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Business Process Outsourcing and India By

Sumitro Mukherjee Baroda, Gujarat, India Email: [email protected]

ABSTRACT

Business Process Outsourcing is the leveraging of technology or specialist process vendors to provide and manage an organization’s critical and/or non-critical enterprise processes and applications. Outsourcing, Offshore-Outsourcing and Offshoring are used interchangeably despite important technical differences. Outsourcing involves the transfer of organizational function to a third party; when the third party is located in another country the term Offshore-Outsourcing should be used. Offshoring in contrast, represents the transfer of an organizational function to another country, regardless of whether the work stays in the corporation or not. Outsourcing and offshoring are not new concepts to the global economy. Earlier, offshoring was mostly restricted to manufacturing through technology-transfer during the maturity and decline phases of product life cycle. Major advantages of outsourcing are cost-reduction, comparative advantage by division of labour and economies of scale, lower turn-around time, data-backup for disaster management. Areas of concern are service quality, data-theft, attrition rate, privacy laws and personalinformation misuse and credit-card frauds. There are other issues also like job-lose in the outsourcing country, cultural differences and information security. The Indian outsourcing industry is growing fast and has become a major investment area. With increased focus on information security and a comprehensive IT act it is going to get a further impetus in coming years.

1 Electronic copy available at: http://ssrn.com/abstract=1014329

DEFINING ‘BUSINESS PROCESS OUTSOURCING’

‘Business Process Outsourcing’ (BPO) is a broad term referring to outsourcing in all fields. It can be defined as ‘an organization entering into a contract with another organization to operate and manage one or more of its business processes (Sharma 2004).’ However, a more technical definition would be ‘BPO is the leveraging of technology or specialist process vendors to provide and manage an organization’s critical and/or non-critical enterprise processes and applications.’ 1 A BPO differentiates itself from a typical third party ‘Application Service Provider’ (ASP) by either putting in new technology or applying existing technology in a new way to improve a process. BPO includes the software, the process management, and the people to operate the service, while a typical ASP model includes only the provision of access to functionalities and features provided or 'served up' through the use of software, usually via web browser to the customer. Use of a BPO as opposed to an ASP usually also means that a certain amount of risk is transferred to the company that is running the process elements on behalf of the outsourcer. Business segments typically outsourced include information technology, human resources, facilities and real estate management, and accounting. Many companies also outsource customer support and call center functions, manufacturing and engineering.

In recent years, with rapid development of information technology, business process outsourcing is increasingly becoming the delegation of one or more IT-intensive business processes to an external provider that in turn owns, administers and manages the selected process based on defined and measurable performance criteria. And thus it is now one of the fastest growing segments of the Information Technology Enabled Services (ITES) industry. However, it is prudent to categorise the IT-intensive processes into Information Technology Outsourcing (ITO) and Business Process Outsourcing (BPO) depending on the extent of decision making ability of the third party ASP.

Information technology outsourcing involves the provision of some or all information systems by one or more service providers wherein key decision rights associated with those services are conferred upon the service provider. Typical functions that may be outsourced in an ITO include: data conversion, database administration, help desk, content development, application development,

systems

administration,

mainframe,

network

management

and

website

development functions.

Business process outsourcing occurs when an organization turns over the management and optimization of a business process to a third party that conducts the activity based on a set of predetermined performance metrics. Typical business processes outsourced include call center, HR administration, finance and accounting functions.

1

http://www.studentshangout.com/index.php?showtopic=23056&hl=BPO

2 Electronic copy available at: http://ssrn.com/abstract=1014329

The key distinction between ITO and BPO is that while ITO is intended to lower costs and introduce new efficiencies (as well as more advanced technologies), IT outsourcers do not take on the direct responsibility for accomplishing the business results. In contrast, with a BPO, the outsourcing firm not only takes over administrative responsibility for a technical function but also assumes strategic responsibility for the execution of a complete, business-critical function. This additional step can introduce new efficiencies and cost savings but it also makes it possible for the outsourcer to deliver important strategic benefits to the client customer.

OUTSOURCING AND RELATED CONCEPTS

There are few similar and related terms like outsourcing, offshoring, offshore-outsourcing etc. that are often used while discussing about business process outsourcing. However, these are used interchangeably in spite of having important technical differences. Let’s try to differentiate among some of these terms.

‘Outsourcing’ refers to the strategic use of outside resources to perform activities traditionally handled by internal staff and resources. It is a strategy by which an organization contracts out, on a long-term basis, major functions to specialized and efficient service providers who become valued business partners. It is often defined as the delegation of non-core operations or jobs from internal production within a business to an external entity (such as a subcontractor) that specializes in that operation. It also includes management and/or day-to-day execution of an entire business function by a third party service provider. A common misconception about outsourcing is that it involves little more than a relocation of jobs. More than jobs, however, are affected by a company's decision to outsource. Competencies get outsourced, and for any organisation, competencies are a combination of processes, people and attitudes. A related term, ‘Offshoring’, means transferring work to another country, typically overseas. Offshoring is similar to outsourcing when companies hire overseas subcontractors, but differs when companies transfer work to the same company in another country. Offshoring can be defined as relocation of business processes to another country, especially a country overseas. Offshoring can be seen in the context of either production offshoring or services offshoring. The economic logic in offshoring is the same as in the division of labour (Evans 2006).

In general, outsourcing refers to work done by people other than a corporation’s full-time employees and when outsourcing involves people doing the job in another country, it is known as offshoring. In other words, outsourcing means sharing organizational control with another organization, or a process of establishing network relations within an organizational field. Offshoring on the other hand, represents a relocation of an organizational function to a foreign country, not necessarily a transformation of internal organizational control (Dey 2004).

