Paper no. 1219	12. 01. 2005
Nations Gunning for IT and BPO Business  Guest Column-by Hari Sud US elections are over and the IT Outsourcing debate is taking a rest. This subject is no longer crowding the US media. Even, Lou Dobbs, the strongest opponent of outsourcing on the CNN News, has taken a respite from this debate. The Democrats, who put this issue front and center for the 2004 presidential elections, are no longer talking about it. Having lost their bid for the Whitehouse and having lost ground in the Senate and the Congress, they are looking for other issues to capture public’s attention.  What next?  The re-election of President Bush will ensure that IT and Business Process Outsourcing (BPO) effort continues. Its benefits to the US and the Europe’s economy are immense. It is more or less replay of manufacturing outsourcing to China from 1982 onwards. Now it is India’s turn to take focus away from China. Next four years will decide how far US and Europe is prepared to go to outsource this vital sector of their economy.   Where does India Stand in Outsourcing?  By far India is the leader with 60% of the IT and BPO business outsourced by the West. Preliminary estimate indicate that India in 2004 exported about $11 Billion worth of software and $5 Billion worth of BPO services to the West. It has employed about 800,000 highly skilled personnel in Bangalore, Hyderabad, Delhi, Bombay and Chennai.  The above has set a national boom in motion in these cities. The nation is the net beneficiary with increased and highly profitable exports. The latter has multiplied the capital investment in much-neglected infrastructure and other sectors of the economy.  Nations other than India Trying to Duplicate this Miracle  India’s hegemony in this field is increasingly being challenged by China, Philippines, Malaysia, Romania, and Russia. Of late, Pakistan is wishing to enter into this field. This as per General Musharraf’s utterances during his recent visit to US that Pakistanis speak better English than the Indian is a marketing pitch to solicit BPO business for his country.  China  Next to India, China has the talent and resources to undertake IT and BPO work. Unfortunately, the work force has to practice their English for another ten years before they will reach the same comprehension as India has. Never the less they have built a huge infrastructure for IT work and are sending multiple delegations to India to learn and copy. Their success will mainly come from hardware manufacturing outsourcing from Taiwan to China. The former is looking for highly skilled labor for its hardware development industry and will outsource to the later as it builds its capability. India will stay a leader in the application development industry. Chinese exports in the IT sector are rising and soon will bypass India except that these exports will be hardware related.   The above is a direct reflection of demographics of IT labor force in the West. Whereas people of Indian origin undertake application development, people of Chinese origin undertake the hardware and infrastructure work.  Russia  It wishes to become the intellectual knowledge headquarter of Europe. Currently it has only 4% share of the work but it wishes to grab more. It wishes to build a silicon valley of the Europe by training additional manpower. President Putin recently visited the city of Bangalore to see for himself the miracle, which took place in India in last ten years.   Russia has a better potential to emerge as a contender to IT business in the future. It is highly competent and intellectually capable society. It can match India’s innovation and design capabilities. Hence all developments in Russia are to be carefully watched.  Israel  For any destination under consideration for IT outsourcing, if Israel steps forward for consideration, it will win hands down. This happens primarily due to strong influence, which Israel has on western psyche, and influence of highly successful Jewish population of America.  Except that the higher labor costs compared to India certainly puts this effort in quandary. For this reason they have concentrated on high-end development work in defense and strategic industries. An Israeli delegation visited Bangalore recently and they wish to collaborate in areas where each has a natural advantage.    Currently, Israel is not competing for the same dollar with India but future co-operation could result in exploiting each other’s advantages. India has nothing to fear from this competition as Israel faces labor shortages and higher costs.  Mexico, Ireland, Malaysia, Singapore & Philippines  They are all currently small players in the field but are building their infrastructure to garner business in the future. Mexico is putting most of its energies to be at the receiving end of manufacturing jobs. Ireland has a significant BPO capability. Malaysia & Singapore are excellent choices as an alternative to India. Philippines have started in recent years to concentrate on this sector of exports. Currently they have a small segment of the total business. But their business share will grow, as they get experienced.   In summary most of the above nations are working to duplicate India’s example. Sooner or later this will start having impact on India’s market share.  India, to protect its lead, will have to innovate and integerate vertically to maintain the market share. To some extent this is already in progress.  