BPO: When Politics Overwhelmed Business
I November 2004

The BPO controversy has been raging for the past several months. In the run up to the US Presidential elections, the concern over American jobs being outsourced to India has even turned into a major political issue. But how valid are these fears and what does the future hold for Indian offshore IT services companies. An exclusive analysis from ICFDC.com

What is BPO?
Business Process Outsourcing (BPO) has been defined as "the delegation of one or more information technology (IT)-intensive business processes to an external provider that in turn owns, administers and manages the selected process based on defined and measurable performance criteria." Increasingly global companies are looking at cutting costs and BPO offers them with the opportunity to do just that. The availability of a highly skilled talent pool and faster adoption of well-defined business processes can lead to higher productivity without compromising on quality. The benefits that BPO offers include improvement in cost, quality and productivity. The business sectors that have adopted BPO include insurance, banking, pharmaceuticals, telecom, automotive and airlines. Insurance and banking sectors, for instance, are able to generate huge savings since a large proportion of processes, such as claims processing, loans processing and client servicing, can be outsourced through call centres.

India has emerged as one of the leading BPO destinations, thanks largely to a robust communication infrastructure, a large English speaking workforce, low labour costs, an advantageous time-zone difference with the West and the rise of the software services sector. The BPO industry in India has been growing at a spectacular rate of 70 per cent a year and is now worth $1.6 billion, employing 100,000 people. McKinsey estimates that if the industry continues to grow at just 27 per cent till 2008 it will deliver $17 billion in revenues and employ close to a million people.


The Politics of BPO
In March 2004, when the US Secretary of State Colin Powell was visiting India he said: "Outsourcing is an opportunity for US businesses as well as a way to service Indian needs. Outsourcing involves loss of jobs and requires creating opportunities in the US to provide jobs. It is a reality of the 21st century that dislocation will take place if new opportunities are created," Powell said. Later in a programme on NDTV's 24X7, Powell said: "People without jobs are a political issue." The loss of jobs due to outsourcing has clearly become a hot political issue in the US. Barring some unusual revisions, President Bush will be the first US president since Herbert Hoover to preside over a net loss of jobs during his administration. After a brief rise in employment in spring this year, employment growth has languished again. The decline in manufacturing employment has resulted in a loss of nearly 3 million jobs since the 2001 recession. According to Forrester Research Inc, an estimated 315,000 US services jobs had been moved overseas by the end of 2003.

It's no surprise then that there has been a steady rise in "protectionist" sentiments in the US. Globalisation too has exposed the US service sector to severe competition. The Democrats see in the rise of the BPO sector an ominous trend for the US economy as they believe that job losses would be concentrated in high paying fields such as medicine, management and consulting. Senator Kerry has vowed to slow outsourcing by imposing new regulations on US companies and restricting government contracts to companies that promise to perform all the work in the US. He has also said that labour and environmental standards in developing countries would be looked at in future trade agreements, which roughly translate into inhibiting trade with poor nations.

These developments have major implications for India. The US is India's largest trading partner. Bilateral trade in 2003 amounted to $18.1 billion and is expected to reach $20 billion in 2004. The US is also the biggest investor in India, with the US Foreign Direct Investment (FDI) touching the $3.7 billion mark in 2003. US investments in India's rapidly growing software sector has also bossted service exports. Revenues from the IT industry are expected to exceed $20 billion in 2004-05. India's goal of rapidly increasing its share of world exports (currently 0.8 per cent) is unlikely with future US restrictions on trade and investment in India. Many US companies have decided to go slow on outsourcing contracts and some have postponed them to after the elections as some senators in the US have blacklisted certain companies that outsource jobs to India and other countries.

