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Business Process Outsourcing and India

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 Business Process Outsourcing and India
By
Sumitro Mukherjee
Baroda, Gujarat, India
Email: mukherjee.sumitro@gmail.com

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 personal-
information 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.

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

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).

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 out-
tasking 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:
• 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.

2
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

5
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.
• Find nothing better to do.
• Education level doesn't matter
• Good work environment
• Good Benefits
• Flexibility of time
• Attractive life style
• Transport facility
• No growth opportunity / lack of promotion
• For higher Salary
• For Higher education
• Misguidance by the company
• Policies and procedures are not conducive
• No personal life
• Physical strains
• 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

6
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

7
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 non-
core 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 59%
2005 234 Billion Europe 27%
2008(est.) 310 Billion Asia-Pacific (incl. Japan) 09%
Rest of the World 05%
Global BPO Market by Industry Employee Cost (Per Annum in US$)
Information Technology 43% USA 19,000
Financial Services 17% Australia 17,000
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
South Low-cost economy, similar time zone to
Africa EU, English speaking workforce
Philippines Skilled English speaking workforce; 94%
literacy rate; educated workforce, cultural
similarities; improved telecommunications
infrastructure; compatible legal and tax
structure; low absentee rates; sizable
presence in call centers, medical
transcription, animation.
Russia Low-cost economy, good technology
skills, large pool of engineers and
scientists, competitive universities.
Canada English-speaking workforce, cultural
similarities, good technology skills,
proximity, good infrastructure.
Weaknesses
More expensive than India, weaker
technology skills, lack large talent
pool.
Political instability, smaller and costlier
workforce than in India. Universities
graduate only 70,000 IT graduates
annually, lack of quality record in
software.
Weak infrastructure, limited linguistic
capabilities, smaller workforce than
India, limited global integration, poor
business environment.
High cost of labor, relatively costly
location, lack large talent pool.

9
China Low-cost economy, advantages in
manufacturing and IT,
telecommunications, power, and road
infrastructure better than in India; growth
in software development and other areas
where strong English skills are not
necessary. Position in the global
marketplace, special processing zones,
political stability.
Mexico Low-cost economy, proximity; potential for
Spanish speaking call centers.
Czech Competitive cost structure, good
Republic technology skills, stable business
environment, strong education system,
proximity to EU, good telecommunications
infrastructure.
South Good technology skills, high literacy rate
Korea and well educated workforce, stable
business environment, good
telecommunications infrastructure.
Malaysia Low costs, primarily for infrastructure; high
level of global integration.
Ireland English speaking workforce, cultural
similarities, stable business environment,
well educated workforce, proximity to EU,
good brand quality.
Sources: NASSCOM, HCL Technologies, Forbes, AT Kearney.
Limited English capabilities, weaker
project management capabilities than
India, lack of good quality record in
software, lags in terms of experience
with offshoring, high attrition rates,
experienced engineers can be up to
25 percent more expensive than India,
tax system, complicated legal
structure, IPR problem, lack of
standards.
More costly than India, good mostly for
low end jobs, lack large talent pool,
limited
English capabilities.
More expensive than India, lack large
talent pool.
Relatively costly location, smaller
workforce than India.
Smaller workforce, lack large talent
pool.
Relatively high compensation costs,
lack large talent pool, has migrated to
higher value added activities.

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

10
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 “near-
shore” 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 English-
speakers 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 still-
considerable 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, English-
speaking 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,

15
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.

17
A SWOT analysis 6 of the Indian BPO sector would summarise the situation:
Strengths
• Highly skilled, English-speaking workforce.
• Abundant manpower
• Cheaper workforce than their Western
counterparts. According to NASSCOM, The
wage difference is as high as 70-80 percent
when compared to their Western counterparts.
• Lower attrition rates than in the West.
• Dedicated workforce aiming at making a
long-term career in the field.
• Round-the-clock advantage for Western
companies due to the huge time difference.
• Lower response time with efficient and
effective service.
• Operational excellence
• Conducive business environment
Opportunities
• To work closely with associations like
NASSCOM to portray India as the most
favoured ITES destination in the world.
• Indian ITES companies should work closely
with Western governments and assuage their
concerns and issues.
• India can be branded as a quality ITES
destination rather than a low-cost destination.
• $69 billion ITES business by 2010
• $97.5 billion IT (consulting, software
solutions) market by 2010
Weaknesses
• Recent months have seen a rise in the
level of attrition rates among ITES workers who
are quitting their jobs to pursue higher studies.
Of late workers have shown a tendency not to
pursue ITES as a full-time career.
• The cost of telecom and network
infrastructure is much higher in India than in the
US.
• Manpower shortage
• Local infrastructure
• Political opposition from developed
countries
Threats
• The anti-outsourcing legislation in the US
state of New Jersey. Three more states in the
United States are planning legislation against
outsourcing Connecticut, Missouri and
Wisconsin.
• Workers in British Telecom have protested
against outsourcing of work to Indian BPO
companies.
• Other ITES destinations such as China,
Philippines and South Africa could have an
edge on the cost factor.
• Slowdown of demand

However, everything said and done, the growth is likely to continue. In 1999 NASSCOM-
McKinsey 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

18
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

20
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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