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Outsourcing Is Part Of Industrial Evolution; Can We Stop Inevitable?

07 November, 2010

In the last week’s US midterm elections, the Republicans seized the House of Representatives mainly on the plank of the Administration’s failure to tackle the rising unemployment in the country. Now lame duck Democrats control the Senate. For the Republicans, this victory is sweeter than the 1994 elections, when Democrats lost 54 House seats with Bill Clinton as the then-President. This change in dynamics is the biggest shift in power since 1948, when it was the Republicans who lost 75 House seats, according to psephologists.

These results have a huge bearing for Indian outsourcing sector as the focus has shifted on to the export of jobs to countries like India. 

India’s outsourcing sector employs more than two million people. Revenues from this sector account for roughly five per cent of the country’s economic output. According to Gartner, the BPO market in India is estimated to grow 19 per cent through 2013. A shift in the strategy of US companies on outsourcing will hurt the Indian IT sector.

Roughly a 70 per cent of business come from US companies, and given the dismal economic scene in the United States and the results of the just concluded Midterms elections, hard times may lie ahead.

Blame it on Outsourcing

Lets take a look back. In 2004, Ipsos-Public Affairs conducted a poll for Associated Press. When respondents were asked if they thought outsourcing did more to help or hurt the US economy, 69 per cent said the latter. 64 per cent of respondents said outsourcing is mostly caused by the greed of corporate executives, while some 30 per cent said outsourcing is mostly caused by the need for companies to compete. 

Lets take a look at public sentiment now. A poll conducted by WSJ/NBC News revealed outsourcing was being blamed for the country’s economic distress. Some 86 per cent of respondents said they believed outsourcing of jobs by US companies have led to economic sluggishness (corporate profit-seeking and healthcare costs were also cited as issues). The poll also highlighted a belief that free-trade agreements have been damaging for US.

Here is some more data. 83 per cent of blue-collar workers say outsourcing of manufacturing functions to foreign countries. 95 per cent of professionals and manager-level employees blamed outsourcing. Respondents across party lines, and rural, urban, and suburban lines are blaming outsourcing according to various polls and reports.

Political Theatre

US President Barack Obama signed into law a new Border Security Bill proposing a steep hike in some categories of H-1B and L-1 visa fees. The state of Ohio proposed banning outsourcing government IT projects to offshore destinations. The ban can only be viewed as counterproductive to the US government thrust on reducing public deficit and possibly lead to an increased tax burden on its citizens,” said Nasscom. Nasscom also pointed out that both the moves came before the Midterms elections, and blatantly called it ‘electoral rhetoric’. 

Outsourcing has indeed  been a key issue in this election. A Democratic bill intended to penalise companies that ships jobs overseas was blocked by the Republicans from becoming a law, mere days before the Midterms. The bill proposed ending tax deductions for expenses when companies cut down US operations, and shift jobs abroad. It also suggested imposing tax on products once made in US but manufactured elsewhere now; besides offering employers a two-year payroll tax holiday on jobs repatriated from overseas.

In other incidents, in California, Democratic representative Barbara Boxer ran television advertisements highlighting her Republican opponent Carly Fiorina’s decision to lay off HP employees in US and shift thousands of jobs abroad, when she was CEO of Hewlett Packard. She won. Fiorina did attempt a comeback asking Boxer to return any money she may have obtained from companies that outsourced, since she was principally opposed to the idea, but that did not seem to cut any ice with the voters.

“While Illinois is hurting, Bobby Schilling is focused on jobs—in places like India and China.” says an ad run by the Democratic representative Phil Hare in Ohio. He lost to Republican Bobby Schilling.

Democratic attacks on outsourcing alienated many Indian Americans in America, according to a report on the Wall Street Journal. For the first time USINPAC the chief Indian American lobbying group notably switched allegience.

NBC has come up with a sitcom called ‘Outsourcing’ to cash in on all the fervour. It shows the inevitable cultural clashes that happen when a US manager is transferred to head a call center in India. Both the Indian and American sensibilities are exaggerated for comedy, but in the end East and West not only meet, but get along famously together. Now if only, life were to imitate art.