3 Electronic copy available at: http://ssrn.com/abstract=1014329

‘Offshore Outsourcing’ is the practice of hiring an external organization to perform some or all business functions in a country other than the one where the product or service will be sold or consumed. This can be contrasted with ‘Offshoring, in which the functions are typically performed by a foreign division or subsidiary of the parent company. To be consistent, outsourcing in corporate context represents an organizational practice that involves the transfer of an organizational function to a third party. When this third party is located in another country the term offshore outsourcing makes more sense. Offshoring in contrast, represents the transfer of an organizational function to another country, regardless of whether the work stays in the corporation or not. For the ICT (Information, Communication and Technology) industry and its customers, the primary driver for offshore outsourcing is the reduction of costs. Some estimate that costs can be reduced by 40 percent and sometimes by as much as 70 percent for offshore destinations such as India, China and the Philippines. These cost savings are directly attributed to reduced labour and other business costs. 2

‘Nearshore Outsourcing’ and ‘Out-tasking’ are two other related terms. ‘Nearshore Outsourcing’ is a form of outsourcing in which functions are relocated to cheaper yet geographically close locations. In the case of the United States, the most obvious nearshore jurisdictions are Canada and Mexico. ‘Out-tasking’ refers to turning over a narrowly-defined segment of business to another business, typically on an annual contract, or sometimes a shorter one. This usually involves continued direct or indirect management and decision-making by the client of the outtasking business.

BENEFITS AND PITFALLS OF OUTSOURCING

To have a better understanding of the recent BPO boom and its impact on various countries, it is important to have a fair knowledge of the various benefits and possible pitfalls of business process outsourcing. Clearly there are strong economic reasons to move customer contacts abroad, but there are also equally compelling quality and growth-related justifications for this decision. Some of the top reasons companies choose to outsource internationally include:

2



To obtain expertise, skills, and technologies.



To increase flexibility.



To improve operating performance.



To reduce costs and investments in assets.



To improve credibility and image.



To expand capacity.



To acquire innovative ideas.



To accelerate expansion.



To increase product and service value, customer satisfaction, and shareholder value.

Global Sourcing Issues Paper, World Information Technology and Services Alliance, February 2004

4

However, it is true that outsourcing is a business decision that is often made to lower costs or focus on competencies and it is characterized by expertise not inherent to the core of the client organization. Cost becomes a major deciding factor as the overhead costs of customer service are typically less where outsourcing has been used, leading to many companies, from utilities to manufacturers, closing their in-house customer relations departments and outsourcing their customer service to third party call centers. On the other hand, between workers having different skills, letting workers focus on their skill set means more goods and services for all. If some people can use some of their skills more cheaply than others, then those people have the comparative advantage. That is the idea that countries should freely trade the items that cost the least for them to produce. In neoclassical economic theory, this will provide for more goods and services for all, and at a lower cost. In Marxian economic theory, this process is assumed to raise the rate of exploitation and result in a more unequal distribution of wealth and income. In other words, some benefit from the process, either directly or indirectly, while others may be worse off. But in either way, focus would remain on the competencies.

The factors most commonly cited in conjunction with a decision to engage in offshore outsourcing include: •

Alignment of global sourcing strategy with business objectives;



Cost savings;



Compensation costs;



Tax and regulatory costs;



Infrastructure costs (including telecommunications);



Experience and skills;



Labor force availability;



Education and language capabilities;



Attrition rates;



Geo-political stability;



Country infrastructure;



Cultural adaptability and similarities;



Security of intellectual property;



Proximity; and



Favorable exchange rates (Ling 2004).

Multinationals are also increasingly citing strategic reasons for going offshore, such as reducing product-development times, increased speed to market, finding new talent, access to qualified personnel etc. Now companies are offshoring innovation and product development and working 24/7 with tech centers around the world to reap the benefits of outsourcing (Engardio 2006). In general, outsourcing works best in such areas as technical expertise for writing codes or billing procedures that may not be a company's core strength. And keeping aside the benefits of cost savings, outside expertise, service quality improvement and increased focus on their core

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business, those companies that have made innovation part of the process have seen the greatest rewards. And those success stories give rise to the following motivation factors towards BPO gaining momentum: •

Factor Cost Advantage



Economy of Scale



Business Risk Mitigation



Superior Competency



Utilization Improvement

On the other hand, the peoples’ perspective towards joining and leaving a BPO are:

Reasons for Joining

Reasons for Leaving



Did not get a better job.



No growth opportunity / lack of promotion



Find nothing better to do.



For higher Salary



Education level doesn't matter



For Higher education



Good work environment



Misguidance by the company



Good Benefits



Policies and procedures are not conducive



Flexibility of time



No personal life



Attractive life style



Physical strains



Transport facility



Uneasy relationship with peers or managers

Off late, outsourcing has become a staffing option that many corporations have tried, and while some has failed, some has simply refused to continue. The BPO business, however, is intensely competitive, operates on low margins and is characterised by high employee turnovers. 3 High attrition rate essentially creates shortage of manpower which in turn affects the service quality. This happens more with the replacement staff; one of the most prominent complaints being the expectation that the replacement staff will have more trouble communicating with customers. Apart from that, one of the more common pitfalls of outsourcing is the reluctance of the companies involved to open up and share secrets, preventing them from building transparent processes that cross between them. Opponents point out that outsourcing sends work overseas, thereby reducing domestic employment and domestic investment. Many jobs in the InfoTech sectors – such as data entry, computer programming, and customer support – have been or are potentially affected. There are different views on the impact on society, which reflects the attitude of Protectionism versus Free Trade. Some see it as a potential threat to the domestic job market and ask for government protective measures, while others (and not just corporations) see it as an opportunity. Though IT has made a profound impact in the management and operations of a few sector-specific global corporations, it has failed to improve the terms of trade in favour of developing countries. Without the physical transfer of knowledge workers to US or Europe, a 3

BPO: Caution Ahead, EPW Editorials, March 2004

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massive ‘brain drain’ from developing countries can be organised now, at a much cheaper rate. And the patent right on any invention rests with the corporations. And few other inhibitors include: •

Cultural misunderstandings;



Project management difficulties;



Infrastructure failures;



Security and privacy considerations;



Language barriers;



Political factors;



Inadvertent knowledge transfer; and



Contract and liability issues in foreign legal system.

