries where their clients are based.
- Local governments may offer tax incentives to attract BPO companies to areas with high unemployment.
- While wages and costs would still be higher than typical offshoring contracts, they would remain lower than operating inside major cities.
Effects on Offshore BPO Economies
Those regions that are heavily reliant on BPO jobs may face economic volatility if international trade restrictions increase.
Uncertain tariff structures might lead to reduced headcounts in traditional BPO roles and currency fluctuations could further strain economies that depend on U.S. dollars for international service trade. For the U.S. market, that could mean shrinking exports due to declining demand and weakened local currencies.
Despite tariff challenges, BPO services that depend on specialized skills and expertise are likely to endure. Even significant new tariffs may not completely counteract the financial advantages of offshoring.
According to HFS Research’s CEO Phil Fersht, even a 10% increase in offshoring service costs typically remains more cost-effective than onshore hiring, where wages can be 30%-70% higher. Based on this data, the job-creation benefits of tariffs might actually be less than expected.
The Future of Offshore BPO
In response, BPO providers might explore diversifying their client base towards less affected regions: those whose countries are not imposing tariffs on offshore outsourced services. Also, to sustain employment, governments in outsourcing-dependent areas may need to incentivize BPO companies financially.
New BPO hotspot destinations may rise, focusing on options such as the Caribbean, Latin America, and Eastern Europe, while established regions like the Philippines could see heightened demand thanks to their available expertise and talent.
These areas, often connected by trade agreements, provide stability and lower risks of sudden changes, making use of existing BPO talent and language skills: provided that they (and the BPO industry) are also not subjected to tariffs.
Even significant new tariffs may not completely counteract the financial advantages of offshoring.
The increasing use of automation in services is likely to continue, as AI handles routine tasks, allowing human workers to focus on higher-value roles. BPOs have long been the leaders in adopting innovative technologies that benefit their clients and their customers.
Furthermore, hybrid BPO models may evolve, integrating onshore and offshore solutions to provide local daytime service coupled with offshore support during evenings and weekends. Providers will likely broaden their global client base, moving beyond traditional markets.
Overall, BPO has consistently delivered more than just cost efficiency. It provides access to specialized services and expertise, ensuring its continued relevance in a changing global landscape.