If the majority of people, across party lines, across demographics and geography, blame outsourcing as the root cause of all American economic evils, whether outsourcing helps or hinders ceases to matter in the short term. What matters is that both the Democrats and the Republicans have to do something about outsourcing to appease the masses, and not only that, they need to be seen by the electorates as doing something.

Neither of them have much of a choice. It did not really matter who got the most votes at least as far as outsourcing is concerned. Now that the Republicans have won the House of Representatives, they will be forced to propose measures that keeps jobs in the country. Bills have been blocked, Obama and the Democrats have been proved mostly incompetent, and there is the 2012 presidential elections coming up.

Some not All

The ‘Report of the Defense Science Board Task Force on Outsourcing and Privatization,’ was published by the Office of the Under Secretary of Defense for Acquisition and Technology in United States in August 1996 (a copy of the report is available in Google Books). “The Task Force is convinced that an aggressive DoD outsourcing initiative will improve the quality of support services at significantly reduced costs,” says Chairman Philip A. Odeen.

The report also clarifies, “It is important to note outsourcing savings are significantly higher in government organizations than the private sector. This difference reflects the relative efficiency of in-house support organizations in the private sector, as opposed to their government counterparts.”

As the report points out, Information Technology was among the first business functions to be outsourced. The trend began roughly in the mid-1980s. If the US companies are competing to drive economic efficiences, and outsource a part of their non-core activities to low cost centers, it is ultimately the stakeholders of the company in US who reap the benefits.

China-based Foxconn (Hon Hai Precision Industry Co Ltd) may assemble and manufacture computer, communications, and consumer electronics devices for companies based in US, but the developers and designers are based out of US. Capital expenditure abroad usually translates to capital expenditure in US as well.

New York Times columnist Thomas L. Friedman has been among the advocates of outsourcing in US. He touched upon the phenomenon in ‘The Lexus and the Olive Tree’. Friedman expands the trends of outsourcing, and talks about the four broad categories of people in his book ‘The World is Flat,’ who can have job security. Workers who are ‘special’ (Bill Gates, Michael Jordon), workers who are ‘specialised’ (specialized lawyers, accountants, brain surgeons), anchored (electricians and plumbers who have to be at a specific location) and workers who are ‘really adaptable’. For the rest of us, we have to ‘learn to learn’ – upgrade our skillsets, learn new skills or specialise in very specific niche areas. 

All for One
There is no way one can underestimate individual trauma and suffering in the event of a job loss. In Silicon Valley, for example, some high tech engineers were forced to take up jobs as grocery clerks to prevent banks from foreclosing their homes. It is true, that increasingly not just back-office work, but functions like engineering and product development are getting outsourced. These are economic realities we have to deal with. Unfortunately, using artificial means to stop the invisible hand of global market phenomenon just do not work.

Think of the Industrial Age. It happened; whether or not people who lost their jobs to machines could adapt to change or not. When processes started getting automated, a whole bunch of us found out computers did what we do, cheaper and better. Again, computers could not be stopped. When the railroads were first being built, it killed a whole bunch of local industries as raw materials could travel further and finished goods started getting transported in bulk. Not building railroads was not an option.

The answer lies in governments creating environments where new skills can be learned and nurtured, and employees are flexible, adaptable, and get handsomely compensated for being so. Protectionism may win short term popularity contests; it will not make long term problems go away.

Another option may be to create new jobs. Energy is one sector, where the government can pump in funding. It is estimated that some $190 million is spenT a day to fight the war on terror. A fraction of that amount can be diverted towards R&D for cleaner fuel perhaps. The country’s education system could use a boost. Maybe the government can start hiring more teachers, especially at the primary levels, where the student-teacher ratio needs much to be desired.

One can only hope Obama will keep these things in mind during his India trip. 


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9 Comments
shiva iyer . 6 years ago

Lets get a point straight. The trend of global cycle of economics points to tremendous readjustment of what we do in next 30 years. Its a fact of life that China and India with there economics of scale can simply make the concept of product development, engineering, manufacturing and supply there hub. Simply western nations trying to hold on to their high per capita while porching the 150 world countries to pay for there life is simply going to change. Lets get this fact straight. No whims and no jokes. The 150 years of western domination is slowly going to whither to more balance way with some minor issues through the path. Of course, its going to be a bigger adjustment to western countries though tough to bite.