As a result there has been a case of failures in the BPO sectors. Some MNCs have started winding up their operations, for some data-security has become a major issue. The failures cited in some of these cases range from customer service agents' ignorance of 'cultural' issues of home countries, to 'thick accents', lack of technical proficiency, to credit card frauds and misuse of personal information. So when outsourcing and offshoring continue to be problematic, firms start moving the work back in-house, which can again cause internal problems.

THE GLOBAL SCENARIO

Business process outsourcing has a long history, and has grown rapidly during the last decade. Globalization is not new when the entire business space is considered. Even prior to India’s emergence as an offshore location, outsourcers from USA, UK and other developed countries had been opening service production facilities offshore in the Caribbean, Latin America, and, particularly, Canada. Beginning in about 2000, some began operations in the Philippines.

Outsourcing and offshoring are not new concepts to the global economy. Earlier, offshoring was mostly restricted to manufacturing. Management gurus have explained why technology was transferred to less developed countries when it entered into the maturity and degradation phase. Raymond Vernon (1966) attempted to explain patterns of international trade by observing a circular phenomenon in the composition of trade between countries in the world market. Then there was another type of offshoring. Strict environmental regulations in developed countries compelled multinationals to relocate many polluting industries to underdeveloped countries.

Outsourcing became a popular buzzword in business and management in the 1990s largely because of a growth in the number of high-tech companies in the early 1990s that were often not large enough to be able to easily maintain large customer service departments of their own. In some cases these companies hired technical writers to simplify the usage instructions of their products, index the key points of information and contracted with temporary employment agencies

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to find, train and hire generally low-skilled workers to answer their telephone technical support and customer service calls.

In the late-1990s fears over the Y2K problem coincided with the frenzied, euphoric internet bubble. Then outsourcing came to the rescue of offices overloaded with work with a seemingly surefire way to get jobs done faster and more efficiently. Sharply rising demand for labour for the internet boom and for tackling the Y2K problem led to a big shortage of IT staff in the US in the late-1990s. US companies began sending more back office IT tasks to India, including pay roll, record keeping as well as software developing. Some set up their own operations in India to cut out the profits pocketed by local contractors, control quality and protect the security of their work (Chithelen 2004).

For some companies, however, what worked in theory didn't always work in reality. While some tech companies farmed out call centers to India, the resulting language problems, cultural differences and information security made the process less than seamless for some customer or tech support services. Nevertheless, more and more companies started outsourcing their noncore key business operations to low-cost developing countries. The driving factor behind this development has been the need to cut costs during the recession that began before the events of September 11, 2001 and deepened since then, while the enabling factor has been the global electronic network that allows digital data to be accessed and shipped instantly, from and to anywhere

in

the

world.

Some

figures

from

a

recent

survey

carried

out

by

PriceWaterhouseCoopers:

Size of Global Outsourcing Market (US$)

Global BPO Market by Geography

2000

119 Billion

United States

2005

234 Billion

Europe

2008(est.)

310 Billion

Asia-Pacific (incl. Japan) Rest of the World

59% 27% 09% 05%

Global BPO Market by Industry

Employee Cost (Per Annum in US$)

Information Technology

USA

19,000 17,000

43%

Financial Services

17%

Australia

Communication (Telecom)

16%

Philippines

9,050

Consumer Goods/ Services

15%

India

7,500

Manufacturing

09%

Rapid developments in information technology have changed the rules for a section of the global economy. Many transnational corporations (TNC) have restructured their organisations, and switched over to a geocentric mode from a polycentric one to optimally utilise global resources. As products life has become shorter, the traditional concepts of technology life cycle (TLC) and product life cycle (PLC) have become redundant. High end services like R&D activities, product

8

designing, technical and management consultancy, software programming, IT enabled financial and customer care services, which were previously reserved for developed country employees, are being increasingly transferred to developing countries like India, China, Brazil and Philippines.

Today, business process outsourcing has become a global phenomenon encompassing a large number of countries across the world. World’s outsourcing locations can be placed into four basic categories or tiers: The World’s Leading Business Process Outsourcing Locations, By Importance Tier

Country

Tier 1

India

Tier 2

China, Canada, the Czech Republic, Hungry, Ireland, Israel, Malaysia,

(Challengers)

Mexico, Australia, Chile, New Zealand, the Philippines, Poland, Russia, Spain, and South Africa.

Tier 3 (Up and

Belarus, Brazil, the Caribbean, Egypt, Latvia, Mauritius, New Zealand,

Coming)

Ukraine, Venezuela.

Tier 4

Bangladesh, Cuba, Sri Lanka, Thailand, Korea, and Vietnam.

(Neophytes) Source: Deloitte Research.

The following table presents the strengths and weaknesses of some major Business Process Outsourcing nations: Leading Business Process Outsourcing Alternatives: Strengths and Weaknesses Country

Strengths

Weaknesses

South

Low-cost economy, similar time zone to

More expensive than India, weaker

Africa

EU, English speaking workforce

technology skills, lack large talent pool.

