The Main Outsourcing Locations for IT and IT Enabled Services - Essay Example

Business in focus Business in Focus Restrictions on outsourcing as a key trend The global economic downturn since about August, 2007 is giving rise to several protection measures one of which is the attempt to restrict or eliminate outsourcing as a business practice. This key trend, originating in the US, is creating nervousness among the businesses both within the US and in those countries like India, Ireland and Philippines which are the main outsourcing locations for IT and IT enabled services (ITES), and in China, Thailand and Vietnam etc. for manufacturing related outsourcing. This analysis examines the issues related to outsourcing in IT and ITES. Outsourcing and off-shoring have been the significant developments in the wake of revolutionary changes in the information and communications technologies (ICT) in the past two decades. Globalisation of businesses on the one hand, and the extensive spread of the Internet on the other, facilitated the phenomenon of global manpower outsourcing. The growth of usage of computers in all walks of life created enormous demand for English speaking and trained manpower for working as programmers. The economic rationale for using foreign nationals in low-end application programmes was the significantly lower wage costs and sheer manpower resource availability. This trend has rapidly spread to many other areas such as call centre operations, legal, accounting and auditing, engineering, manufacturing processes etc. generally termed as business process outsourcing (BPO), and gave rise to two types of employment of foreign nationals - onshore or off-shore services and in each case there have been corresponding loss of job opportunities for locals. In the onshore format, the foreign national is Business in focus 2 physically located in the client's country while in the off-shoring format, the work process itself moved to a foreign location. In the US, which is the major promoter of outsourcing as a model for competitive global business operations, there is a growing public resentment on the jobs lost to foreign nationals. The volume of jobs lost can be gauged by the fact that in each of the cities like New Delhi, Mumbai, Hyderabad and Bangalore in India, there are hundreds of companies employing thousands of men and women, providing back office services on 24x7 basis, to the US and European companies (BPO India, 2009). In the past most of these jobs in areas such as customer services, credit card operations, medical transcription, data entry, telemarketing etc. were being performed locally in the US itself by US nationals. The high hourly wage costs and the opening up of the world markets for services led to the outsourcing trends. In addition, the major Indian IT firms place thousands of their employees at the clients' premises for operations such as programming, installation, maintenance and training. Further, major US firms like Microsoft, IBM, Dell, Accenture, and Deloitte have established subsidiary companies in India i.e., they have effectively shipped jobs abroad. While economising on manpower costs is one reason for outsourcing, avoiding payment of taxes in the US is another aspect. Some business houses establish overseas operations in tax haven countries because the corporate income tax in the US is relatively higher, thus encouraging firms to establish operations abroad where either there is no tax or the tax rates are much lesser. Under the double taxation agreements, which the US has with a host of countries, if US firms pay taxes abroad on the income generated from Business in focus 3 their foreign operations, then there is no need to pay taxes again on such income in the US, meaning consolidation of global income for tax purposes is not required. There is a growing criticism of such tax breaks for firms, which ship jobs abroad. The current economic down turn has only accentuated the demands for discouraging firms from outsourcing. During the 2004 presidential elections, Mr. John Kerry strongly advocated eliminating tax breaks. The new US President Mr. Barack Obama has recently outlined his steps to actively discourage outsourcing by removing tax breaks and his statement 'Yes to Buffalo and no to Bangalore' says it all (BPO Watch India, 2009). From these developments, it is certain that businesses will have to rework their economics of outsourcing. It is one thing for the government to take a populist view and discourage outsourcing and altogether another matter for the companies to remain competitive in a globalised world. The economic benefits of outsourcing to the consumers in terms of lower costs of products and services can not be ignored as much as the competitive forces at work in free market economies. In conclusion, it can be said that the restrictions and public outcry against outsourcing will moderate once the global economy resumes the path of growth. 2. Concerns over customer privacy Invasion of customer privacy was practically an unknown threat before the advent of the ICT revolution. Advent of the Internet and online transactions has changed this, causing serious concerns to customers about their privacy and security. Blattberg et al describe these concerns as, "'customer's ability to control the collection, usage and anonymity of his or her data" (Blattberg et al, 2008). When there is no control, Business in focus 4 customers are not sure as to what purposes their personal data may be used by unscrupulous individuals and companies. According to Consumer Fraud Reporting, the number of complaints received at their website during 2008 at over 275,000 was 33% higher compared to the previous year (consumerfraudreporting.org, 2009). BBC News reported theft of database of over 100,000 customers, that includes names, addresses and financial details, and the stolen database was being illegally used by call centres in Pakistan (2007). The database was used to steal money from bank accounts and from online payment companies like PayPal, by cloning customer identity, as reported by BBC News. Thus, customer privacy concerns are justified by the rising trend of online cheating occasioned by the use of the Internet for transactions or even for accessing information. The concerns have been identified as 'data security, secretive data collection, junk mail and spam, third party access, none of your business, feelings of violation, inequitable exchange, and fears of errors' (Blattberg et al, 2008). The authors go on to identify the result of such concerns for businesses as 'decreased sales, increased cost of compliance, and ethical dilemma for managers'. Databases may be stolen by