Not H1B . 6 years ago

You sound like Robin Hood. Why can’t India grow their “high per capita”, instead of TAKING from America? Is the cast system in India a form of corrupt corporate greed that is preventing this? Why don’t Indians help their poor, build up their own country and cycle their own currency in their own country?

Raj Shama . 6 years ago

There is nothing inevitable about outsourcing. Tom Friedman and other idiots have ‘paved the way’ for this false idea. Exactly who are the VCs going to loan money when all the manufacturing is in china and IT in india?

Jake_Leone . 6 years ago

India and China are both protectionist countries.

India has laws that require projects to be staffed by 99% Indian workers.

China has deliberately undervalued their currency for decades.

India has abused the U.S. visa programs, most Indian IT companies throw away the resumes of U.S. citizens, U.S. citizens are never given the chance to even compete for job. The ethno-protectionism of Indian companies, cannot be allowed.

Companies that use H-1b and L-1 must abide by the civil rights laws of the United States. You cannot have a workforce that is 90% foreign, predominantly from your home country in the United States unless you can demonstrate that you actually read, and consider, the resumes of U.S. citizens when trying to fill a job in the United States (before turning the H-1b or L-1 visa system).

Vivek Chandrasekhar . 6 years ago

It is no surprise that Americans are wary about outsourced service providers. It is common wisdom among those who know the system well that there are hundreds of body shopping outfits in the US who have been faking CVs of candidates and placing them on client sites. These firms cannot employ Americans and hence the natural angst from US citizens grew over time. Interestingly, whenever we talk about American angst against outsourcing , we only talk about Infosys, TCS et al. No journalist has so far attempted to bring to light the real truth behind this – the millions of IT workers employed on wrong credentials – easily one of the biggest corporate frauds in terms of lost opportunity cost.

Jeff Thomas . 6 years ago

Outsourcing will be gone soon.Some of the factors that will leads to its end in near future :-

1. Currency arbitrage the biggest factor leading to dramatic profits of firms like Infy and TCS will be gone .

2. The poor lifestyle and pay packages for IT workers will force them to make mistakes and bugs in mission critical apps in airline and banking industry will lead to sudden blow up and loss of reputation.

3. Consider this if a Paki or afghnani comes to know that IT industry is based on optic fibre links layed between Indian and USA wont they cut those and the day that happens IT is gone forever.

4. The day a new business paradigm is relaised by Americans that they need to employ more real people to do business rather than pay up billions to do the same task through machines they will not wait long to decomission the machines and replace with humans .

Overall I see IT outsourcing going bust .

Mack Cunha . 6 years ago

Outsourcing will be gone after 2012

Shekhar . 6 years ago

Jeff your points are valid but why will all this happen now since it didnt happen in past 20 years ? What will happen to millions of people employed in outsourcing industry ?

Vidya Devaiah . 6 years ago

Although no one should discount the hardship and uncertainty faced by an individual who has lost his or her job, nothing is that black and white. The popular misconception is that outsourcing always means job loss and a windfall profit for the company doing the outsourcing. A more accurate perspective is that for companies, it is often a matter of staying afloat or struggling to grow, not getting windfalls, and with regard to jobs – when economies are not stifled by protectionism – job losses and gains tend to balance out. Please see more at my blog post at Law Without Borders.

Furthermore, those American companies with manufacturing and service set-ups abroad haven’t made these arrangements to take advantage of the tax deferral. They have done it because of lower operational costs, or because of the proximity to target markets, or for other reasons that may have nothing to do with tax breaks or outsourcing of jobs. Changing the tax code to remove the deferral will only create a barrier that will reduce the ability of U.S. companies to compete in today’s global marketplace. If the U.S. government offers incentives and tax credits to companies that create more jobs for the American workforce, that might help a bit.

Vidya Devaiah

high-end legal outsourcing

Outsourcing Is Part Of Industrial Evolution; Can We Stop Inevitable?

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