Philippines

Skilled English speaking workforce; 94%

Political instability, smaller and costlier

literacy rate; educated workforce, cultural

workforce than in India. Universities

similarities; improved telecommunications

graduate only 70,000 IT graduates

infrastructure; compatible legal and tax

annually, lack of quality record in

structure; low absentee rates; sizable

software.

presence in call centers, medical transcription, animation. Russia

Low-cost economy, good technology

Weak infrastructure, limited linguistic

skills, large pool of engineers and

capabilities, smaller workforce than

scientists, competitive universities.

India, limited global integration, poor business environment.

Canada

English-speaking workforce, cultural

High cost of labor, relatively costly

similarities, good technology skills,

location, lack large talent pool.

proximity, good infrastructure.

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China

Low-cost economy, advantages in

Limited English capabilities, weaker

manufacturing and IT,

project management capabilities than

telecommunications, power, and road

India, lack of good quality record in

infrastructure better than in India; growth

software, lags in terms of experience

in software development and other areas

with offshoring, high attrition rates,

where strong English skills are not

experienced engineers can be up to

necessary. Position in the global

25 percent more expensive than India,

marketplace, special processing zones,

tax system, complicated legal

political stability.

structure, IPR problem, lack of standards.

Mexico

Low-cost economy, proximity; potential for

More costly than India, good mostly for

Spanish speaking call centers.

low end jobs, lack large talent pool, limited English capabilities.

Czech

Competitive cost structure, good

More expensive than India, lack large

Republic

technology skills, stable business

talent pool.

environment, strong education system, proximity to EU, good telecommunications infrastructure. South

Good technology skills, high literacy rate

Relatively costly location, smaller

Korea

and well educated workforce, stable

workforce than India.

business environment, good telecommunications infrastructure. Malaysia

Ireland

Low costs, primarily for infrastructure; high

Smaller workforce, lack large talent

level of global integration.

pool.

English speaking workforce, cultural

Relatively high compensation costs,

similarities, stable business environment,

lack large talent pool, has migrated to

well educated workforce, proximity to EU,

higher value added activities.

good brand quality. Sources: NASSCOM, HCL Technologies, Forbes, AT Kearney.

From the beginning USA has been the frontrunner among the countries which frequently outsource to other countries. US companies cut jobs and move them to India due to the availability of skilled, English speaking labour for a fraction of the wages paid in the US. Finding cheaper labour is an easy, short-term fix to help cut losses/raise profits, especially at service companies where labour often accounts for a big portion of total costs. Rising profits mean larger bonuses and other big financial gains for top executives, including through generous self-awards of low priced stock options and grants at most publicly traded companies. The whole process ion turn helps the economy of both the countries. A widely quoted recent McKinsey study revealed that more than three-fourth of the value being created in the global economy through offshoring

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goes to US and receiving countries like India get only 22 percent. The report also mentions that by offshoring $1 of US labour costs, $1.45 to $1.47 in value is created globally. Of this, the US captures $1.12-$1.14 and receiving countries get only $0.33. 4 The following table would give an idea about the volume of US jobs moved or expected to move offshore in next few years: Number of U.S. Jobs Moving Offshore Job Category

2000

2005

2010

2015

Management

0

37,477

117,835

88,281

Business

10,787

61,252

161,722

48,028

Computer

27,171

108,991

276,954

72,632

Architecture

3,498

32,302

83,237

84,347

Life Sciences

0

3,677

14,478

36,770

Legal

1,793

14,220

34,673

74,642

Art, Design

818

5,576

13,846

29,639

Sales

4,619

29,064

97,321

26,564

Office

53,987

295,034

791,034

1,659,310

Total

102673

587593

1591100

2120213

Source: U.S Department of Labour and Forrester Research, Inc.

This trend is visible in every sphere. Particularly in the commercial sphere, the customers of IT services are under intense pressure to reduce costs in order to be competitive in the global market. IT service companies, in turn, are being driven to reduce their costs by sourcing globally in order to remain competitive in today’s marketplace. Globally business process outsourcing is a rising tide expected to experience a compound annual growth rate of 10 percent in the next three years. Forrester Research has predicted that at least $136 billion in wages will shift from the US only to low cost countries by 2015 5 while McKinsey & Co. predicts global market for IT-enabled services to be over $140 billion by 2008.

Nearly 75% of US and European multinational companies now use outsourcing or shared services to support their financial functions. 72% of European multinational companies have outsourced financial functions over the past two years. Additionally, 71% of European companies and 78% US companies plan to use these services in the next 12-24 months. Overall, 29% of US and European companies expect to increase their use of outsourcing of financial functions, with spending expected to be nearly 16% higher than current levels.

The U.S is expected to be the largest source market for the ITES accounting for nearly 60% of the market. The share of the offshore component is expected to increase to 23% of the total spending by 2007. Europe is expected to be the second largest market for the ITES sector, accounting for

4

The Economic Times, September 12, 2003

5

The Statesman, March 25, 2004

11

22% of total spending which is expected to reach Euro 129 billion by 2008. U.K and Ireland being the main markets for BPO in Europe are likely to account for about 45% of the European market followed by countries like Germany, Switzerland and Austria with a 20% share. The fastest growth expected within the European market is in the U.K and Ireland with a CAGR of 14%. However, the maximum growth is expected in the Asia-Pacific region, with ITES-BPO spending to grow at 14.7% for the next two years.

