The BPO backlash?

WORLD MONEY

Even as IT-enabled services (ITES) exports registered a sharp growth in 2003, some incidents raise questions about the long-term prospects. Two of the better-known names, Dell and Lehmann Brothers, recently reduced the services outsourced to India.

Some individual states in the US have also passed laws banning the outsourcing of public services to foreign providers, under pressure from the business and employee lobbies. When HSBC decided to transfer some work from London to an Indian unit, the unions protested and there was also criticism of the move in the British press.

In a way, such protests and actions are a tribute to the success of Indian ITES. On the other hand, does it portend ill for the long-term prospects of the industry? Consider a few perspectives on the business process outsourcing (BPO) debate.

First, with increasing globalisation of manufacturing, far more blue-collared jobs in the industrial world have gone to countries like China. However, this did not attract the kind of opposition that the much smaller transfer of white-collar jobs is attracting.

Is the variation because blue-collared jobs were traditionally thought of as vulnerable to foreign competition, but not so the white-collar ones? Foreign sourcing of white-collar services is a recent phenomenon, which blossomed after technological developments cut telecom costs sharply, and the internet provided a cheap communication platform.

Second, the irony is that many developing countries, including India, were opposed to the inclusion of services as part of the World Trade Organisation (WTO) treaty. The fear was that domestic companies in industries like banking and insurance would not be able to compete with their far stronger rivals from industrial countries.

The BPO experience is yet another instance of the law of unintended consequences: instead of western banking and insurance services flooding the developing world, the result has been the other way round with a wide spectrum of business processes being transferred from industrialised countries to developing countries like India.

There is a third angle. The trend is from less sophisticated, elementary work to increasingly sophisticated business processes "" from code-writing and system maintenance to co-development and design of products, and to proprietary products; from medical transcription to reading of X-rays to sophisticated surgery and hospitalisation services; from call centres to processing of personal loan applications and insurance claims, to sophisticated financial analysis; the list is long. Indian hospitalisation and healthcare services exports alone are expected to amount to $ 5 billion by 2008.

Indeed, given the WTO rules, and the obvious comparative advantage that countries like India enjoy, chances are that the present backlash may not have much of a longer-term impact. If HSBC's move to transfer 4,000 jobs to India evoked protest, this has not deterred Barclays from announcing only the other day that it would be transferring 5,000 jobs to India.

Currently, the ITES industry in India employs about 200,000 people directly. This is expected to go up to a million in the next five years. This apart, the ITES industry also creates a large number of jobs in services like employee transportation and catering that it itself outsources.

And, we are still merely scratching the surface. To quote from an article in the McKinsey Quarterly 2003 Special Edition, "Business-process offshoring is still a nascent industry. By our estimates, in 2002 it was worth $ 32 billion to $ 35 billion, just 1 per cent of the $ 3 trillion worth of business functions that could be performed remotely!"

One compelling driver of the BPO movement should not be lost sight of. While BPO has so far been a US-centric phenomenon, in Europe and Japan the proportion of working population to retirees is falling sharply as a result of drops in birth rates and rising lifespans.

Therefore, a larger segment of the working population will have to work on services that cannot be outsourced. The inevitable result will be an increase in outsourcing of those services that can be outsourced "" the only alternative being immigration from younger countries like India. The difficult sociological problem will be whether to prefer BPO to immigration of people of other races and cultures.

The McKinsey study also estimates that for each dollar of work transferred offshore, the direct and indirect benefits to the US economy are around $ 1.12/1.14, as compared to just about $ 0.33 to the outsourcee country.

The problem, of course, is that, first, the benefits are less visible than the jobs lost and, second, the person who has lost his job is hardly in a position to appreciate that the economy as a whole has gained significantly.

What needs to be done at our end for capturing a significant portion of the pie? First, the quality and reliability of power needs to be improved, and the cost of telecom services reduced. We also need to remove some tax irritants. Second, it would be counterproductive to obstruct services imports.

Two recent cases: Metro, a German wholesaler, operating in Bangalore on a cash-and-carry basis, attracted protests and boycotts because it could sell cheaper than its competitors.

On a different plane, the chartered accountancy profession does not want foreign firms to be allowed to do audit work in India, but recently permitted Indian chartered accountants to enter into partnerships outside India to get professional work abroad. We should not forget that, overall, we have far, far more to gain by globalisation of services.

Email: avrco@vsnl.com