The Hindu Business Line : Outsourcing to offshoring, it is advantage India

OUTSOURCING by the US is assuming massive proportions. The reason is "it saves money, time and frees in-house staff to do work central to the company's core mission." What is saved? Thirty-forty per cent, estimates the solutions group, Loud Cloud. Its CEO, Mr Field Glass, says: "Anywhere from 10 per cent to 25 per cent of what they are spending on their labour contractors." Mr Tom Turnstall, Senior Consulting Manager, KPMG, who researched on outsourcing deals in the 1990s, thinks it is difficult to quantify the savings. Usually firms with higher-than-average overheads or those that are relatively small outsource. Now, outsourcing is giving way to offshoring or setting up offices in outside locations to get their work done. India, favoured for outsourcing, is also the choice for offshoring. Will they undercut existing units?

So far 12 per cent of IT and 3 per cent of non-IT companies in the US have outsourced or shifted work; 22 per cent of this was by the big companies. Many more are heading the India way. Reflective of this is the surging exports of software and traditional and non-traditional products. Offshoring would raise exports just as much. Of longer-term significance are research facilities which 100 Fortune 500 companies are setting up with impressive results already in thrust areas.

Companies are thinking of increasing outsourcing apart besides setting up their own offices. According to consulting firm Gartner, such IT services as e-business, automation and manufacturing computer networks are set to grow at 29 per cent and business process outsourcing (BPO)of accounting, pay roll management, checking on insurance claims, engineering and web designs are set to grow at 68 per cent between 2002 and 2007 (both at CAGR — Compound Annual Growth Rate). Another firm, Forrester Research Group, estimates that 4,50,000 computer jobs will move to India in the next 12 years, which is 8 per cent of US' total jobs in the sector. IDC, yet another firm, in collaboration with Assocham, projects that BPO jobs can increase at 32 per cent (CAGR), from 0.15 million to 0.60 million. Finance wise, Gartner estimates India's BPO earnings to grow from $1.2 billion to $13.8 billion.

What is US companies' evaluation? Forrester Research surveyed 145 American companies: Eighty-eight per cent thought foreign firms give better value and 71 per cent felt offshore workers did quality work. That could over 15 years move, says Forrester analyst Mr John McCarthy, 3.3 million jobs to India and other countries. The impact of this on the US economy is being hotly discussed. Gartner insists outsourcing will increase in spite of the contemplated legislation by US State governments. In the US, the new laws can be obviated by entrusting work to private parties which, in turn, outsource.

Addressing Computer Associates in Las Vegas, Mr Henry Kissinger, the legendary Secretary of State of the Nixon era, was "scathing" in his remarks about Americans losing jobs. "Careful thought should be given to prevent this. May be through incentives. Can America can remain a great or a dominant power if it is primarily a service economy?" True, over 70 per cent of Americans are in the service sector but the 23-24 per cent engaged in manufacturing turn out quality goods. The US is the only country that has had a consistently high favourable technological balance of payments.

The US-India relations are on a high, though that did not prevent objections being raised to the 1,95,000 H1-B visas being given to Indians; they were scaled down to the previous 65,000. Also, professional bodies such as the Institute of Electrical and Electronic Engineers (with 2,35,000 members) have made representations to US Congressional Committees. However, the US President, Mr George Bush, assured an Indian delegation that "he would seek to maintain a strong H1-B programme."

There are demands in Europe, though feeble, to block the entry of Indian professionals. British Telephone workers protested the transfer of facilities and jobs to India where the company is setting up two call centres. A compelling reason is the difference in wages. So, why is India preferred? And will it retain the present status? A Nasscom-Mc Kinsey's report highlights that if work is contracted to India there is a cost saving of 40-60 per cent, quality improvement of 3-8 per cent and productivity increase of 20-150 per cent.

India tops the list among the countries in the outsourcing arena. Global management consultancy firm A. T. Kearney evaluated the advantages of India's advantages by cost, environment and quality of people criteria. India is rated high for cost and the quality of personnel but slips badly in environment.

Competitors are moving up the ladder though Kearney believes India will be the first choice for some more time. A study of Kearney shows that nine out of 10 chief executives wanted to outsource to India.

Twenty-five per cent of the respondents wanted IT and auto component work to be given to India, 15 per cent favoured China and 13 per cent Mexico. India's well-educated, motivated and English-speaking workforce is the main factor that makes it the favourite.

India has some way to go in environment, especially infrastructure which needs to be upgraded. As regards labour, where India scores over most countries, China poses a threat. Ms Rita Terdiman, Research Director, Gartner, holds that new service providers have broken the stranglehold of India.

Microsoft plans to recruit 4,000 in the US but only 1,000 in India, which lays bare American fears. Unlike Microsoft other firms have not indicated relative recruiting plans. A substantial number of non-US students are obtaining degrees in different fields including IT. Is there a shortage of professionals in the US? What does it imply for outsourcing or offshoring by the bigger companies? Will foreign students who come for studies stay on in the US or go back because of offshoring? How does Microsoft's injunction fit into this?

Britain's Minister of Trade admitted a shortage of skills in the UK and Europe. That makes it advantageous to outsource work to India, more so because the British are familiar with India. Sixty per cent of UK info-tech permits have been given to Indians and that will happen with Germany also, despite competitors in Europe.

Contrary to the apprehension that outsourcing of work to India by the US is detrimental to the latter's interests, a Mckinsey study shows the parent company retains equity control. Including IBM, Hewlett Packard, Oracle, Accenture, and Microsoft, 12 companies have made acquisitions in India involving $3,858 million. Look at the economics: For every dollar of investment, $1.45-1.47 value is created. Of this, the US receives $1.12-1.14. India only 33 cents. American investors and customers get 58 cents and exporters 5 cents. Those laid off can work in the newer investments made from profits. The frontiers of technology are widening, so also job opportunities. Mckinsey's study shows how offshoring is beneficial. Will offshoring displace outsourcing and by how much?

Keeping the trade-offs in view, the Information Technology Association of America (ITAA) justified outsourcing and offshoring. The Association argued that the IT industry being global the US should keep in view the changing market conditions and customer expectations. Ignore them, and the country's "long term competitiveness suffers." IT companies get 50 per cent or more of their total revenues from overseas markets "for meeting the needs of overseas customers, off shore product development may be required to preserve adequate localisation".

For the same reason, ITAA and its President, Mr Harris Miller, are against "undue restrictions on the issue of visas." The Association criticised the political class for fuelling feelings against outsourcing and offshoring. It clearly felt the four US States contemplating legislation and those advocating restrictions on visas should review their thinking.

At the same time ITAA is all for improving educational and teaching standards within the US. Where different countries are trying to out do each other, the basic solution lies in the free movement of capital and personnel. Of importance from India's point is not the setting of more educational institutions but of emphasis on the quality of teaching and training. They have to go up the value chain to retain their present advantage. Indians have to learn new programming techniques and also languages such as German, Japanese, Chinese and so on.

(The author is a former Director of Assocham.)

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