The BPO controversy has created much heat and dust in Indo-US relations as well. During his visit to India, Powell acknowledged the inevitability of outsourcing and expressed a "desire on the part of the US to see greater opportunity in India", including more foreign direct investment, more economic reforms and ease of entry for US businesses in the Indian market. But at a joint press conference with his Indian counterpart Yashwant Sinha, Powell insisted that this did not amount to a quid pro quo for not pulling the plug on outsourcing. "For minimising dislocation (due to loss of American jobs), we seek more opportunity for US business...so that we can create new jobs... and offset losses," Powell said Reacting to Powell's statement, the then External Affairs Minister Yashwant Sinha, said, the opening up of the Indian market was a process and the government was determined to see it through. "It is in the interests of India to integrate with the rest of theworld economy and therefore autonomously we are following that path," Sinha said. "It should not be seen in the context of pressure and counter-pressure," he added. However, another key US government official, Robert Zoellick, the US trade representative, tried to establish a link between outsourcing to India and the opening of India's markets for both services and agriculture. "We need to make it a two-way street that includes services, goods, and agriculture," said Zoellick, adding that India was not in a position to complain as it has not signed a World Trade Organization agreement on government procurement. In January 2004, when the US Senate passed an appropriations bill totaling $328 billion, containing provisions that restrict government contractors from outsourcing work overseas, the move was soundly criticised by Indian government officials. The then commerce and industry minister Arun Jaitley said: "It is strange that on the one hand people are talking about openness of markets, and on the other the US is banning business process outsourcing."

What's in store for the future?
Despite the political rhetoric, it is unlikely that new barriers to free movement of goods, services and capital will occur, regardless of the outcome of the US elections. In a recent statement the Federal Reserve Chairman Alan Greenspan warned that while curbing outsourcing of American jobs to lower wage countries like Indian and China may provide temporary relief, it would backfire on the US. Restrictions on free trade, he warned, would hurt US standards of living. "We do have a choice. We can erect walls to foreign trade and even discourage job-displacing innovation. The pace of competition would surely slow, and tensions might appear to ease. But only for a short while," he said.

A recent study by the US Congress has found that outsourcing has had a "far limited impact" on US jobs and economic growth, though government data on the "growing" phenomenon remains limited. The study released by the Government Accountability Office, the investigating agency of Congress, cited Department of Commerce statistics showing that US imports of services associated with offshoring - business, professional and technical services (BPT) - grew from $21.2 billion in 1997 to about $37.5 billion in 2002, an increase of 76.9 per cent. During the same period, US exports of BPT services increased 48.6 per cent, with the US maintaining a trade surplus in this category. Commerce data also show that US investments in developing countries that supply offshore services "were small compared to those in developed countries" and that most of those services were sold to non-US markets.The study pointed out: "While we make no recommendations at this time, we observe that the reasons for the growth of offshoring are relatively well understood, but less is known about the extent and the policy consequences of this activity."


Outsourcing will actually benefit the US
Even as the US Congress report pointed to offshoring's limited impact, a new report by research firm Evalueserve and sponsored by the Indian National Association of Software and Service Companies (NASSCOM) titled 'Impact of Global Sourcing on the US Economy, 2003-2010' said that offshoring will actually benefit the US. The key points made by the study are:

• · Offshoring will grow at a rate of 15% for the next eight years and about $98 billion worth of these services will be offshored by 2010.
• · For every $100 of call-centre work offshored by US firms, $143 goes back into the US economy as repatriated profits, increased sales of telecom equipment and cost-savings.
• · The amount invested back into the US economy (for every $100 of work) is $133 for IT services, and $142 for high-end knowledge services like equity research, underwriting and risk management.
• · Offshoring of IT services has enabled US workers to move to specialised and creative roles. The proportion of specialists in the US IT workforce increased from 38% in 1983 to 74% in 2002.
• · Utilisation of offshore facilities results in the growth of the local economy and an increase in the disposable income leading to the expansion of the global market for US goods and services. For example, in India, the proportion of the consuming class in the overall population expanded from 14% to 30% in the 1990s and is set to reach 40% in 2006-07.
• · There will be a short-term impact on the US labour force. About 1.3 million jobs will move offshore between 2003-2010, affecting one million US workers. Of these, about 0.7 million (0.4% of the labour force) will be unemployed for a short duration. Over eight million jobs are reallocated every quarter in the US economy and hence, the reallocation process will not be a strain for the temporarily unemployed ones.
• · About 300,000 workers (0.2% of the workforce) will be unemployed for more than three months due to offshoring. They will require re-training and redeployment.
• · Over the next decade, the US economy will mirror the growth of the 1990s leading to an increased demand for labor. There will be a domestic labour shortfall of about 5.6 million workers by 2010 due to slow population growth and an ageing population.