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BPO: Hurt by protectionism? - Views on News from Equitymaster
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  • Mar 11, 2003

    BPO: Hurt by protectionism?

    BPO (business process outsourcing) is expected to be the next growth engine for the IT industry that is passing through a rough patch. In the recent past, expectations of a swift growth in the industry have been tarnished by moves in the US to block jobs being outsourced to India. While Nasscom and IT services companies have maintained that such a move is unlikely to have an impact on the sector, we feel that this could slower the rate of growth in outsourcing.

    Of course, such moves have come at a time when prospects of the US economy are uncertain and the corporates are still reeling from the blow dealt by the technology slowdown. Due to the bleak economic environment, companies are cutting jobs. At times like these when corporates move jobs to low cost options like India, politicians and employee unions are fighting back.

    The move against outsourcing to India was started in New Jersey and then spread to other states. However, Nasscom and the Indian ITES majors are playing ‘not worried’. According to them, such moves are likely to be restricted to the Government sector and the US Government’s work outsourced to India is very low at 2% to 3% of the outsourced volumes. However, Mr. Vivek Paul, Vice-Chairman - Wipro, has pointed out that this is no different from globalisation that took place in the manufacturing sector in the 1970’s. This saw exodus of jobs like making shoes, cheap electronics, and toys to developing countries. According to one estimate, highly import competing industries lost 6.4 m jobs in the US between 1979-1999. Despite this, outsourcing did take place.

    But this data has to be looked in another light post 1982. The US economy underwent an unprecedented growth phase (after a brief pause in 1991). Consequently, the unemployment rate had fallen to 3.9% in December 2000. However, the situation is presently very different and the unemployment figure had touched a high of 6% in December 2002.

    Our biggest concern is that protectionist move that has been started by the Government sector may gradually spread to the private sector. The US officials may be forced to back the ‘anti-outsourcing’ lobby as a political move. Therefore, what has started as a small rumbling could soon develop into a high pitch political battle. Infact, magazines like Businessweek have gone on to call the outsourcing story as the second wave after the shift towards outsourcing manufacturing. Even a story by Economist, on outsourcing was titled as ‘America’s pain, India’s gain’. According to Forrester Research, 3.3 m white-collar jobs and U$ 136 bn in wages will shift from the U.S. to low-cost countries by 2015.

    Thus, as the outsourcing wave gets stronger it might encounter problems that have not been factored into the rosy projections given out by various sources. Thus, investing in technology companies on the back of a growth in BPO services could be an extremely risky proposition. Only those with a high-risk appetite should look at this as an investment case. As far the technology majors like Infosys and Satyam are concerns, it could be prudent to take in to consideration growth from existing business lines while evaluating the future prospects of the company.



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