Can Indian ITES companies ride out the storm?

The recent past has seen a spate of protests and resentment against companies in the US and UK that outsource work to India. The local workforce, especially the middle class in these countries, is up in arms against the growing trend of outsourcing work to countries like India. Fears of rising unemployment due to outsourcing are fuelling this phenomenon. Abhinav Singh analyses the impact of these events upon the Indian ITES sector

Five years back, no one had even heard the term IT-enabled services. The past couple of years, however, have seen the rise of the IT-enabled services (ITES) sector in India. ITES companies employ 1,71,100 workers (Nasscom estimates) and generate huge export revenues (projected at Rs 117 billion during 2002-03) for the country. Today more than 500 of the world’s top companies outsource work to India. The quantum of new investments in the ITES sector had reached $800 million by the end of 2002. According to Nasscom, the Indian ITES-BPO industry will grow by 65 percent during the current financial year. The recent spate of protests in the form of legislation in the US aimed at preventing government departments from outsourcing work to foreign destinations and in Britain by employees of British Telecom against outsourcing work to India may have an effect on the fast-growing ITES sector in India.

Nasscom is against such moves and it recently lobbied hard along with the Information Technology Association of America (ITAA) to prevent the New Jersey bill from being cleared. It now appears that the bill will be amended and may not carry the clause, which precludes US government departments from outsourcing to Indian companies. If the bill is amended as per the demands of the two bodies it will be a major victory for Nasscom and the Indian ITES sector. However, it doesn’t mean the end of the fight—three more states in the United States are planning legislation against outsourcing—Connecticut, Missouri and Wisconsin..

India: A preferred outsourcing destination
India has been a preferred destination for foreign MNCs looking at its numerous advantages—the foremost being India’s abundant, well-educated, technically skilled, English-speaking workforce ready to work at much lower wages than their Western counterparts. According to Nasscom, the differential in wages of workers between the parent location in the US or UK and India are more than 70 to 80 percent. Moreover, attrition rates, especially in the ITES sector, are much lower in India when compared to that prevalent in Western countries, particularly in the United States.

That said, there’s more to the Indian ITES story than low-cost labour. Zia Shiekh, CEO of Infowavz, a Mumbai-based BPO company says, “At Infowavz, most our clients initially got attracted by the labour cost arbitrage potential and cost benefits. Our clients have benefited from the quality of customer service, more efficient service delivery and faster response time. All this was possible because our people are looking at a long-term career in this industry, while in the West, it is perceived to be a low-value, stop-gap job.” Apart from this, the time advantage that India offers due to the huge time difference helps an organisation operate in multiple shifts, helping it carry on round-the-clock operations for improved efficiency. It is estimated that due to the numerous advantages that the Indian ITES sector offers, as many as 50 million such jobs may land up in the country during the next ten years.

A tide of protests from the West
Local professionals in Western countries fear that if the present trend of outsourcing backoffice operations is allowed to continue, they will lose their jobs to workers sitting thousands of miles away. Many are stressing that rather than outsourcing work to India, China and other Asian countries, domestic training initiatives and recruitment should be undertaken in their respective countries to bring down rising unemployment levels. They feel the need for a serious attempt on part of their respective governments to stress on technical education. There are also fears among Western professionals that their IT industry might be overtaken by foreigners if nothing is done to stop the trend of outsourcing to other countries, particularly Asian countries.

The Indian counterpoint
A majority of Indian players in this sector are unperturbed about the backlash abroad. With regard to the New Jersey legislation, many players felt that it would have a minimal impact on their businesses as it is aimed at preventing government departments from outsourcing their work to foreign destinations. Avinash Vashistha, neoIT’s managing director says, “Government contracts make up only a minor chunk of the BPO deals that originate out of the US. Many of the world’s major companies outsource work to India and will continue to do so. As a result of these bills, there would be little or no impact on the ITES sector in the short term.”

The perception among industry folk is that this is not a new phenomenon. There were huge protests in the US in the early 1980s when the manufacturing sector decided to outsource work to other countries, but that did not stop companies from using better and more efficient destinations even though it resulted in the loss of local jobs. Shiekh adds, “Foreign companies are moving their various IT and business processes to countries like India, the Philippines and South Africa where the same services can be delivered not just at lower cost, but also with higher quality. Market forces are going to prevail and the resistance to change is going to be overcome.” Similar sentiments were echoed by iSeva CEO Vaibhav Tiwari who says, “Such protests are a natural phenomenon, which occur when jobs are moved out of a country to other destinations. But these decisions are completely guided by market economics and there are not too many options but to outsource.”

What the future holds
Although it seems unlikely that repeated protests in Western countries would have much impact on the Indian ITES sector, companies are stressing the need to formulate a strategy to deal with any eventuality. Some are working along with Nasscom to portray India as the most preferred ITES destination in the world. A few feel that the best way to stop western governments from initiating legislation against outsourcing is to convince them that their step will in turn affect their country’s competitiveness. Although they might be successful in saving a few jobs, this in turn would lead to the country in question losing out to other countries in terms of providing world class service.

Many have also stressed that the Indian ITES sector should work towards removing misconceptions that get reported due to ignorance on the part of opinion-makers and to highlight their concerns and issues with the government and industry associations in India and in the West. K Ganesh, ICICI One Source CEO says, “Indian BPO companies should develop a communication platform with the opinion-makers and influencers in the West to put their viewpoint forward.”

One option would be to avoid branding India as a low cost destination. Gurmukh Singh, Gotocustomer.com’s CEO says, “The only way the Indian ITES sector can prevent western governments from initiating anti-outsourcing legislation, is by ensuring that it is not branded as a “low-cost” destination, but a partner who can both add value and bring down the cost.”

Although a majority of Indian ITES players have shrugged off the possibility of any detrimental impact that the present backlash might have on their respective businesses, their taking up the issue with Nasscom and other western associations reveals disquietude on their part. It cannot be denied that there is some concern amongst the Indian ITES players about the protests and with the current economic recession and the Iraq war bringing in global job cuts, MNCs are bound to feel pressure on the home front. It is in these times the Indian ITES sector needs to adopt a long-term roadmap and strategy that would go a long way toward bringing them business continuity and more work from their western customers.