not only by outsiders through fraudulent access, but also employees of the organisation itself, for personal gain such as selling of such data to interested parties. Thus data security is an important concern. Secretive data collection, mainly through cookies on websites, is used for junk mail and spam. Databases usually include names, addresses, social security details, banking information, online and off-line purchase habits and personal preferences. In effect, these databases describe consumer and what he is most likely to Business in focus 5 spend money on, how much and through which method - credit cards, online banking, etc. Sale of such data for other marketing companies for personal gain is one aspect of the problem. In addition, people with criminal bent of mind can use this vital data for cheating and criminal offenses like theft or blackmail. For businesses e-commerce is a factor that can not be ignored. It is a result of the technological changes that are occurring and is a fantastic tool for fine tuning marketing efforts to the specific needs of consumers and business customers. Collection and analysis of databases permits segmentation and targeting more effectively. It enables businesses to focus advertising and other promotional measures more specifically, thus enhancing the value of such spends. E-commerce reduces transaction costs both for the customers and the businesses. In the face such compelling reasons, it is natural that businesses lay great emphasis on database creation and management. From the customers' point of view, while the benefits of e-commerce are welcome, the potential loss of privacy, theft of identity and online fraud are real concerns as per reports that appear from time to time. Customers who are annoyed with junk mail or spam tend to ignore even genuine online marketing efforts. In view of the serious risks involved in online transactions, legislative measures were also imposed in many countries e.g., in the US, the Sarbanes Oxley Act lays down that, "'organizations need their security strategy to guard against three main threats: external attempts to compromise network security through viruses, spyware, phishing and pharming; internal sabotage from employees consciously divulging or inappropriately storing sensitive information, and internal carelessness or willful disregard for corporate policies (for example, sending out Business in focus 6 confidential information over email" (Mastoras, 2005). Businesses have to comply with such legislation and ensure that customer privacy concerns are adequately addressed. 3. Indian economy and possibility of recession Recession is not a very clearly defined idea. In the US, if the economy contracts or shows negative growth over two successive quarters, it is treated as being in recession and this definition is generally accepted all over the world. Recession is a state when businesses lose volumes and profits, credit is not available easily, jobs are lost, and consumer confidence hits a low. The vicious cycle of low spending leads to closure of businesses and more job losses. Recession in the developed economies of the US, Europe and Japan has a cascading effect on developing economies like China, India, Mexico or Brazil. Demand for goods and services that are produced in these countries is reduced and this will have a direct impact on their economic growth, unless the demand contraction is matched by increased domestic consumption. With reduced demand, prices fall, profitability reduces and investment dries up and hence the fall in economic growth. India opened its economy to global integration during 1991 through policy changes and has since shown impressive growth. Globalisation and liberalisation are the two catch words that dominated all political and economic policy decisions since then. The India Country Report 2008 released by the Economist Intelligence Unit identified that during the four years since 2003-04, the Indian economy registered an average annual growth rate of 8.83% and that in the first quarter of 2007-08 (April -June), the Business in focus 7 growth rate spurted to 9.3% (2008). The Report went on to predict that while the high growth rates were not likely to be sustained, the expected rates for the next two years would be 7.9% and 7% respectively. Reuters India quoted the Indian Prime Minister Dr. Manmohan Singh informing that the growth rates for the years 2008-09 and 09-10 would be below 7% (April, 2009) in view of the global economic downturn. Thus, it is still on a high positive growth trajectory and with the massive stimulus packages being implemented in the US, the European Union and Japan etc., the Indian economy is expected to return to 9% plus growth rates within two years. High level investments in infrastructure projects and liberalised policy on foreign direct investments were the features of the high growth in the preceding years and there has been no change in these policies. While a country like China which has a high dependence on export led growth suffers more intensely, India is impacted to a lesser extent due to the current global downturn. This is so because exports at about $176 Billion formed not more 14.23% of the 1.237 trillion dollar Indian economy during 2007-08 (CIA, World Factbook, 2008). Of the GDP, services contribute about 54%, manufacturing 29% and agriculture, the rest. ITES and software services, gems and jewels, textiles, chemicals, auto components and leather goods are important constituents of exports. To the extent that the rate of growth of the economy has slowed down from around 9% to less than 7% at present, the impact of the global economic downturn on the Indian economy is clearly seen. The decline in overseas demand for products and services can also be offset at least partially, by the growing local demand as incomes are rising and consumers have greater purchasing Business in focus 8 power. Government is implementing ambitious employment generation schemes for the rural unemployed, guaranteeing minimum wages and assured work for at least 100 days in a year (NREGS). The demographic factors also favour the Indian economy, with the median age of Indian being just 25.3 years and the young nation is capable of keeping the wheels of commerce moving smoothly (CIA, World Factbook, 2008). To conclude, Indian economy is unlikely to face recession as in the western countries. But given the economic slow down, the government must look to alternative ways to mitigate the hardships of export sector and its employees. This is possible only if the demand for similar products and services in the Indian market is actively created. This might involve giving tax breaks for modernising