Source: www.merinews.com

Outsourced business in India has not only left an indelible impact on the culture of our nation but is also providing empowerment to women and employment to many 'out of stream' candidates. It also is an added asset to the Indian economy. IMPACTING EC.

THE BUSINESS practice of outsourcing focuses on relocation of labour-intensive service industry functions, to locations remote to the business centre, such as India, Ireland or the Philippines. It has been enabled by two main changes in the business environment. First, the improvement in international telecommunications capacity, and the concomitant step-change of reduction in global telecommunications costs; which, is the fundamental to the economics of outsourcing. Second and just as important, over the past two decades personal computer (PC) has enabled the computerisation and digitisation of most businesses services. As a result of these two changes, information can now be transmitted over long distances at very low cost and with little loss of quality. These changes make organisational boundaries and national borders much less important in deciding the location of service functions. As is commonly realised, the prime motivation for outsourcing is that it reduces labour costs.

There continues to be large differences in the wages paid for equivalent skills between the United States (US) and developing countries such as India and the Philippines. For example, the equivalent of a software developer which costs 60 dollar an hour in the US costs only 25 dollar an hour in India. Similarly, a data entry agent which costs 25 dollar an hour in the US costs only 15 dollar an hour in India. However, there is also a second reason why outsourcing brings economic benefits. While in the US many of the outsourced jobs are seen as relatively undesirable or of low prestige, in the countries they are outsourced to, they are often considered desirable and attractive. As a result, workers in low-wage countries often have higher motivation and outperform their counterparts in developed countries in terms of performance measures such as the number of transactions per agent, or the number of errors per transaction.

The Indian Information Technology (IT) and Information Technology enabled Service (ITES) industry has been one of the great success stories of modern India. An industry that did exist barely two decades ago has today arguably created international benchmarks for quality, proving to the world that Indian companies can compete globally and win on quality. It has also demonstrated what can be achieved by unleashing the power of middle class and first generation entrepreneurship in India. The overwhelming majority of companies in this sector were started by entrepreneurs with modest backgrounds and with very limited access to capital. In many ways, this industry has helped create the brand of ’New India’ and served as an inspiration for everyone else.

The IT/ITES industry’s contribution to the country’s Gross Domestic Product (GDP) has been steadily increasing from a share of 1.2 per cent in Financial Year (FY) 98 to 5.2 per cent in FY07; it has contributed to foreign exchange reserves of the country by increasing exports by almost 36 per cent and its direct employment has grown at a Compound Annual Growth Rate (CAGR) of 26 per cent in the last decade, making it the largest employer in the organised private sector in the country. In addition, The IT/ITES industry has significantly contributed through socially relevant products and services and community initiatives in human resource development, education, employability, health, encouraging women empowerment and employment of ‘out-of-the-mainstream’ candidates.

The difference in wages alone exaggerates the potential economic benefits. Though the wage-saving is substantial, additional costs are incurred in terms of telecommunication and the management of the offshore facility. Nevertheless, once these costs are taken into account, there is at least 45 to 55 per cent saving in the cost base. Re-engineering the process design can further increase this potential saving to 65 to 70 per cent of initial costs. A simple example is - changing the sequence for processing a customer service call, which would result in a penalty on labour productivity but a substantial improvement in capital productivity and thus a net impact of a 50 per cent increase in profits. In addition to significant cost savings, companies are also using outsourcing as an opportunity to drive revenue growth. For example, by leveraging cost arbitrage, airlines are now able to chase delinquent accounts receivables that they would earlier be forced to ignore. Similarly, computer manufacturers are increasing market penetration by offering customers services they could not afford to offer earlier. As a result, by outsourcing, many companies are creating far more value from increased revenues than from reduced costs.

US businesses dominate the global share of outsourcing, accounting for some 70 per cent of the total market. Europe and Japan account for the remainder of the market, with the United Kingdom (UK) as a dominant player. Both the US and the UK have liberal employment and labour laws that allow companies greater flexibility in reassigning tasks and eliminating jobs. This flexibility is essential to capture outsourcing opportunities effectively.

There is also a supply-side element shaping the current pattern of outsourcing. It has been conducted primarily in countries where English is the main business language. In general, the presence of an English-speaking population is a key factor in the choice of location of offshore services, as the commonality of language helps to ensure that quality and performance criteria can be fulfilled.

