The future of BPO in India
The Institute of Chartered Financial Analysts of India (ICFAI), is one of the premier academic institutions in India. The ICFAI publishes a monthly finance magazine, The Analyst.
In the forthcoming March 2004 issue of Analyst, the ICFAI is attempting a story on India's BPO Industry - Challenges Ahead.
India is fast emerging as the "Back Office" of the World. It has brought a host of challenges ranging from poor quality of work, emergence of new competitors and the rising backlash against outsourcing in the West. The US Senate has imposed a ban on Federal contractors from outsourcing overseas. This has led to a question mark on the industry.
In this context, Guy Kirkwood was invited to write about his perceptions.
Questionnaire
1. What are the challenges that are facing the BPO industry today and how is the industry gearing up to face these challenges?
The main bar to rapid uptake of BPO services remains inertia. The BPO market is still immature and in certain areas (ie payroll) is becoming commoditised. These seemingly contradictory elements makes BPO difficult to sell. Strong growth is inevitable when the first-movers (both suppliers and customers) can demonstrate real bottom-line advantage over competitors. We are not there yet.
2. What do you feel about the prospects for the BPO industry in India in both short and long terms?
In December of last year, there was a predictable response from the UK Unions following Aviva's widely reported news that 2,500 jobs were moving to India. In what The Independent described is becoming a flood of jobs to parts of the world where labour costs are dramatically lower than in Britain, HSBC announced that 4,000 positions would be moved to India, China and Malaysia by the end of 2006. ABN Amro said it might outsource up to 200 jobs.
This is but the start.
Labour arbitrage in a global economy is not only desirable, but necessary for the good of the "home" economy as much as for India.
3. What are the reasons for the backlash that is emerging against outsourcing in the West and the impact they are likely to have on the future of the Indian industry?
In an excellent opinion piece, Bob Evans, the editor of Information Week, talked about the politicisation of outsourcing in the US:
"If protectionism would solve the problem and lead to things like "full employment," I'd be all for it. If government-mandated limits on what level of profit businesses can make would make those companies more competitive and successful and lead to higher employment, I'd bang the drum loudly. No matter how painful it is to see the impact on some American workers as the global economy unfolds, we cannot attempt to create a future that's a frozen image of a past that's just not compatible with today's round-the-clock, round-the-world economy."
I'm hoping that this is one American import that Europe will not be wanting. But, I have a horrible suspicion that the politicians sitting in Brussels will not be able to help themselves.
4. In the light of the US Senate passing the Bill against outsourcing overseas and possibly few more states likely to initiate similar legislation, could you tell us what impact is it likely to have on the industry ?
Protectionist law recently passed in the US is defended by two major arguments. The first is that protectionist policies save jobs in domestic industries. This argument reasons that if a domestic industry is forced to compete against a foreign country that provides services more cheaply, such as India, then that domestic industry will have to lay off hundreds or thousands of workers in order to stay competitive. Entire communities whose livelihoods depend on the service or industry will be decimated by poverty.
The second argument, a corollary to this one, is that eventually, left to compete for too long against India, a domestic industry might collapse completely, leaving the protectionist-prone country dependant on foreign operations. This, the argument goes, could be devastating as it would find itself unable to provide a badly needed resource.
So the question, when times are tough for a particular industry, is not, "Should we save these jobs?" It is, "Should we save these jobs at the expense of other jobs, or should we let economic efficiency decide where people and resources are best employed?"
5. Could you tell us your assessment about how the industry will cope up with the emerging backlash in the US?
Domestic protectionism always has a domestic cost. Most of the time, however, the costs of protectionism go unnoticed, because protected jobs in one industry are concentrated and easy to see, while the costs throughout the economy are widely dispersed, over a hundreds of industries and millions of consumers.
In the case of the steel tariffs George W Bush introduced in March of 2002, the cost was an estimated USD732,000 in higher prices for each steel job saved, according to the Cato Institute.
If offshoring becomes the next industry that the US and Europe seek to repress, it's my opinion that this protectionism will cost the domestic economies much and achieve little.
6. Could you tell us what will be the impact on the US firms that have already outsourced or planning to outsource to countries like India and also in general the impact on the US economy itself?
"Outsourcing is still for losers." That is the conclusion on IT outsourcing reached by Paul Strassmann writing for Computer World.
"Losers were outsourcing more than half of their costs. The returns on shareholder equity for the winners were clustered around low outsourcing ratios; the large losers showed high outsourcing ratios."
If this is true, it could prove disastrous to the BPO and offshoring market. No company will want to be associated with outsourcing if it gives out the message that this is the last gasp of a dying firm.
Is this implication correct? For anyone who has read Guy Kirkwood's article on Win win within a European ITO, this piece does not ring true.
Whether BPO is "different" to ITO is one question, but I see that the main issue is one of perception. Economies change, jobs change; appear and disappear. It does not matter if those jobs are in the US, Europe or in India, the work will ultimately move to where it is most efficiently carried out.
I'll leave you with the unintended wisdom of the CEO of Sears who got himself into all sorts of trouble for "speaking the truth" about offshoring.
Not only did Alan Lacy talk all too frankly about the financial attractions of going offshore, but he also doubled his trouble by unfavourably comparing the intellect and drive of US workers with their overseas counterparts.
"There are four or five times as many smart, driven people in China than there are in the US."
What Lacy learned is that candid, open discussion about offshore outsourcing is the new corporate taboo. Nothing will be more politically incorrect this year than expressing interest in offshoring.
But be assured, this taboo won't stop it happening.