Have you realised the logic recently? Everybody talks about business process outsourcing, outsourcing or offshoring of jobs to India. More and more survey data and documents are being published describing the facts and outlining the fears. We don’t necessarily want to reiterate what has been said all around but let us look at some numbers that are not necessarily mentioned together all the time:
It has to be admitted that the numbers are huge, and we understand the fear. Forrester Research Inc. estimates as many as 3.3 million U.S. service jobs will migrate offshore by 2017. And the American Electronics Association reports that more than 770,000 U.S. technology jobs have been lost since 2001. And the recent jobless recovery in the US is adding fear, especially when employees learn that their employers hire overseas.
But is it that much?
BusinessWorld Philippines (March 5, 2004) states that India's call center revenues last year amounted to one-fourth of one per cent of America's domestic call center expenditures. Even if India were to double its work volume every year, India would not reach three per cent of the US domestic volume until 2006. But this is for callcenters only.
But further: Goldman Sachs tallied up the number of employees of the top American IT services companies (the likes of IBM Global Services and Accenture) and compared this total with that of the top six Indian IT firms (Infosys, Wipro, etc). It found out that the US employees outnumbered the Indians by a ratio of 8 to 1.
IDC estimated total global IT services spending in 2003 at US$454 billion. On the other hand, the Indian software association NASSCOM estimated total 2003 India software and services exports at US$7.2 billion, or less than two per cent penetration of the world market.
The global offshoring market is pegged at US$30-35 billion in 2002 by McKinsey. This is projected to grow by 30-40 per cent annually over the next five years – which would then reach around US$155 billion (taken US$35 bn as the basis and a growth rate of 35%) - which is pretty huge and surely puts pressure on affected countries.
Let us see, how the market works and start by reiterating the drivers behind outsourcing? The main reasons are:
Development of infocommunications – it is easy for companies to operate frictionless across the globe on a 24/7 schedule;
Companies look for cost savings – The Walmartisation of the economies puts the pressure on companies to lower their prices for products. In addition, countries like China and other emerging tigers establish companies after companies after companies. The ability to put together pieces of different products together quickly via contract manufacturing, and brand the final product under your own name allows companies to enter markets quickly, even if they have not much of an experience in the market. Just do it is the motto here. The markets than become flooded with products, providing many more choices to consumers. And the products are good, most of the time or at least provide value for money – and how much can you expect if a full-fledged DVD recorder costs way less than US$100;
Consumers were taught over the last couple of years that many products are free or extremely – look at the peer-to-peer networks on the Internet, or the time before the dot.com bust, when companies offered products on the Internet for free or at a loss. Nowadays, there is a sale anywhere – prices drop dramatically. And as a consequence, the function that you get low quality if you buy something cheap doesn’t work anymore. Consumers learnt to go for cheap products, expect high quality, and were trained to think like that by the companies themselves. Value propositions that allowed for better bargaining power are gone, and only subtly come back – think Starbucks. Another reason for companies to slash costs wherever possible to compete in a race that ultimately might be lost.
Ultimately, the demographic balance will also favour outsourcing. The educated white-collar "boomer" generation in the US will be retiring in this decade, and will be replaced by a successor generation which is much smaller in number. There will thus be a skilled worker shortfall in the US of about 5 million by the end of this decade (BusinessWorld Philippines, March 5, 2004).
India is in the news as the main destination for outsourcing, but market forces work against it already, which might be a surprise for some:
The market for good employees is empty – those that are good are employed already. Other employees are hired and subsequently, might not provide the level of quality service that is needed – a danger for companies to damage their reputation.
Poaching of good employees becomes rampant – Companies with big pockets poach good employees from other companies, putting pressure on salary levels. According to a recent Hewitt-Nasscom Survey, conducted on small and medium IT enterprises (SMEs), 45 per cent of the respondents said they will seriously consider a job switch for a 20 per cent higher compensation. This could go up to as much as 50 per cent in the next two years.
Employees, especially those in lower ranks, which might still earn less, see job-hopping as a way to increase their salaries. Turnover rates of up to 40% in the call-center industry are common. Many multinational firms are blamed for that;
Complacency: The competition for India is there. Infoworld (March 8, 2004) quoted Ravi Ramu, CFO of MphasiS BFL Group as saying: "It's unlikely that anything can go wrong for the Indian outsourcing industry. There is no competition for India at present, as countries like the Philippines and China cannot scale to offer the large number of skilled, English-speaking people that we have in India." – and this is exactly the reason, why companies and countries fail. It is the feeling of being unstoppable and unbeatable which makes them complacent! Goldman Sachs research has already identified the five top countries today for cost-effective outsourcing of IT services and business processes. These are (in descending order of business volume): India, the Philippines, China, Mexico, Russia. And a recent BusinessWeek article had the headline: Forget India – Let’s go to Bulgaria (March 1, 2004).
Other reasons are based on geopolitical risks, social upheaval, lacking infrastructure – India is not necessarily world class in any of these.
These are the dangers for India. What is the remedy? Indian outsourcers say they are moving up the value curve, from primarily software coding and maintenance to new areas such as IT consulting, systems integration, infrastructure management, package implementation, and product development, since lower-valued service like call-centers becomes a commodity.
This will put more pressure on the US and other countries to move up – Nandan Nilekani, CEO of Bangalore-based Infosys Technologies, succinctly addressed the transformation in January 2004 at the World Economic Forum in Davos, Switzerland. "Everything you can send down a wire is up for grabs."
It is a scary world out there, but it also provides great opportunities. Is your company prepared? Has it strategies in place to play along the game, or stay atop? Be sure to do it now, since tomorrow, it might be too late.
(By Asia Business Consulting)