However, off late, there has been much hue and cry in the US over outsourcing of white collar jobs to developing countries, especially India. The whole issue received much media attention before the US presidential election due to stunted job market there. Unlike the blue collar jobs going to Mexico and China, the jobs sent to India are white collar and professional jobs. People in such jobs are more visible, vocal and better organised as lobbying groups. As a result, some quarters have advocated government action to limit offshore outsourcing. The Connecticut democrat’s amendment, added on to a bill to restructure corporate taxes, would prohibit outsourcing in three areas of government contracting: privatising of federal work, federal procurement of goods and services and state government procurement using federal funds. Another bill introduced by representative Bernie Sanders, a Vermont independent, would bar companies from receiving federal grants, loans and loan guarantees if they lay off a greater percentage of workers in the US than they lay off in other countries. This movement appears to be particularly strong in the U.S. and to a lesser, but growing degree in countries such as the U.K. and Australia.

As the industry is witnessing a phenomenal growth, more and more countries are entering the outsourcing arena and the old players are trying to rewrite the global outsourcing equation. Though India is still the most preferred outsourcing destination, but countries like Philippines, Canada, China are catching up fast. Most developing countries in Asia and elsewhere are trying to emulate India’s success. The Philippines is already successful and other countries such as China, Vietnam, Bangladesh and Sri Lanka are making significant investments in education and infrastructure in an effort to obtain offshore business. Building on a strong R&D foundation, transitional; economies, such as Russia, Ukraine and Belarus, have demonstrated strong capacity for addressing complex technical issues. Altogether, Eastern Europe has become a strong IT region with broad potential for providing global outsourcing services, particularly in the “nearshore” IT outsourcing to Europe. Not all countries entering the offshore outsourcing market are entering at the low-end. The Ukraine, for example, is attempting to leverage its considerable project management and high-end skills obtained through years of doing work for the Russian military.

As India moves more up-market in outsourcing, the Philippines is fast gaining a share of the customer-contact call center business. It might be low-end and low-margin, but for the Philippines it has been an employment boon. Call centers in the Philippines have “the lowest unit costs, the

12

highest quality and the lowest attrition of any centers in the world….(they) are well placed not only to compete, but to dominate in the sector." (Vikas Kapoor, CEO, IRMC) This will ensure more call center operations are attracted to the Philippines, where there is still a plentiful supply of Englishspeakers and new graduates, and average wages are about 20 percent lower (Greenlees 2006).

BUSINESS PROCESS OUTSOURCING IN INDIA

The business process outsourcing industry in India has grown by leaps and bounds and as its size increases so does its competitive advantage. Compared with 1996 when this Industry had started inroads into the United States with Outbound Tele-marketing campaigns, today the vehicle for these calls-the internet has become cheaper and more reliable for the average Indian business.

Up until the mid-1990s, Indian companies were hired mostly to do tedious work – writing repetitious code for software programs and so on. These jobs were ignored by most information technology (IT) professionals in the US, since the salaries were low and the offices were often white collar sweat shops.

Then, in the late-1990s there was the fear that unless older computer systems were patched up or upgraded, they would crash and cripple operations when the date switched to the year 2000 (the Y2K problem). The software patches said to be necessary for handling the Y2K problem also mostly involved tedious work that boosted demand for Indian IT services.

The expansion of high speed telecommunication links between India and the US, the growth of internet-based communications and the declining costs of computers and communications also vastly aided the outsourcing trend. The falling costs and higher reliability of newer communication systems were especially important to the shifting of less skilled and relatively lower wage telephone call service jobs from the US to India.

Today the jobs moving from the US to India cover a range of professional skills, in addition to IT work and call centres, including debt collection, equity and bond analysis, accounting, filing income taxes, clinical drug research and so on.

The sector witnessed considerable activity during 2004-05, including a ramping up of operations by major Indian and MNC players and stepped up hiring. The domestic BPO market, catalyzed by demand from the telecom and BFSI segments, matched the growth of BPO exports. The market experienced maturity and consolidation, a result of numerous mergers and acquisitions taking place within the sector. There were over 400 companies operating within the Indian BPO space, including captive units (of both MNCs and Indian companies) and third-party services providers.

13

With increased focus on outsourcing, the Indian BPO industry remains on a growth path, emerging as one of the key investment markets in the country. Global scenario is also in favour of India’s role in the outsourcing market. Indian service sector is also witnessing a steady growth. Driving India’s service-sector growth is an ever-expanding definition of what Indians are able to do. Outsourcing services now run the gamut from cold-call marketing to computer programming to technology-infrastructure management to medical services that include reading X-rays overnight, even to R&D. As India’s service capabilities ramp up, the limitations mainly lie with Western companies and their own flexibility, or lack of it. However, the biggest India opportunities to date for U.S. companies have not involved catering to consumers, but rather hiring operators, programmers, and other back-office support personnel. India handles about $10 billion a year of this business-process outsourcing, including call centers and order processing (Curran 2007).

The extent to which the West has come to depend on these services not only has created a sizable business-services industry in India but also has made many of its major players’ prominent names (e.g. Wipro, Genpact, IBM Daksh, HCL, Infosys etc.) around the business world. Their awesome growth reflects the broad range of services these companies and their peers offer. The demand for outsourcing work in India will continue to grow in the coming years as long as it is cost effective and provided a high quality of service is maintained. To prove the point global majors like GE, Citigroup etc. are pumping in billions of dollars here. But which factors are actually tilting the scale in favour of India and which are the possible areas of concern, should be looked into.

