The social and economic challenges of outsourcing in Luxembourg

Outsourcing is an increasingly common practice in Luxembourg, particularly in the financial, IT and services sectors. Driven by a constant quest for competitiveness and cost reduction, this trend raises many questions and concerns about its economic and social impacts. While it offers short-term benefits for companies, massive outsourcing poses major risks for local employment, the quality of services and the national economic fabric.

Regulated by CSSF circular 22/806, which is based on the guidelines of the European Banking Authority (EBA/GL/2019/02), this practice is supposed to guarantee financial stability in the EU. However, as currently implemented, excessive outsourcing is gradually eroding the foundations of a stable and fair local economy.

Reasons for mass outsourcing

1.      High wage costs in Luxembourg

Luxembourg ranks first in Europe for average gross annual salary, with €72,250 in 2021. This figure, much higher than that of Denmark (-14%) or Ireland (-43%), reflects a prosperous economy, a high standard of living and a skilled workforce. However, for companies, these costs can be perceived as a barrier to competitiveness, prompting them to relocate activities to lower-cost countries.

2.     Flexibility and a permissive legal framework

Luxembourg's regulatory framework facilitates redundancies for economic reasons, which encourages companies to restructure their business model by outsourcing certain functions abroad. This flexibility can be exploited to cut costs in the short term, but at the expense of local employment.

3.     Risk reduction and optimisation of resources

Outsourcing enables companies to offload certain operational responsibilities and concentrate their efforts on strategic activities. However, this optimisation logic leads to a loss of know-how and increased dependence on third-party service providers, often located outside the European Union.

The consequences of excessive outsourcing

1.      Precariousness of local employment

Massive outsourcing leads to a significant reduction in employment opportunities at all levels, from operational positions to highly skilled functions. Local employees are often faced with redundancies or a deterioration in their working conditions.

For example, a major financial services company has outsourced all its operational services to Eastern European countries. Not only do local employees have to train these new employees, but they also have to maintain current activities, correct the mistakes of outsourced employees, and constantly retrain new arrivals due to the high turnover in these developing countries. The consequence for local teams: a considerably increased workload with fewer staff, while at the same time managing a duplicate infrastructure in another country. This outsourcing model, although often presented as a cost-effective solution, remains a big question mark that is rarely clearly explained by the employers who are following this trend.

2.     Loss of strategic expertise

Transferring skills to external service providers can ultimately weaken local expertise, making Luxembourg companies dependent on foreign partners. This loss of control exposes companies to operational and strategic risks.

3.     Economic imbalance

Outsourcing contributes to the evasion of added value from Luxembourg, thereby weakening the local economic fabric. Savings on labour costs only benefit shareholders, with no direct benefit to the national economy.

ESG standards: a lever for responsible outsourcing

ESG (Environment, Social, Governance) standards provide a framework for assessing the social responsibility of companies. Although environmental and governance aspects are widely adopted, the social pillar is often underestimated. There is an urgent need to fully integrate these social criteria when assessing the impact of outsourcing strategies.

Main social criteria to be strengthened:

• Working conditions: guaranteeing stable, well-paid jobs;
• Diversity and inclusion: promoting a diverse workforce;
• Employee rights: protecting fundamental rights against unfair dismissal;
• Community impact: encouraging the creation of local jobs.  Knowledge must remain local.

ALEBA's proposals for balanced regulation

1. Imposing limits on externalisation rates

ALEBA is proposing to cap the proportion of business outsourced by companies to Luxembourg at 25-30%. This measure would ensure a fair distribution of activities between local and foreign operations.

2. Introducing mandatory ESG assessments

Outsourcing to third parties can reveal an ethical gap where no due diligence is carried out to ensure that subcontractors' practices meet ESG standards.  This includes risks such as labour exploitation, human rights abuses and irresponsible environmental practices, undermining the company's commitment to its sustainability objectives. An ESG rating system would measure the impact of companies on employment and the local community. For example, a company could be rated on criteria such as the number of jobs retained locally, respect for social rights or initiatives in favour of continuing training. These ratings would be made public to inform investors and employees.

3. Introducing an ESG tax

Companies that outsource on a massive scale would be subject to an ESG tax. Example: a company outsourcing more than 50% of its activities could pay a tax proportional to the difference between the cost of outsourced labour and the cost of local labour. The revenue from this tax could be used to finance retraining programmes or support for sectors affected by outsourcing.

4. Strengthening employee rights

Introduce stricter rules on redundancies for economic reasons to prevent abuse.  For example: make a social audit compulsory before any mass redundancy, with the obligation for the company to prove that it has explored all alternatives, such as trying to keep the affected employees in the company in other jobs, reducing dividends or investing in technological solutions to maintain jobs. A company could finance the modernisation of its work tools, such as the introduction of software or automation platforms, while training its employees in the new skills needed to manage these technologies. This would make it possible to maintain jobs while increasing productivity.

Towards responsible outsourcing

Outsourcing in itself is not a bad practice, but its excesses can be detrimental to Luxembourg's economy and society. The adoption of stricter rules and tools such as ESG standards would make it possible to reconcile economic competitiveness with social equity. Luxembourg, as a model of stability and prosperity, has a duty to set an example in regulating these practices.

This article was initially written by Thierry Roland, member of ALEBA's Executive Committee