Backlash on outsourcing may bite masters

As the US election nears, the issue of outsourcing is again at hand. But could political efforts to curb work going abroad actually damage the country that created the industry?

India has been a major beneficiary of the outsourcing phenomenon and, understandably, there has been growing concern there over the backlash on outsourcing in many countries, not least the US.
Post 1991 reforms, India benefited immensely from the revenue generated by Business Process Outsourcing (BPO) model, with increasing numbers of American and non-American companies outsourcing services to India.

Things fell into place towards the end of the millennium, as several factors created favourable conditions for BPO businesses to thrive in India.

Some of the major factors for this success were:


  • Technological advancement - The 1990s saw the advent of the telecom revolution in the country. Private players were, for the first time, allowed to compete with state-owned telecoms giants.
    At the same time, there was an impetus towards computerisation and the penetration of computers was on the rise. India was waking up to the digital age.
  • "Brand India" - At the same time, Brand India was being recognised by the world at large. Indian products were breaking new ground and were finding new markets all over the developed and the developing world.
  • If there is one industry where India can boast of being one of the world's leaders, it is in the IT industry. Indian software exports have grown manifold since early 90s and future prospects look good. Many software giants like Microsoft set up research facilities in India and the acumen of the Indian software professional has achieved global renown.
  • Another reason that had a positive bearing on the Indian BPO sector was the drive toward disinvestment and privatisation carried out by successive regimes since it was first undertaken by the Rao government in 1991.

The aforementioned factors led to an almost exponential growth in the industry. Since the early 90s, the BPO industry in India has been growing at a phenomenal rate of 60-70 per cent annually. It took the IT industry 15-20 years to establish itself firmly in India; the BPO sector has done that in five years flat.

If one looks at the figures of the last five years, it would become clear that the revenue from the BPO sector has grown from US$565 million in 1999-2000 to US$2,400 million in 2002-03. The projected growth for 2005-06 is US$1.2 billion.

The industry today employs 200,000 people and if industry watchers are right, one million people would be employed in the BPO sector in the next five years. But India's share is still less than one per cent of the global market which is US $150 billion strong.

One major advantage that the developed world sees in India is the relatively low input costs. Input costs such as infrastructural expenses, labour wages and overheads are lower by as much as 40-60 per cent in India compared to countries in the developed world.

The Indian workforce is fast becoming fluent in English and a graduate in India can be hired for a pittance compared with a person of similar education in the developed world.

Contrary to popular belief, the BPO industry in India is not a new phenomenon.

This industry has been around since the 1960s with companies exporting engineering services from India. This trend gained momentum in the 80s and 90s. It was post the liberalisation in 1991 that companies like British Airways, AFS and Datamatrix came in, and with their advent came a world of employment opportunities.

So what is the hysteria being whipped up in the US regarding the outsourcing all about, and what impact will it have on the fledgling BPO industry in India?

Why are Americans, the proponents of globalisation and free market, suddenly edgy about outsourcing which is an outcome of the free market ideology?

The answer is best summarised by Sushma Ramachandran of The Hindu newspaper, where she noted: "The flag bearers of globalisation and free trade have found their creed coming back to haunt them."

Suddenly these votaries of free trade have become worried about employment export, an aspect that has not concerned them much in the past.

Concerns have escalated to make outsourcing a key point in the upcoming US presidential elections. The white collar American is suddenly jittery as he sees his desk job being snatched from under his nose.

Even George W Bush has done an about-face. Last year, when certain American states considered banning outsourcing, Bush stood his ground. In fact, assurances were given to India at the governmental level in this regard. However, as elections drew closer, the US Administration reversed its position and even passed legislation banning outsourcing of government contracts to foreign countries.

This reversal has everything to do with politics and nothing to do with economics.

The US job losses are largely a result of the price-sensitive market forces that heavily favour India and China, as these countries offer services at a fraction of those in the US.

Available data indicates that the actual loss of jobs in the US is around 2.3 million, out of which only about 200,000 have gone overseas (2001 figures), thus indicating that reduced employment in the US is largely due to a host of other mostly internal factors. But the outsourcing issue has simply been put on the political pedestal as it is helpful in obscuring facts.

Industry-watchers and analysts believe the legislation that has come into effect in America will have little if any ramifications on the Indian industry. They say that the US Government outsourced only a small fraction of the total business outsourced to India and this will have some bearing in the short period only.

In the long-run, experts feel that the share of outsourcing by the private sector would increase. Also, the UK and other European nations would outsource more to India, and these gains would more that make good the losses.

It is high time that Americans wake up to the reality that outsourcing merely means that countries like India and China have a competitive edge. Price competitiveness is the knife-edge on which the forces in a free market economy operate and protectionism, in the longer run, may prove detrimental.