None of the above mentioned big names, especially non-Indian corporations, dismiss India’s stillconsiderable problems – maddening bureaucracy, a dizzying tax code, poor infrastructure, persistent though declining mass poverty, even bouts of terrorism. But they are swayed by the alluring demographics (including an average age of just 26), trustworthy property rights, a common language, and the sheer market potential that makes India worth the bet. Even for midsize and smaller companies, Indian opportunities are too great to ignore, whether looking for chance to lower costs with an India-based call center or data-processing operation, or to position themselves to market tomorrow’s consumer durables. There is no doubt a big and growing US demand for skilled Indian labour. On the low-tech business-process front in particular, India’s cost advantages remain considerable. Operators are paid about $250 per month, versus roughly $1,800 per month in the U.S. Programmers and highly educated employees earn more but are still much less expensive than their American counterparts. And because of a shakedown in the businesses of some of the Indian BPO majors, the negotiating power of small and mid-size US companies in new outsourcing deal may improve. What that means is that organizations like General Motors are moving from long contracts with one provider to multiple bids across a range of services. While the big winners are likely to be India’s IT giants, the movement of accounts could give smaller U.S. companies the opportunity to strike a good deal. With rising infrastructure costs in Tier-I cities (e.g. Mumbai, Delhi, Bangalore, Hyderabad etc.) many BPO's are shifting

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operations to Tier-II cities like Ahmedabad, Indore, Jaipur, Kochi, Kolkata, Nagpur etc. which are offering some amount of cost advantages to the crunching profit margins of the BPO’s. Added to that, shifting of focus on data and service-quality and security issues is going to give a further impetus to this industry.

However, after the vision of bright and promising future for Indian BPO sector, a question remains. Could a withdrawal from India in the near future be as rapid as the speed with which US companies currently seek to get in? This is a question worth considering, especially in the case of telephone call centres, where moving to a new geographic location is cheap and easy to do. The history of call centres in the US also bears this out. Call centres were moved from high cost urban areas to low wage, low rent cities in the mid-west and the south of the US and then on to Canada and Ireland and now to India. Therefore, the India BPO 'success story' needs to be tempered with a little bit of caution. The trajectories of growth that are being projected for this emerging industry display little concern for both political and structural constraints. The BPO industry has no doubt clocked some impressive numbers in the past few years; exports grew from US $565 million in 1999-00 to US $2.5 billion in 2002-03, more than five times in three years. Research by a UK company, cited in The Financial Times, revealed that UK firms answer 25 percent more calls than their counterparts in India and that 17 percent of their queries are resolved in the first instance, while one call in three does not get resolved in India. Another area which invokes concern is our statistically lush financial sector and its off-limit regulations. Global BPO majors feel skeptical in committing major capital to this largely regulated industry.

But even as the demand for outsourcing to India grows, the issues of availability of skilled labours and quality of service are being raised frequently. As more US jobs move to India, the constraints of supply of skilled, English speaking professionals will likely come to the fore. Shortage of skilled manpower is mainly due to two reasons – increase in job volume and hence competition and employee turnover. Today Indian universities are trying to address the increasing demands of the business-process-outsourcing industry with tailor-made courses in accent modulation, personality development etc. Essentially in the technology–driven jobs, India is facing an improbable challenge. On the engineering side, the fight among companies to have the best workforce is intense. In a country once regarded as a bottomless well of low-cost, ready-to-work, Englishspeaking engineers, a shortage now looms. India still produces plenty of engineers–nearly 400,000 a year at last count compared with about 120,000 in the U.S. Colleges. However, their competence has become the issue. A study commissioned by the NASSCOM, found only one in four engineering graduates to be employable. For the rest, it said, either their technical skills are deficient, their English-language abilities are below par, or they have not been taught how to work on a team or deliver a basic oral presentation (Sengupta 2006).

The question is whether or not a limited supply of such labour will lead to a drop in the quality of service, which could restrict or even reverse this growth. Increased competition amongst vendors,

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coming on top of labour supply constraints, could compound the decline in quality of service. The issue of quality of service is also raised by the very high staff turnover rates in India, especially at call centres, where annual turnover is said to exceed 50 percent. High staff turnover is reported even amongst the more established, employee friendly IT companies, some of whom offer stock options and residential accommodations to entice employees to stay on. The staff turnover, especially at call centres, is no doubt partly due to employee burn out and other job related stresses. But employees are also leaving to take up jobs with rival employers who offer higher wages. The high turnover indicates that there are more such jobs in India than there are good candidates to fill them. High staff turnover must make it increasingly expensive for India based operations to maintain and improve their quality of service. This is due to the rising costs for hiring and training and the higher wages needed to attract quality employees. This then brings up the issue of the impact of such costs on profit margins, especially for new entrants into the business and for those with limited capital and/or high debts. Poaching of employees is also behind an increase of about 50 percent in labor costs and wage rates over the past five years, and has piled heavy additional training expenses onto call center budgets, according to major outsourcing companies. Turnover of staff in some call centers in India has been as high as 200 percent in a year. In comparison Filipino employees have displayed more loyalty, with turnover rates of 40 percent or less. This high employee turnover / attrition rate could be problematic for India in near future as put down by Clint Streit, EVP-Global Operations, Convergys, "The longer you have an employee, the higher the quality they are going to deliver…From that point, the Philippines has a clear advantage over India….Ultimately, we have to stem attrition rates in India [or] otherwise switch to the Philippines."

Some of the possible reasons for the high attrition rate could be: •

Many see this space to be an Internet sweatshop where all that the employees are required to do is just mechanically input numbers into excel sheets or, worse still, answer phone calls in the same tone and repeat the same lines at least 100 times a day/night.



People who join a BPO usually do so to make a 'quick' buck. They are bound to quit because sooner or later they will find something more attractive in terms of the job profile and/or pay.



The industry has concentrated on hiring young, dynamic and these are looking for more than just a job.



