Open any management journal or business newspaper, and it is likely that there will be some comment on outsourcing, or principally offshoring. India itself has been flavour of the month for sometime; now offshoring has really given further food for thought by presenting yet more advantages that the country can offer to the West. However, as companies progressively investigate a spectrum of activities to outsource, the offshore fever appears to be suffering from some overheating, with recent backlash and protectionist behaviour resulting in mild panic.
The facts could not be clearer, with the main research houses confirming that there really is only one direction for offshoring, and that is upwards. Gartner have predicted that by 2010, a quarter of IT jobs in the rich economies will be performed in offshore countries. Forrester also state that over the next 15 years 3.3 million US service jobs will be move offshored. Deloitte’s research corroborates these views with a prediction that 2 million jobs in financial services could be displaced over the next 5 years.
The speed with which the trend has gathered momentum has been sparked by hunger for the financial benefits that could be potentially leveraged. The convergence of consumer goods itself presents a problem for companies, in that competitive advantage through differentiation has not manifested to be the sole strategy for survival; the focus has now turned towards controlling costs without compromising quality.
At the micro-level, the laws of comparative advantage dictate that firms should source their activities from countries that incur the lowest costs. In fact, this concept is nothing innovative and can be gleaned from any economics thesis – however in this case the driver of the unique benefits is the breaking down of global boundaries resulting from the increased sophistication of IT and telecoms. What this broadly translates to is a potential 40-60% reduction in operational costs; no wonder 36% of European banks are considering offshoring as a business model (according to Datamonitor). The additional savings made on the cost reduction can be invested into further value-added activities, which would have otherwise not been possible.
Further visible benefits include shifting the fundamental dynamics of a company, by focussing it on change, efficiency and innovation – essential ingredients for today’s competitive environment. Companies have found that their overseas operations present distinctive advantages such as “follow the sun” approach (24 hours coverage) and a skill-set not present in the West, which translates into more efficient processes and superior performance.
At a macro-level, the economy benefits due to increased revenue growth resulting from a greater level of consumption through lower prices. In addition, a good selection of Indian BPO/IT vendors have bases in the US/UK and hence stimulate the economy with their investments and expenditures.
So, given the benefits what is all the commotion about?
The world is not new to outsourcing, and the benefits could not be more attractive, yet the richer economies appear to be reacting negatively to the movement of globalisation. Just as India and China are scaling up to service the needs of other economies, the West have caught a bout of protectionism.
The threats have not been taken lightly, and have consequently led to moves by the US to safeguard their boundaries and begin a variety of anti-offshoring initiatives. Two presidential candidates have publicly spoken out against the practice and some state assemblies (New jersey and Indiana) have proposed protectionist laws. A further blow was dealt by the US senate in January who passed a legislation limiting the offshore outsourcing of federal work. (In reality this latter move will hardly affect Indian companies given that only a small proportion of the income comes from the US government.) Further indirect practices have included capping visa numbers to limit the influx of Indian nationals.
The UK has not reacted to the same extent; nevertheless, the BPO climate is evidently more sombre than last year. Patricia Hewitt, the Secretary of State for Trade and Industry, has given tacit support to offshoring, and commented that the UK should have “nothing to fear from free and fair trade”, but still she has asked for an enquiry into the issues. Unions such as Amicus are lobbying support from companies to boycott Indian-based activities.
Grounds for protectionism
The main concern has stemmed from a widespread fear of the “Third World Assassins”, as they are known – that is India’s well-educated, English-speaking employees (more than a million graduate jobs a year) who will “steal” the jobs in the West.
Many would argue that any anxiety has been exaggerated, and that to date, there have been insufficient analysis on this topic from which to draw any conclusions. Essentially, it is very difficult to prove that a reduction in employment figures here has been directly caused by offshoring. Using analysis by Nasscom (trade for IT software and services in India), IT jobs in India increased last year by approximately 24% to 650,000. If say 60% of these relate to manufacture and development of products for the US, then one may liberally assume that approximately 390,000 jobs have been taken. To start with, this is such a small figure compared to the unemployment levels in the US that it is hardly worth complaining about. Moreover, it is a weak hypothesis to assume that the job displacement is a like-for-like occurrence; in principal, there could be other reasons contributing to unemployment increases, for example, changes in consumer demand, regulation and economic climate. Finally, the figures do not consider the potential redeployment of the staff made redundant. Overall, there seem to be no real grounds for alarm.
Besides job losses, the presence of further apprehensions in the industry has caused companies like Dell, and Lehmans to shift their operations back onshore. Attrition (staff churn) rates have been between 30-50%, which have possibly contributed to poor customer service, as investigated by Babel, a call centre research company. Some would say that the fundamental postulation about employee motivation has been misunderstood. An MBA graduate in the UK would probably not work in a call centre even for £100,000, let alone make a career out of it. Levels and drivers of motivation are universally experienced, therefore giving fairly menial and monotonous tasks to intelligent people without any additional incentives or career structure is not the correct model.
Companies have been witnessing other reservations, such as wage inflation, principally exacerbated by the growing levels of competition amongst the players in India. Infosys recently announced it was going to hike its wages by 17%, in line with inflation rates in the industry of about 15%. These issues could jeopardise the business case for cost reduction, but they may actually be symptoms of a consolidating industry, which will soon subside.
So how should a company contemplating outsourcing proceed? Admittedly this is an election year for both the US and India, hence any propaganda should be taken with lightly. That aside, the decision to offshore is notably a strategic one at a business or company level. Each entity individually needs to investigate the potential benefits that the move could propose in helping it achieve innovative growth. As Goldman Sachs recently highlighted in the BRICs report, the emergence of countries like India provides important productivity opportunities for the West; their future growth potential should not be underestimated.
Reproduced from Asian Voice newspaper, May 8th 2004. For any questions, please contact Nina Sodha at :- email@example.com