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Monday, Dec 08, 2003

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The `cyber coolie' is here

Ranabir Ray Choudhury

The emergence and growth of BPO activity — described as the "cyber coolie" regime by British critics of the phenomenon — is a true reflection of the changing nature of the international economy, specifically its gradual shift from manufacturing and traditional services to the true globalisation of back-up services for distinctly national economic activity of practically every sort with the help of IT-enabled facilities.

CHEAP appropriate labour and good digital connectivity have enabled India to take a big slice of the emerging international business processes outsourcing (BPO) market which, it is expected, will contribute significantly to the future economic performance of the national economy. One only hopes that this will turn out to be true, the major beneficial offshoot being not merely the economic parameters involved but, perhaps more importantly, the enhancement of the country's image as an emerging player in the international economy of the 21st Century.

The emergence and growth of BPO activity — described as the "cyber coolie" regime by British critics of the phenomenon who have yet to free themselves from the Raj hangover — is a true reflection of the changing nature of the international economy, specifically its gradual shift from manufacturing and traditional services such as banking, insurance, etc, to the true globalisation of back-up services for distinctly national economic activity of practically every sort with the help of IT-enabled facilities. Clearly, any country that establishes itself in this new sphere will be looked at differently by the rest of the world, the stamp of the digital age indelibly marked on its economic façade. It is precisely this advantage which India will reap from its deepening involvement in the world BPO market, thereby strengthening its already well-established image of being a "software specialist" in the world marketplace.

But what exactly is this BPO phenomenon? Why has it appeared on the world economic scene, what are the criteria necessary for its successful operation, what is the division of the spoils from such activity, etc? These are important questions which will determine the scope and depth of BPO relations between national economies, the inference being that there should be a clear understanding of the fundamentals involved before major national initiatives are taken in the BPO direction. The McKinsey Global Institute (MGI) recently came out with a perspective on the entire subject — "developed during the course of our extensive work in the IT and business process offshoring sectors in India" — which is considered to be important "given the din of the current debate on the issue and the need for a broader fact base".

Appropriately, the first point discussed is "what drives offshoring"? In other words, what has made BPO feasible today, irrespective of whether there is any economic justification for it? Two basic reasons have been cited: (a) the improvement in international telecommunications capacity and associated reduction in costs; (b) the clear predominance of the personal computer, enabling computerisation and digitization of most business services. The net result of these two factors has made traditional organisational boundaries and national borders much less important in arriving at decisions to locate service functions.

The next question is: What are the economic benefits of outsourcing, for it is self-evident that unless such benefits are on the cards, there is no point in engaging in such activity, even if it is technologically feasible? Quite appropriately again, the McKinsey study cites the labour-cost angle as being the most obvious benefit. Two examples have been provided: first, a "software developer" who costs $60 an hour in the US would cost just $6 in India; and secondly, a data entry agent who charges $20 an hour in the US would get no more than just $2 in India.

The productivity angle is also there which is encapsulated in the following statement: "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".

A third benefit is the revenue spinoff. The study cites the case of airline companies, using the cheap labour at their disposal, being willing to chase troublesome accounts which they would have earlier have been forced to ignore. The considered conclusion of the study is that many companies are "creating far more value from increased revenues than from reduced costs".

Which are the countries going in for BPO, and where are they going? The study says that the US dominates the outsourcing market, accounting for around 70 per cent of the total market. Europe and Japan account for the remaining 30 per cent with the UK having a sizable presence. Interestingly, the point is made that both the US and the UK allow companies "greater flexibility in reassigning tasks and eliminating jobs", which may in fact be on the verge of change given the developing opposition to BPO in these countries.

As regards the issue of where the outsourcing flows, the study points to "supply-side" determinants: "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". According to the study, Canada, India, Ireland and Israel are the preferred destinations because they have large English-speaking populations who can be transformed in "cyber coolies". Of the world outsourced services market in 2001, Ireland had the largest share of $8.3 billion, India followed with $7.7 billion, Canada and Israel coming in third and fourth with $3.7 billion and $3 billion, respectively.

The most interesting part of the study deals with the ongoing debate about whether BPO is a win-win gambit for both investing and recipient economies or whether there is a clear winner-loser divide. The debate itself is inevitable in view of the statistical projections that have been offered on the number of US jobs that will be displaced because of outsourcing of business processes. The study, in fact, quotes one set of figures, which show that the number of US jobs offshored will grow from around 400,000 today to around 3.3 million by 2015, accounting for some $136 billion in wages. Of this 473,000 jobs from the IT industry will go abroad over the next 12 years representing eight per cent of all current IT jobs in the US.

Expectedly, such projections have raised an alarm in the US and the UK with a concerted move being currently underway to slow down the BPO movement. But the McKinsey study argues that the fears are misplaced. First, the projected job losses are peanuts compared to normal employment-scene changes triggered by traditional factors such as technological change, economic recession, changes in consumer demand, business restructuring and public policy, among others. Secondly, industries are being drawn to outsourcing because they want to become even more competitive, which really means that at the end of the process more benefits will be passed on to consumers. Thirdly, there is the pot of additional economic value waiting to be gained through means such as lower costs, increased revenues, repatriated earnings and the redeployment of additional labour into more effective fields of economic activity.

The MGI study concludes with the statistically-backed message that the US stands to gain 12-14 cents in net additional value from every dollar invested abroad in BPO activity. Indeed, "of the full $1.45 to $1.47 of value created globally from offshoring $1 of US labour cost, the US captures $1.12 to $1.14 while the receiving country captures, on average, just 33 cents". In view of this, reverting to protectionist measures — especially during election time — would be unfortunate because, as the study rightly says, the openness of the American economy and its inherent flexibility (particularly as far as the labour market is concerned) are "recognised widely as two of its greatest strengths", and to undermine them would merely be threatening the US's future wellbeing.

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