Client Base of the Outsourcing Business  The outsourcing business originates in USA, UK and Western Europe (referred to as the West). Most countries that are at the receiving end of this business as listed above are in the East. Deliotte & Touche have estimated that a total of $200 billion will be outsourced in the financial and related sectors in the current year. This includes Business, Professional and Technical (referred to as BPT). It is estimated that an average enterprise in the West will outsource 66% of its work to others. Of this 30% will be IT and back office related work. The latter will head for overseas destinations like India and other countries.  Now the question is why should an executive in the West pick India as its destination.  Reasons are obvious i.e. cheaper costs and availability of IT talent. A recent survey of about 200 companies indicated that 40% would choose India above other countries. This high confidence in India’s IT industry is a good news.  The bad news is that if too much of this work arrives and India’s silicon valley centered in Banagalore is unable to deliver, then the customer will look elsewhere. This is particularly true if the infrastructure around the silicon valley starts to crumble and other areas under development in Kolkatta, Hyderabad, Chennai and Delhi are unable to catch up, and then the customer may look for suitable alternative. Currently, Bangalore has entered into the West vocabulary as primary destination for IT outsourcing. This view has to be managed into other centers.  Hence the development of other centers of IT excellence is of paramount importance.   Nations Capability to Outsmart India  Always watch for Russia and East European emerging economies. They have a highly capable workforce and are in close proximity to Europe. Their entry into the European Union last year is a major plus for them. These nations in their presentations while soliciting IT and BPO business have targeted India’s over extended infrastructure and rising labor costs. One such example is a Romanian delegation to an IT conference in US last year. The delegates through a strange logic had come up with a figure that placed Romania cheaper than India in labor costs.  Nobody bought this logic, but the point is that other countries are trying hard to solicit business away from India by hook or crook.  Future of Outsourcing Worldwide  This is the second wave in last twenty years that US and Europe has outsourced to Asia. The Chinese were the beneficiary of the first wave in early eighties aided by huge sums of money in form of FDI for capital investment. Now manufacturing and China are synonymous to each other. This trend is irreversible.   The current wave of service sector outsourcing started in 1998 and will continue for a while. In late nineties India was the only country where the West could outsource its IT and BPO work. Other nations joined in a bit later. The business in India grew from under $500 million in 1998 to $11 Billion in 2004. This phenomenal rise is no comparison to China’s miracle but is close behind. This business will maintain its explosive 25% a year growth in next decade or so. It is estimated that by 2010, amount close to $100 Billion in IT and BPO work will be outsourced worldwide. Of this amount about $50 billion will come to India.   Economically, IT and BPO work are higher margin businesses. Superior intellect needed to undertake the work is the main reason for higher margins. It is estimated that profits generated by $10 billion exports by India (IT & BPO) is equal to profits generated by $30 billion of manufacturing exports generated by China. This will ultimately place India ahead in economic development through its own resources. This is unlike China, which has to rely on FDI.  Political Stability and Economic Policies in India are Key to the Future  If India stumbles politically or adopts a bit regressive economic model any time in the future, the outsourcing business will take a flight. The West has nothing to lose in relocating this business elsewhere. Their investment in this whole enterprise is insignificant, hence relocating for them is a small issue. Hence as the years pass, each and every of India’s policies of yesteryear including very regressive labor laws are to be modified or jettisoned. New laws are to be either encouraging the FDI including welcoming the investor or are to be business friendly.  Both are important.   In a smart change of heart, the Communist rulers of West Bengal are spreading a red carpet to welcome the investors. Their counterparts in the national parliament are die-hard old time comrades who still stick to the old regime of state control and reduced contact with the West. They are of a dying breed. As the benefits of economic development are felt, the new leaders are taking a different view. They are learning from the Communist Chinese experience and are taking a friendly attitude towards the West. (The author is a retired Vice President from C-I-L Inc. and has lived in Canada for the past 34 years. A graduate of Punjab University and University of Missouri; Rolla, USA, the author is a former investment strategies analyst and international relations manager. The Views expressed are his own. email- harisud@hotmail.com)
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