BPO bottlenecks

BEATING THE STREET

In some statements at the "India Outsourcing Summit, 2004" in Bangalore, pioneering outsourcing consultant Michael Corbett offered interesting and perhaps controversial insights.

To cut a long story short, he said, that the current growth rates (approx 70 per cent per annum) cannot be maintained for more than two or three years. Factors like "skills and innovation" will never be a driving force in the outsourcing business.

Indian BPOs can maintain their competitive edge by shortening delivery times and raising service standards. India also needs better corporate and IT security legislation to be eligible to even bid for certain contracts. In particular, developed countries are wary about citizens' personal data being moved offshore into insecure environments.

India's advantages in the outsourcing industry lie in favourable cost factors, lots of experience and familiarity with Western business practices and untapped brain power.

The last should allow Indians to move up the value-chain as outsourcing gets more sophisticated and opens up new areas such as drug-testing.

By 2006, Corbett expects staffing shortages in the Indian IT industry and growth will thereafter taper off to 15-20 per cent by 2007. This implies incidentally that the industry will quadruple in size before growth slows down. Corbett also expects the anti-outsourcing backlash in the USA to ease off after the conclusion of the presidential elections.

Nobody relishes the prospect of slower growth. But it must be inevitable at some stage. Corbett's take on impending staff shortages are backed by projections from other consultants, notably McKinsey. This would be a definite bottleneck.

Also, given the inefficiency of Indian legislative processes, it's anyone's guess how long it will take before appropriate IT security legislation is passed. Without this, Indian companies will be shut out of markets where data security is paramount.

Obviously, any take on the backlash will be highly subjective; it may or may not ease off once the political posturing of the US presidential elections is over. By the time it does ease off, a fair amount of protective legislation may already be in place.

Bush has never been anti-outsourcing. For one thing, the logistics chain in Iraq depends on it. Kerry once made a famous remark about outsourcing US CEOs being "traitors" but he's toned down the recent rhetoric quite a bit.

In speeches this month, he's said he will try and protect American jobs but he can't stop outsourcing. So, regardless of the winner, the US federal government may ease off on this issue.

However, various US state legislatures might tighten the screws anyhow - there's anti-BPO legislation pending in many US state legislatures. Ultimately the political acceptability of outsourcing depends on economic buoyancy. In a cycle of full-employment and prosperity, outsourcing is acceptable. If unemployment stays high, there will be increasing anger about lost jobs.

The weight of public opinion could force the political establishment into protectionist measures.

Corbett's analysis suggests that most experts are focusing on a long-term risk rather than a clear and present danger. Most experts see the major danger to Indian growth as competition from China, Eastern Europe, etc. But if Corbett's right, growth will slow due to internal bottlenecks long before China produces serious, English-fluent competition.