Outsourcing backlash: Would that hurt? - Views on News from Equitymaster

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Outsourcing backlash: Would that hurt?

Feb 4, 2004

"Globalisation is a fact of life. But we have underestimated its fragility," said someone. While business process outsourcing (BPO) has come to be one of the greatest benefits (and as a way of life) of globalisation to developing nations like India, the disturbance it has created at the origin, the US has now brought into light the 'fragility' factor. Loss of well-paid jobs of the Americans to relatively low-paid Indians has attracted much ire of the US government and of labour unions in that country, and the results can be seen in the increasing noises of backlash towards outsourcing of work from the US to India. In this regard, we conducted a poll on our website, asking our readers whether protectionism towards outsourcing is a big threat to the Indian information technology (IT) sector. The results have indicated a mixed feeling.

The response
While a majority (52%) of the respondents have negated the fear of a negative effect on the prospects of the Indian IT companies, a marginally lesser number (45%) feel that the backlash is likely to have real damaging consequences for these corporations. And why not? The choice of this latter group has been well fueled by daily reports emanating from the media about the increasing resistance in the US regarding outsourcing of jobs to India and other low-cost nations. This (outsourcing) has resulted into many Americans losing their jobs to their Indian counterparts, and has brought under question the ability of the US government to create more jobs, let alone save the existing ones.

Our view
While we do not deny that this backlash towards outsourcing has seeds of much larger resistance throughout the globe, we believe, in the longer term, economic sense would prevail as global corporations, in their aim of becoming globally more competitive, would outsource their non-core operations to low cost countries like Indian that also provide benefits of high quality.

Let us look at some of the factors that drive the move towards outsourcing. The first and foremost is the cost savings for MNCs of around 35%-40%. This is at the root of these MNCs initiatives of becoming globally more cost competitive. While this factor of cost advantage has been on the forefront of the drive towards outsourcing, the long-term benefits for Indian service providers lie not in holding on to this advantage, but rather improve upon their domain competencies to provide higher-end outsourcing services to their clients. To prosper in the long-term, Indian companies have to move ahead of this 'commoditisation' of services. The second major factor that has helped the Indian BPO market to grow is the availability of quality manpower in the country. India has the maximum number of qualified personnel coming outs of its technical universities and this has aided the country's prospects further. Thirdly, the technology-ready infrastructure provided by Indian software companies acts at a major attraction for global companies looking to outsource their non-core activities to the country.

According to NASSCOM estimates, over 50% of the Fortune 500 companies have incorporated offshore outsourcing into their strategies, and around 80% of these now use India as their development base. While the US government seems to be in a mood of putting greater restriction on federal government departments outsourcing their jobs to countries like India, this should not be a cause of concern for the Indian companies. This is because while the US government contributes to just around 2% of the Indian BPO revenues, the backlash is unlikely to have a contagion effect. This is because, over the long term, economic sense is likely to prevail over the negative effects of backlash that is more based on political considerations than economic.

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