the existing industry and infrastructure. Further, poverty alleviation is a major concern for the Indian government since a large percentage of Indians still live below poverty line and the reduced economic growth rate would result in prolonged period of distress for these people. To put purchasing power in the hands of these people, it is necessary that the rural employment guarantee scheme is implemented for more number of days in a year with increased wages. Emphasis on infrastructure and housing projects should be continued since they stimulate demand for steel, cement, and a host of supporting industries like plumbing, electrical items, glass & ceramics, wood work etc. Construction industry is labour intensive and helps in employment generation. Demand for housing at affordable prices is also very high and government should exploit the talents of private sector to come up Business in focus 9 with solutions for economising housing costs by providing policy incentives like concessional interest rates and faster depreciation. 4. Economic growth is important The prosperity of a nation is reflected in the quality of life of its citizens, which in turn is the sum total of education, healthcare and income-earning opportunities. In economic terms, the difference between the developed nations and other nations is the difference in the respective per capita GDP values - the higher the value, the more prosperous are its citizens. At the same time, it is also important that the GINI factor (a measure of the even distribution of incomes among population over percentiles) of a nation favours equitable distribution and that the wealth is not concentrated in the top strata of the society. Economic growth or a healthy rate of increase in the gross domestic product is imperative to raise the per capita GDP value of a nation. Growth creates employment opportunities, enhances disposable incomes and purchasing power, stimulates demand and in general generates a sense of well being. Food, shelter and security are the primary needs of a society and once these are obtained, the disposable incomes look for comforts, luxuries and leisure activities, thus stimulating demand for quality products and services. Education and training play crucial role in accessing the primary and premium quality goods and services. Governments can increase economic growth through investments, especially in creating public goods and services like infrastructure, education and healthcare facilities. Infrastructure projects like roads, bridges, airports and sea ports demand high investments, long gestation periods and low rates of return. To this extent such projects Business in focus 10 do not attract private investments easily. At the same time, absence of such facilities decreases the overall efficiencies of production and distribution and increases costs. For example, congestion at the air / sea ports and delay in loading or unloading can lead to demurrages, loss of consumer confidence and even damage to perishable cargo. The high success of export oriented economies like Japan, Singapore, S. Korea and Taiwan can be traced at least in part to the excellent infrastructure facilities that serve their vibrant manufacturing facilities. Similarly, in India the high level of investments in communication facilities enabled IT and ITES to cater to the world demand and put it in the forefront of technologically advanced nations. India is also investing heavily in modernising its infrastructure in public-private partnership mode called 'build-operate-transfer' whereby investments are shared by the government and private sector and the assets are transferred to the government by the private sector after a defined period of operation and profit sharing conditions. Government policies on trade and tariffs go a long way to stimulate economic activities that contribute to growth. In China, the government spent vast amounts to create hundreds of 'special economic zones' for export manufacturing. These zones were provided with the infrastructure facilities like roads, power, water and administration wings that cut red tape and promoted efficiency of import/export transactions. They helped the country to emerge as the world's manufacturing base for virtually any product - metals and metal products, plastics, chemicals, electronics, textiles, toys, readymade garments, sports goods and so on. These facilities are directly responsible for the phenomenal growth rates of China and helped millions to find jobs. Business in focus 11 Travel and tourism is another sector that adds significant value to an economy. Business or leisure travel has been growing in tune with the economic growth around the world. Investments in airports, hotels and holiday resorts can be made by governments either solely or in partnership with private investors to meet the demand of the travel and tourism sectors. Thus the avenues for governments to stimulate economic growth are many and are already being put to use in developing countries. It is also interesting to note that the current thinking in all the major developed nations for quickly coming out of the economic downturn and resume path of growth is to depend heavily on public investment. The US government under President Obama has committed to billions of dollars of investment in education, healthcare and energy, as a means to overcome recession. Business in focus 12 References BBC News (2007). "Database theft hurts consumers". Retrieved May 7, 2009 from: http://news.bbc.co.uk/1/hi/business/6693307.stm. BPO India (2004), "BPO Industry in India-A Report". Retrieved May 10, 2009 from: http://www.bpoindia.org/research/bpo-in-india.shtml BPO India (2009). "Outsourcing BPO to India - The cost savings". Retrieved May 7, 2009 from: http://www.outsource2india.com/why_outsource/articles/BPO_india.asp. BPO Watch India (2009). Retrieved May 7, 2009 from: http://www.bpowatchindia.com/. Blattberg R.C., Kim P., Scott A. N. (2008). "Database marketing: Analyzing and managing customers", Springer Publishing. CIA World Factbook 2008. Consumerfraudreporting.org (2009). "Internet fraud, scam and crime statistics - 2009". Retrieved May 4. 2009 from: http://www.consumerfraudreporting.org/internet_scam_statistics.htm. Country report: India 2008 - 09, The Economist Intelligence Unit, September 2007, London. Mastoras G., (2005). The medieval approach to SOX compliance. Retrieved May 8, 2009 from: http://customerservicezone.com/Privacy_Issues_and_Customer_Service/. NREGS. Retrieved May 8, 2009 from: http://nrega.nic.in/. Reuters (2009). Business news. Retrieved May 10, 2009 from: http://in.reuters.com/article/businessNews/idINIndia-38850020090402 Read More