| Tuesday, June 01, 2004 |
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OUTSOURCING |
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INDIA’S DOMINANCE IN OUTSOURCING
E.C. Thomas*
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16:55 IST |
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India has made a strong niche for itself in the Information Technology – Enabled Services and Business Process Outsourcing (ITES – BPO). The outsourcing industry in India has emerged as the single biggest employment generator in recent years.
India’s $ 3.6 billion outsourcing industry, backed by its army of cheap, English – speaking skilled personnel is expected to reach an annual turnover of $ 13.8 billion or nearly half of the global offshoring market by 2007.
India is the most preferred choice for global companies when it comes to outsourcing. India got 60 per cent preference amongst the global companies, while its closest competitor was China with 32 per cent preference, according to a study by the Hewitt Associates of US on global sourcing trends and outcomes.
Outsourcing
Outsourcing is a long-term growth and survival strategy for multinational corporations by which an organization contracts routine functions to service providers who specialize in such functions. The business proposition of BPOs is to take over the non-core processes of companies and bring in the best practices. From outside companies are using BPO to reach a wide range of goals. What was once viewed primarily as a way of reducing expenses has now emerged as a means of achieving productivity gains, short-term innovation cycles, enhance customer intimacy and enter new markets.
According to National Association of Software and Service Companies (NASSCOM) estimates, over 50 per cent of the Fortune 500 companies have incorporated offshore outsourcing into their strategies and around 80 per cent of these now use India as their development base.
BPO offerings are becoming more comprehensive. From managing repetitive, transactional chores like Payroll and Accounts Receivable, BPOs have enhanced their service portfolios by also handling knowledge-based activities like Budgeting or Resource Planning, giving customers access to a complete menu of end-to-end processes in functional areas such as HR, Finance and Customer Care.
Growth
The BPO sector in India has been growing at almost 60 to 70 per cent per annum. According to NASSCOM, the projected revenue of the BPO industry in India is expected to touch US $ 12 billion in 2006. This is a nearly four-fold growth from the 2003-04 revenue estimates of around US $ 3.6 billion.
The number of jobs increased from 140,000 at the end of March 2003 to a projected 245,000 in March 2004, according to Nasscom’s ‘Strategic Review 2004’. This could rise almost five times in the next five years. Each day nearly 200 people join the Indian ITES – BPO industry.
BPO is a specialized form of international trade in services, based on the doctrine of comparative advantage in international trade. Today, companies outsource to destinations like India because they see value in their investments in terms of quality service and financial spending. By outsourcing to quality and lower cost operations, these companies are able to lower overhead costs, compress time-to-completion with efficient time difference management and focus on core competencies. There are many clear instances of such advantages to companies over a short time-frame. Likewise, banks and financial institutions will not send their data to these countries, unless they are sure of the credentials. As pointed out in the McKinsey Institute study, the US economy benefits in outsourcing in more ways than one.
One estimate says that the General Electric (GE) which employs 18,000 workers in India, saves $ 350 million per year through outsourcing. In all, $ 8 billion has been saved in the USA through outsourcing. A NASSCOM report estimated 60 per cent savings in costs for companies outsourcing to India. There exist 185 Fortune 500 companies which outsource work to India. Information Technology Enabled Services (ITES) provides opportunities for MNCs to reap the surplus in the service sector that did not exist earlier. The companies engaged in production of value-added services, from medical transcriptions to software programming, require skilled labour which countries like India have in abundance. In fact, Indian call centres have a higher productivity as compared to those in the USA or UK.
According to NASSCOM, an Indian call centre agent makes on an average 98 correct transactions, as compared to 95 by an agent in the UK. Besides, the Indian makes 120 transactions an hour, while his British counterpart makes only 100. However, efficiency does not always mean higher pay. A worker’s basic salary in the USA is $ 63,000 per annum, while it is $ 5,850 in India and $ 4,750 in China for the same job.
Controversy
The recent controversy that outsourcing had resulted in job losses in the USA is more political than economic. Ever since the US Senate passed the Bill on banning government outsourcing to foreign countries in January 2004, there has been a lot of resentment in the Indian IT industry.
Although the US Senate Bill will not affect the Indian outsourcing industry much, as it accounts for a mere 2 per cent of the total volume, the regular efforts to create emotional cries about job loss for Americans are disturbing.
The American search for foreign scapegoats for the unemployment problem is not new. In the 1980s, Japan’s trade surplus and acquisition of major entertainment companies such as CNS Records and Columbia Pictures fanned irrational fears of an economic and cultural occupation. The anti-Japan hysteria waned once the US economy revived. In a similar vein, subsequent waves of panic about job losses, first to Mexico and then to China, have ebbed and flowed without making a material difference to employment levels.
By no stretch of imagination can the estimated 245,000 employees now working in business process outsourcing in India pose a threat to the 100 million workers in the US services sector. American business houses themselves do not want to be restrained in any way from tapping cheaper sources outside the United States. From a macroeconomic perspective too, the US cannot afford to ignore the increase in productivity that outsourcing ensures.
Competition
Outsourcing is the considered response of companies in the wake of the enormous pressure that businesses worldwide are faced with and this trend will continue, as there are tangible benefits in terms of productivity, quality benefits and cost savings. This means lower costs and better service for consumers, even as it increases the market share and profitability for the corporates. Gaining efficiencies, leveraging existing investments and hence enabling companies to be more flexible and adaptable to changing business and market conditions are some additional benefits of outsourcing.
*Senior Freelance Writer
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