The Hindu Business Line : Outsourcing: Win-win for all

IN THE post-WTO (World Trade Organisation) era, trade barriers are falling as member-nations open out to free market. Goods and services have started moving from one nation to another more freely.

With ever faster communication shrinking the world rapidly, outsourcing and subcontracting have assumed truly international dimensions. The realisation that outsourcing can enhance profitability without sacrificing quality has prompted multinationals, in every sector, to increasingly take this approach. It is for the same reason that many corporate giants in the US, Europe, Australia, and Japan have opened International Procurement Organisations (IPOs) in developing countries including India, China, Mexico and Brazil.

Outsourcing to Indian entrepreneurs happens mainly in the IT sector, followed by medical transcription, automotive spares/components, engineering segment, and business processing.

The facts

While outsourcing has been a huge bonanza for many American and European corporates, it has also curtailed a number of job opportunities in the respective home countries.

Many highly paid local employees have either been terminated or laid off indefinitely. This led to a political uproar as more than 2.2 million people in the US alone lost their jobs in the last four years.

The recently-concluded US presidential elections has sensitised the US political system to the outsourcing policy practised by American companies. A federal legislation for restricting the business of outsourcing is under consideration by the US Senate.

Thirty-five American States have already tabled a legislation in their Legislatures to ban outsourcing of government contracts. US companies engaged in business activities related to finance, transport and those receiving government funding are also likely to be barred from outsourcing their work.

A paradoxical situation, indeed. On the one side, the US strongly advocates the universalisation of free trade practices, but the other contemplates legal restraints to outsourcing businesses from foreign lands. David Associates, an international human resource consultancy, in a research study, has stated that a lot of job opportunities are shifting from developed countries to the Asia-Pacific region with India, Malaysia, the Philippines, Mexico, and Brazil being the main beneficiaries.

The world's total market for outsourcing business has been increasing by 9 per cent annually, while the Indian market is registering an annual growth of 54 per cent.

Another global agency, Forrester Research has predicted that, by the end of 2005, the number of jobs outsourced would be close to 0.83 million. It also points out that the US companies face increasing pressure to curb outsourcing to developing countries even if labour in those countries is significantly inexpensive.

For instance, it costs $60,000 just to fly an empty aircraft from the US to Singapore for servicing/maintenance check. But the wage rates for skilled aircraft engineers in Singapore are so low compared to that in the US, that the flying cost is more that made up. US airlines have been following this practice to cut down on maintenance costs.

Similarly, Boeing outsources 60 per cent of its components, assemblies and sub-assemblies.

India Incorporated

India is fast becoming a popular outsourcing destination for major manufacturers across the globe. Global auto makers, such as Ford, GM, DaimlerChrysler and Volkswagen, have opened IPOs in India.

According to a REFCO research report, this alone could translate into a $15-billion market potential for India. Riding on the outsourcing wave the Indian auto component sector is on a roll and, for the first time, its exports have reached the $1-billion mark. Outsourcing assumed political overtones in the run up to the US Presidential election, with the Democrat contender, Senator John Kerry, making an issue of it. If the President, Mr George W. Bush, was more circumspect, perhaps, it was because some of his campaign material came from India.

Capital Communications, Washington, awarded HCL, Noida a contract to prepare a voters' list of 80 lakh people along with their phone numbers. Call centres in Noida and Gurgaon won contracts for assisting his campaign. Indian skills in software development are being acknowledged worldwide. Companies in Europe and the US are aware that the Indian IT industry provides quality services at highly competitive prices. With the West coming out of the post-9/11 slowdown, the Indian IT industry is regaining jobs. Apart from the biggies Tata Consultancy Services, Wipro, Infosys, and Satyam, a number of small software developers are also getting contarcts.

Today, India's contribution to the IT Industry is worth $16 billion accounting for 3.2 per cent of GDP. The exports in the next five years are likely to touch $50 billion.

Taking advantage of the cheap labour in developing countries, many MNCs have set up subsidiaries in India and elsewhere. In the past decade, US companies alone have invested $7 billion in their subsidiaries in India, reaping a net saving of more than $26 billion. Telstra, an Australian telecom company, for instance, saved more than $75 million a year by outsourcing many jobs to Indian enterprises.

This is a clear indication that, despite divided opinions in the US, Britain and other countries, corporate managements will continue to favour outsourcing. On the employment front, there are two schools of thought: One, that outsourcing is leading to massive unemployment; and, two, that it has not contributed to unemployment, as is sought to be made out. In fact, as pointed out in a recent report by the US Chamber of Commerce, the main cause of increased unemployment in the US, Britain and other developed countries is the enhancement in productivity due to continuing advancements in technology.

The report quotes the example of General Motors (GM) in the US. While three decades ago, the company used to employ over 4,50,000 workers to produce five million vehicles annually, it now employs less than 1,18,000 hands to turn out the same number of vehicles.

This reduction is mainly due to the evolution of designing, manufacturing, assembling and testing technologies including robotics.

A win-win situation

Then there is the impactof new technologies on the the problem of unemployment. One example is the introduction of computers and computerised technology in the banking industry in India. The initial uproar over the move to computerise operations, on fear of job losses, died down as more lucrative employment opportunities opened up elsewhere. So, the fear of losing jobs to technology was only short-lived.

The concept of outsourcing is also technology driven. It is based on the principle that one must outsource low-tech areas and concentrate on core activities, research and development and development of new technologies.

The profits from outsourcing could be used for further diversification and expansion. This would generate newer and larger employment opportunities. However, employees must be receptive and suited to these new openings.

A report prepared by McKinsey Global Institute for the US Chamber of Commerce has pointed out that: "A US company earns on an average a net profit of $1.12 to $1.14 by outsourcing work for which it pays $1.0 abroad." It has further stated that by outsourcing low paid jobs to foreign soil, US capital, intellectual or otherwise, can be utilised to create more profitable and higher income generating jobs.

The report also points out that by outsourcing call centre work to India and other developing countries, many American/European companies are also opening new markets in those countries. Call centres so established in India or other developing countries are being essentially equipped with American products such as Compaq Computers, Microsoft software, Lucent phones and Carrier air conditioners.

A `Catch- 22'

If the efforts of US Congressmen (under the leadership of Bernard Sanders) to legislate14 `Defending American Jobs Act of 2004" succeed, a Catch-22 will emerge. Corporates in the US will then have to depend on a highly paid work force even for low-tech jobs.

As a result, goods manufactured in US factories will become costlier in the world market and would, therefore, not be competitive, which may again put US companies under tremendous pressure of either closure or reduction in productivity; this again will result in job loss for many.

In-house outsourcing

To encourage outsourcing within the country, the Government of India, through the Ministry of Small Scale Industries, has been organising a number of Vendor Development

Programmes-cum-Buyer-Seller-Meets and Exhibitions.

These events bring both the buying and selling organisations into an environment conducive to business outsourcing. In addition, the Government of India is also encouraging the establishment of Sub-Contracting Exchanges (SCX), not only in the field institutions set up under its domain, but also in industry associations.

A Sub-Contracting Exchange is an entity that builds information on expertise infrastructure etc. to connect Small, Medium and Large Enterprises (SMEs) and facilitate a comprehensive relationship among them. Such an exchange is a store ouse of data on the capacities of the small-scale units as well as the requirements of the buyer. Matching the buyer-seller data through the Exchange also provides a roadmap for outsourcing.

(The author is Industrial Adviser, Office of the Development Commissioner, Ministry of Small Scale Industries, New Delhi.)