Section 2: DISCUSSION
2003 Economic Statistics for the US and India
United States
GDP per capita $35,060
Unemployment rate 5.8%
Labor force 141.8 million
Population below the poverty line 13%
Typical salary for a programmer $70,000
India
GDP per capita $480
Unemployment rate 8.8%
Labor force 406 million
Population below the poverty line 25%
Typical salary for a programmer $8,000
Top 5 US Employers in India
General Electric 17,800 employees
Hewlett-Packard 11,000 employees
IBM 6,000 employees
American Express 4,000 employees
Dell 3,800 employees
Source: Wired Magazine (Jan 2004)
Industry Trends
Based on the above economic data, the trends in outsourcing to India are focused primarily on labor-intensive activities in the technology and service sectors. Focusing on the operational end of business activities, firms are outsourcing primarily in the areas of business process outsourcing (BPO), services like payroll management, accounting, legal research, and call center service.
Call center outsourcing is proving to be one of the most successful ways to increase cost effectiveness. Companies like GE, American Express, Sprint, Dell, AOL, and Amazon illustrate this pattern. After outsourcing call center work to lower cost locations like India, these and many other Fortune 500 companies have improved cost effectiveness by up to 50 percent in some cases (this is appearing to be the generous exception not the standard). In addition they have improved the quality of their customer support and satisfaction.
Dramatic results have been observed in IT outsourcing where a cost reduction of 50-60 percent can been achieved in production and programming costs. Many industry experts are establishing that technology jobs are following a path well trodden by the manufacturing industry, which sent millions of jobs offshore or simply eliminated them in the past 30 years, contributing to a drop in the average wages of low-skill workers. Technology professionals will face the same kind of wage drop, and the work will go offshore much faster than manufacturing did, according to Matthew Slaughter, Dartmouth College’s associate professor of business administration. “[IT work] will move faster because it’s easier to ship work across phone lines and put consultants on airplanes than it is to ship bulky raw materials across borders and build factories and deal with tariffs and transportation.”
Although this discussion focuses primarily on technology outsourcing it is important to note that manufacturing and production industries have also seen increased outsourcing activities to India. In a recent survey, conducted by consultancy firm ATKearney, revealed that leading automobile and component manufacturers from the United States preferred offshoring jobs to India over China, Mexico and Brazil. India was voted as the top offshoring destination by 24 percent of the voters, followed by China at 15 percent, Mexico 13 percent and Brazil 10 percent. (Source: Asian Pacific Newswire)
Large firms with abundant capital will generally create an offshore development center or (ODC) instead of outsource activities to an Indian based firm. These ODC’s are in essence offshore campuses used as an extension of domestic operations. These centers work especially well in India where the labor is capable and cost effective and the technological infrastructure is in place. The various benefits expected out of an Indian offshore development center are summarized below. This is as per an established report by Nations Banc Montgomery Securities, an analyst firm in US
- Ready Infrastructure available
- Leverage a disciplined quality Methodology
- Leverage existing Project Management expertise of your ODC partner
- Access to a large pool of skilled professionals
- Access to diversified skill sets
- Lower cost to customer
- Shortened development cycles due to time difference
Why India?
In North America, in the technology sector labor costs are the largest share of operating expenses 30 – 40 percent. In India, labor costs are much lower, about 10- 20 percent of the US cost. Because of this operating expenses are more evenly distributed. The savings can be significant for companies. Unlike outsourcing locations like Mexico and the Caribbean the labor pool in India is highly skilled (India alone produces 2 million English-speaking college graduates and 300,000 post-graduates annually). Although approximately 5% of Indians are proficient in English, in a country of more than one billion people, this still represents a labor pool of more than 50 million people. Someone answering complicated financial questions on the phone or product testing new software in the U.S. may expect $40,000 a year, but in India, labor costs are often 1/4 of U.S equivalent positions.
In addition the Indian workday begins when the American workday ends, companies can conduct labor-intensive activities, like software testing, both at home and abroad and save time by having the work continue around the clock. As workforces in America, Europe and Japan are aging; the population of Indians under the age of 25 will increase by 47 million by 2020.
Findings from a January 2003 Nasscom's survey include:
• The number of Indian IT software and services professionals should hit 650,000 next month, a 24.4 percent spike from last year.
• Basic salaries for IT workers rose an average of 8 percent in 2002, with most companies adopting a variable pay strategy in a bid to control costs and to link pay to company performance.