Talent in this space is generally overlooked, which leaves the deserving few disgruntled with top management and hence fosters attrition.

BPO firms are trying to solve this big problem: •

By hiring mature talent (i.e. people over 35 years in age).



HR must realise that fatter pay cheques can never be a sure-shot way to retain employees. More important aspects like a secure career, benefits, perks and communication cannot be overlooked at any level.

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Employee retention must be the focus, which means that talent must be recognized and suitably rewarded.



Hire outstation candidates (from small towns) and provided them with shared accomodation.



Offer management diplomas and MBA courses.



Only 5 out of 150 employees become team leaders in a year, hence cash-incentives is one way to keep the employees happy. Daksh shells out about Rs 4,000 bonus per month to almost 85% of its workforce.



Use psychometric tests to get people who can work at night and handle the monotony.



BPO must concentrate on becoming an 'employer of choice'. A comprehensive process framework and access to proper infrastructure in the work place goes a long way in retaining employees, as a congenial work environment is critical.

India’s big outsourcing companies are experiencing another side effect of success: wage inflation. Pay at the biggest third-party suppliers of such services, like Infosys and Wipro, is rising at double-digit rates as competition for skilled programmers grows intense. These companies are competing not only with one another but with foreign outfits that run their own call centers, and with other operations in India. For new entrants—companies hiring Indians for their own operations or to outsource—this probably portends lower margins on India operations. But experienced global players are mostly past the days when cost savings were their primary reason for choosing India. One side effect of the high wages paid by Indian based operations catering to US (and other foreign) clients, must be a sharp rise in the wage costs of companies competing for this pool of labour to serve the domestic Indian market. This then brings up the issue of whether or not high labour costs and inability to hire the best talent hurts product innovation, productivity, quality, market share and profits of Indian companies serving the Indian market.

But the additional infrastructure necessary to train these students, from primary school on through to college, does not exist. Setting up such facilities is very costly, involves years of planning and execution, requires hiring good staff, large tuition subsidies and financial aid schemes. So they are unlikely to receive the attention and funding from Indian central and state governments. Private sector efforts in this regard will be constrained by the inability of most middle class families to bear the full cost of such education for their children, without massive subsidies and financial aid. The growing demand for outsourcing jobs in India is attracting several new entrants into the business, increasing competition and lowering prices.

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A SWOT analysis 6 of the Indian BPO sector would summarise the situation: Strengths

Weaknesses



Highly skilled, English-speaking workforce.





Abundant manpower

level of attrition rates among ITES workers who



Cheaper workforce than their Western

are quitting their jobs to pursue higher studies.

Recent months have seen a rise in the

counterparts. According to NASSCOM, The

Of late workers have shown a tendency not to

wage difference is as high as 70-80 percent

pursue ITES as a full-time career.

when compared to their Western counterparts.





Lower attrition rates than in the West.

infrastructure is much higher in India than in the



Dedicated workforce aiming at making a

US.

The cost of telecom and network

long-term career in the field.



Manpower shortage



Round-the-clock advantage for Western



Local infrastructure

companies due to the huge time difference.



Political opposition from developed



countries

Lower response time with efficient and

effective service. •

Operational excellence



Conducive business environment Opportunities



To work closely with associations like

Threats •

The anti-outsourcing legislation in the US

NASSCOM to portray India as the most

state of New Jersey. Three more states in the

favoured ITES destination in the world.

United States are planning legislation against



outsourcing Connecticut, Missouri and

Indian ITES companies should work closely

with Western governments and assuage their

Wisconsin.

concerns and issues.





against outsourcing of work to Indian BPO

India can be branded as a quality ITES

Workers in British Telecom have protested

destination rather than a low-cost destination.

companies.



$69 billion ITES business by 2010





$97.5 billion IT (consulting, software

Philippines and South Africa could have an

solutions) market by 2010

Other ITES destinations such as China,

edge on the cost factor. •

Slowdown of demand

However, everything said and done, the growth is likely to continue. In 1999 NASSCOMMcKinsey estimated by 2008 it will be $17 billion but it has been revised to $21-24 billion by 2008. India can capture 25% of global BPO offshore market and 12% of the market for other services such as animation, content development and design services. Gartner projects India’s revenue from ITES to US$ 13.8 billion in 2007, estimating India’s share of supply to be 57 percent of the global market. Gartner does not incorporate animation, medical or other (legal) transcription services, GIS, market research, data search, research and development, network consultancy 6

http://www.bpoindia.org/knowledgeBase/#indian-market-size

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and other non-business processes in its estimates on the ITES market size and potential. And hence, companies in India that zealously focus on quality and innovation, even at the cost of short-term profit, are likely to be major beneficiaries in the long run of the growth in outsourcing.

EMERGING ISSUES

With changing global business scenario, the dynamics of outsourcing industry are also changing. New issues are coming up and to tackle the problem areas outsourcing companies and the service providers are re-writing the rules of the trade.

The Data Protection Act prohibits UK banks from transferring personal information of their customers outside of the EU and a select few countries that have 'adequate legal protection'. Similarly, federal and state laws in the US regulate service activities related to health care, financial services, debt collection and investment banking. Privacy laws in the US and western Europe are stringent and require client databases containing sensitive information such as credit card numbers, social security numbers, tax and health information to be secured.

Another crucial aspect is to know how to protect data securely to prevent loss or operational standstills in any disaster or setback while developing an operational strategy that works efficiently in the infrastructure. Mapping out a plan to safeguard the infrastructure's continuity under such a situation is critical.