Without a shared language, errors are much more likely to occur, thereby undermining the benefits of outsourcing. Canada, India and Ireland have all proved particularly attractive in that they have large English-speaking populations. Other countries with English-speaking populations, such as Australia, South Africa, and the Philippines, are also potentially attractive to a greater or lesser extent. This emphasis on the commonality of language might also explain in part why non-English-speaking countries have not resorted to outsourcing to the same extent.

There is potential to outsource a very wide range of functions. The criteria for successful outsourcing include the requirement that the function can either be digitised or handled by telephone, and that appropriate skills are available or easily developed at the outsourcing centre. Among the functions to be outsourced first are back-end processing, call centres, and accounting. Higher-value work has since been added to this list, particularly in areas where there is an offshore abundance of what are otherwise scarce skills. The prime example of this is software maintenance and development, which continues to attract increased investment in offshore facilities.

The debate about outsourcing is expected to grow at the rate of 30 to 40 per cent a year over the next five years. Forrester, a leading analyst, projects that the number of US jobs outsourced will grow from 400,000 jobs today to roughly 3.3 million jobs by 2015, accounting for some $136 billion in wages. Of this total, Forrester expect 473,000 jobs from the IT industry to go offshore over the next 12 years, representing eight per cent of all current IT jobs in the country. Very few doubt that outsourcing is good for India – India gains a net benefit of at least 33 cents for every dollar spend offshore.

But, is outsourcing really bad for the United States? What is the impact on employment? The evidence suggests that fears about job losses, however reasonable they might be, tend to overplay the likely impact of outsourcing. The vast majority – some 70 per cent – of the economy is composed of services such as retail, restaurants and hotels, personal care services, and the like spanning very broad wage and value added ranges. These services are necessarily produced and consumed locally – and therefore cannot be outsourced.

This is not to say that no jobs will go overseas. They will. And as with any trade related or other industry restructuring, the changes will be painful for many involved. But even if Forrester is right, and 3.3 million jobs do go offshore by 2015, the United States has been there before. It has the world’s most dynamic economy and is fully able to generate new jobs. The argument is that the advantages of outsourcing are:

Reduced costs: Cost savings represent the largest form of economic value capture. For every dollar spent offshore, 58 cents are captured as net cost reduction to businesses even as they often receive an identical (or better) level of service. A more competitive cost position will lead to higher profitability, increased valuations and help keep US companies highly competitive in the world economy. Initially, the savings will flow to investors, or they will be invested in innovations or new business ventures. Eventually, as outsourcing becomes more prevalent, competition will yield the savings to consumers. In either case, outsourcing will contribute significantly to increasing national earnings.

New revenues: For every dollar spent offshore, offshore services providers buy an additional five cents worth of goods and services from the US economy, thereby creating exports and extra revenue for the US economy. Providers in low-wage countries require US computers, telecommunication equipments and other hardware and software. In addition, they also procure legal, financial, and marketing services from the US.

Repatriated earnings: Several providers serving US outsourcing market are incorporated in the United States. These companies repatriate their earnings back to the US, which amounts to an additional 4 cents out of every dollar spent offshore.

Redeployed labour: As low value-added service is sourced from overseas, US workers previously engaged in providing those services are freed up to take other jobs. If redeployment continues at the rate it has over the past two decades, then for every dollar spent offshore, the economy will capture an additional 45 to 47 cents per dollar outsourcing from the new jobs that are generated. This appears a reasonable assumption given the empirical evidence that services workers find employment more quickly than do manufacturing workers, and job-displacement during the last two decades – when jobs outsourced were primarily in manufacturing was at least as high as the projected job displacement in services. Far from being bad for the United States, outsourcing creates net additional value for the US economy that did not exist before, a full 12-14 cents on every dollar off shored. Indeed, of the full 1.45 dollar to 1.47 dollar of value created globally from outsourcing 1.00 dollar of US labour cost, the US Captures 1.12 dollar to 1.14 dollar, while the receiving country captures, on an average, just 33 cents.

The openness of the US economy and its inherent flexibility, particularly in terms of its labour market, are recognised widely as two of its great strengths. These aspects need to be reinforced, not undermined. The current danger is that policy makers will inadvertently pander to protectionism. To do so would be dangerous for America’s future well being.

Outsourcing of IT / ITES business to India has not just impacted the culture but is today deeply interwoven into the socio economic fabric.

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