• Hiring of new IT professionals was highest in South India at 44 percent and lowest in the Eastern region at 6 percent.
• The overall median age of Indian software professionals was 26.5 years.
• 79 percent of professionals in software companies were men, whereas 21 percent were women. However, this ratio is likely to be 65-to-35 by 2005. The ratio is reversed in the IT-enabled services sector, where the ratio of males to females is 35-to-65.
• 42 percent of the software professionals or knowledge workers surveyed possessed more than three years of work experience.
• The survey also revealed that 76 percent of all software professionals had a graduate degree or higher
Source: CNET http://news.com.com/
Implications on the US
Consider some of these statistics.
• In a talk on how the US will actually benefit from outsourcing rather than incur losses, Azim Premji, the chair man of Wipro, said that the US economy was projected to save about $11 billion from outsourcing to India in the current year. · "Indian IT professionals in the US spend $1.2 billion contributing to the domestic economy there. Indian firms paid over $350 million to the US social security in 2002-03 and this amount is expected to cross $1 billion in the next few years," he said.
• In a recent report by Inductis, to understand the magnitude of the impact on the US economy of offshore outsourcing, figures showed that 8 billion dollars was saved over the last four years.
• The Inductis report also showed that GE, which employs 18,000 workers in India, has seen a total savings of 350 million dollars a year.
Business Process Outsourcing (BPO) and off shoring is expected to grow substantially in the next five years. Approximately $300-400 billion of services will be moved offshore and/or outsourced. India's share in the outsourcing market is likely to be 2/3rd. Outsourcing reduces costs, increases capacity and enhances capability. The numbers are significant and for many firms they speak for themselves.
Section 3: CONCLUSION
By the end of 2004, research company Gartner estimates, one in 10 IT jobs at U.S. IT companies and one in 20 at non-IT companies will move offshore.
It is clear that offshoring and outsourcing are an integral element of the modern global economy. If firms seek to be competitive in the global market they must allocate resources in an efficient responsible manner, India is a wise place for managers to use as an outsource/offshore destination. Although offshore operations US firms in India have been scrutinized the trend will continue but the shock on US employees will gradually be minimized as supply-and-demand for outsourced work meets equilibrium. In addition "Expectations about the benefits of outsourcing are becoming more realistic," according to a report by DiamondCluster International, a Chicago-based consulting firm, which recently released a survey of more than 180 companies involved in offshore outsourcing. "Most buyers in the previous study expected gains in efficiency in the range of 50 percent. Today, those expectations have declined to 10 to 20 percent."
India's wage inflation, which approached an estimated 14 percent last year, is a natural byproduct of a classic supply-and-demand scenario. Although projections for outsourcing remain highly speculative, Forrester Research has estimated that 3.3 million American jobs will be moved to other countries by 2015. But as far back as a year ago, India technology trade association Nasscom (National Association of Software and Services Companies) was already concerned that India would fall short of demand for workers by as many as 235,000 professionals. The equilibrium for offshore outsourcing is on the horizon and whether the demand is met in India or in other nations such as China the benefits to firms will continue to be significant.
But regardless of whether offshore outsourcing savings are 10 percent or 50 percent, increased productivity in IT will have far reaching implications in the areas of production and operations management. Better less expensive software will save cost in IT based Total Cost Management systems, Inventory Management System and every other automated production management tool.
SOURCES:
C/NET News.com, India could face IT staff drought, Feb 19 2003 http://news.com.com/2100 (April 16, 2004)
Reuters, U.S. Firms Eye More Outsourcing to India, Sept 26 2002, reutersnews.com, (April 18, 2004)
CIO Magazine, Offshore Outsourcing, Sept 2003,
(April 19, 2004)
Wired Magazine, Outsourcing to India, Feb 2004, (April 20, 2004)
United Press International, Workforce Management, March 26, 2004, (April 20, 2004)
Wipro, Offshore Outsourcing: White Papers, Feb 2004, (April,18,2004)
Fortune Magazine, India Outsourcing: Dreams and Illusions, Dec 2003, (April 17, 2004)
2004 Financial Times Information, Global News Wire - Asia Africa Intelligence Wire
Copyright 2004 Silverline Information Systems Pvt. Ltd, India Business Insight
March 14, 2004, (April 19, 2004)