As organisations are becoming more experienced outsourcing key IT and business process functions, the importance placed on direct cost savings is diminishing while other factors such as security, quality, service and the existence of solid trusted networks’ are rising. In the knowledge based new economy, corporates are coming out of the shadows of the state. The importance of proprietary control on patents and copyrights to manage the ICET sector is gaining grounds; and so do the need of global bodies like WTO, WIPO and agreements like GATS, TRIPS etc.

Another focus area for outsourcing that is just beginning to be explored is its potentially positive impact on a country’s economy as a whole. According to Catherine L. Mann (2003), Senior Fellow at the Institute for International Economics, in International Economics Policy Briefs, “Globalization of IT hardware production is a model for the global evolution of IT services and software.

Although technological change is the most important driver of IT price declines,

globalized production and international trade made IT hardware some 10 to 30 percent less expensive than it otherwise would have been.

These lower prices translated into higher

productivity growth and an accumulated $230 billion in additional GDP (1995-2002). Real GDP growth might have averaged 0.3 percentage points less per year from 1995 to 2002, if globalized production of IT hardware had not occurred.”

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With the growing outsourcing trend, companies are gradually turning to ‘Smartsourcing’ to make the practice work for optimum effect. By smartsourcing, a company is leveraging its strengths and managing its weaknesses through strategic partnering. Outsourcing only streamlines costs, while smartsourcing streamlines the entire value chain. Efficient integration of work across value chain becomes important and transparency becomes critical in order to design cross-organizational processes that are in harmony, not in conflict. Traditional outsourcing generally emphasizes on replacing systems and bodies, but smartsourcing focuses on the core areas of innovation in which an organization must excel to differentiate itself. The standard outsourcing relationship sacrifices innovation and treats the outsource partner as a separate entity. Companies that ‘smartsource’ collaborate with their outsourcing partners while stepping up their ability to innovate. There's more to innovation, however, than simply taking products and services to another level. Balancing jobs performed locally and jobs moved overseas for optimum efficiency is one of the main components of location-based business process outsourcing.

In case of India, to sustain its competitive advantages in the global outsourcing scenario, few business critical issues are to be taken care of. More and more BPOs are moving to the Tier-II cities which offer lower business process overheads compared to Tier-I cities, but these cities may have a less reliable infrastructure system which may hamper dedicated operations. The Government of India in partnership with private infrastructure giants should strive to bring all around development and providing robust infrastructure all over the nation.

India has poor privacy laws, and also an appalling record of observing them and monitoring violations vis-à-vis global requirements. Hence to safeguard their own interest, Indian BPO firms must obtain renewable federal and state-level licenses that might differ from state to state, in order to contract these services. They are required to enter into a 'trading partner agreement' that holds US firms liable for lapses on the part of the subcontractor. Regular audits are required to be carried out at the BPO site to ensure compliance and it is some of these audits that companies have failed either because they have not conformed to the standards of the outsourcing company or because they are short on legal compliance. This is why UNCTAD's call to bring legislation relating to BPO under the General Agreement on Trade in Services (GATS) and for developing countries to take a more active role in negotiations is a welcome move.

However, some of the companies are possibly moving jobs to India to also avoid facing laws, regulations and public scrutiny in the US over the human and environmental impact of their research, development and production activities. This calls for close official monitoring and greater public scrutiny in India of outsourced work in fields like clinical trials for pharmaceutical drugs and in chemical, biological, genetic and similar areas.

An extensive study of India’s financial industry by McKinsey & Co., released in August 2006, contends that improved allocation of capital, more efficient use of savings, and reduction of

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operating inefficiencies across the financial sector could raise India’s projected annual GDP growth by three percentage points. That may speak to India’s shortcomings, but it also illustrates its enormous potential.

In these circumstances, the quality of service provided becomes a key issue not only for growth, but also for the survival of individual firms. At the same time, keeping up quality standards where attrition rates and, therefore training and recruitment costs are high, can become difficult. The recent federal law in the US banning companies from outsourcing government contracts offshore notwithstanding, a number of other considerations, will influence the pace and direction of growth of BPO in India.

And last but not the least comes the issue of ‘reverse migration’, few stories of which are also covered by the US media. Indian IT professionals in the US are now themselves being hurt by the partial success of the Indian educational system, which originally got them their well paying jobs in the US. Many of them are now facing wage cuts and unemployment, as US companies move jobs to India.

To summarise the global scenario of the business process outsourcing and its future, the quote by Mr. James Champy, Chairman-Consulting, Perot Systems, would be very prudent: "Open markets and information technology have made intellectual work movable. Work will naturally go where it can be best done – in quality and price. Trying to prevent this movement will just result in protected and weak economies."

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REFERENCES

1. Chithelen, Ignatius (2004): ‘Outsourcing to India–Causes, Reaction and Prospects’, EPW Commentary, March 2. Curran, John J (2007): ‘A Director’s Guide to India’, January / February 3. Dey, Dipankar (2004): ‘Anxieties over Offshoring - State vs. New Economy’, EPW Commentary, June 4. Engardio, Pete (2006): ‘Is Outsourcing a Luxury?’, Business Week Online, November 5. Evans, Meryl K (2006): ‘Getting 'Smart' About Outsourcing’, ECT News Network, June 6. Greenlees, Donald (2006): ‘Outsourcing: India Moving Up, Philippines Moving In’, The New York Times, November 7. Ling, Theodore (2004): ‘Outsourcing to Canada: Legal and Tax Considerations’, Baker & McKenzie 8. Sengupta, Somini (2006): ‘India Struggles to Keep Up With Surging Employment Needs’, The New York Times, October 9. Vernon, Raymond (1966): ‘International Investment and International Trade in the Product Cycle’, Quarterly Journal of Economics, May

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