Indian BPO flies high despite backlash

It’s a hot topic of discussion—while US senators debate the pros and cons of outsourcing back-office work to countries like India, employees of local call centres here are worried about their jobs. Will India’s BPO industry be able to turn the tide in its favour despite the controversy? And at what cost? Chris Ann Fichardo gets some answers

Fame comes at a price. And being the fastest-growing and most cost-competitive outsourcing destination could sometimes elicit responses like the slogan popular with some Germans agitators: “Kinder, klein Inder!” which roughly translated means, “The solution to labour shortages is more children, not more Indians.”

The fact that India is emerging as the back-office of the world and that our ITES-BPO industry is estimated to grow by around 65 percent year-on-year, is not taken too well by trade unions and others in developed countries from where jobs are coming to India. Even as investments in the ITES-BPO industry are increasing by the day, banners and placards demanding a ban on outsourcing of jobs to India are increasingly visible. In the last three months, the US saw five states—New Jersey, Maryland, Connecticut, Washington and Missouri—tabling bills that sought to ban the transfer of state data processing contracts to developing nations. In the UK, three of the country’s biggest trade unions have come together to fight the loss of jobs to India, especially British Telecom’s move to open a huge
call centre in Bangalore. The unions fear that if BT outsources its service sector jobs to India, then the competition would also be forced to follow suit. German agitators have been running a sustained political campaign against the German green-card scheme for a while now.

The main reason for all this negativity is that India is perceived as a direct threat to the livelihood of the average citizen of these countries. In a scenario where India offers manpower at £0.75-£1.25 per hour, as opposed to the £5-£10 per hour charged for the same work in the UK, it’s clear India is a more viable base to do routine back-office work like finance and accounting, facilities and operation management, legal services, etc. (See box: Top three segment earners in BPO). And of course, call centres in India typically attract graduates, many of whom look at it as a career, as opposed to the West where many employees see it as an in-between-jobs option.

But is this backlash justified? Is the growth of the Indian BPO industry going to be at the cost of thousands of jobless American, British or German citizens? Not at all, say US Congressman Jay Inslee and the Indian Union minister for Information Technology and Communication, Arun Shourie. Inslee, who represents the state of Washington in the US Congress, reassures the Indian IT industry when he says that though some Americans are tempted with the “potential of protectionism,” the vast majority of them share the view that protectionism is a mistake and the Bills tabled before the House are not a cause of concern. “You will find the discussions and debate [about outsourcing] raging on for the next couple of years. But at the end of the day, the dynamism of trade will pervade. History has shown that whenever America had to choose its growth path, be it the threat imposed by the imports of Japanese cars in the 60s, or the import of electronic goods in the 70s and 80s, America did not opt for protectionism,” emphasises Inslee.

While this could spell good tidings for those who have invested millions in the Indian BPO industry, the survival strategy comes directly from Shourie, who says that the only way to end the debate is for BPO firms to provide high-quality services at competitive prices, so that firms in the West have no option but to outsource to India. Elaborating on the remedies for the current outsourcing controversy, Shourie says, “BPO firms must be scrupulous in visa matters; must put to work those firms that have outsourced to them; and lastly, matters that involve the IT industry should be taken up officially and promptly by senior government officials.”

Reasons behind the backlash
While the concept of outsourcing is not new—it has its origins in the pre-Y2K days when India was discovered as a coding paradise by panic-stricken Western CIOs—the difference now is that the work being outsourced goes far beyond IT. For example, Unisys has a $700 million contract with Lloyds for cheque processing, CSC has a $100 million deal with the US Department of State for visa processing, while Ernst & Young uses Indian accountants for its tax work. The breadth, width and scope that Indian outsourcing has today, coupled with its tangible benefits, is beginning to scare the white-collar workforce in developed countries.

Alok Sethi, CEO of outsourcing firm MsourcE says, “Loss of jobs will understandably lead to a backlash. Indian players need to be sensitive to the situation.” IT analysts also say that the tech meltdown has made people more aware of outsourcing. Says Arjun Saxena, associate principal of Inductis, a US-based global management consulting firm, “In sheer number terms alone, the compounding effect and the adoption of the offshore model to lower (call centre) and higher-end (equity research) services implies that if four years ago outsourcing to Indian IT/BPO companies resulted in around 25,000 job losses per year, the same companies are now probably responsible for over 100,000 job losses per year.”

And the last is the earnings that BPO firms have recorded in a short span of time. “Infosys and Wipro command market caps that rival giants like Accenture and EDS, and are probably actively considered in any major technology outsourcing deal. This was not the case two-three years ago,” says Saxena.

Benefits of outsourcing
Despite the negative publicity that outsourcing contracts are currently attracting, what is clear is that this option does save companies millions of dollars each year. Nasscom statistics show that the banking and financial sector in America has saved $8 billion in the last four years by outsourcing its requirements. In its Strategic Review 2003 report, Nasscom states that the differential in wages between the parent location in the US/UK and India is more than 70-80 percent for offshoreable processes. However, as India is a remote location, the interaction cost works out to around 10-20 percent, which still results in net savings of 40-60 percent for offshore processes.

A recent report in Fortune magazine clearly illustrates the benefits of BPO to India. The report states that a FMCG company that earlier found it unviable to follow up on defaulters with outstanding payments of less than $1,000, today profitably chases bills less than $100, through its outsourcing firm, Wipro.

“Corporates benefit significantly from outsourcing work to the BPO industry in India. The benefits are not just in terms of costs, but also better quality and productivity. This helps corporates show better results—especially in times when revenues are not looking up. However, every such important movement does have its moments of pain—this should be handled maturely,” says MsourcE’s Sethi.

The way forward
The manner in which the ITES/BPO industry handles the current backlash will determine its future growth. For even while MNCs discuss, debate and weigh the political implications of moving non-core work to countries like India, the Indian ITES/BPO industry knows that it is fighting for survival. If allowed to grow at the present growth rate, the potential of this industry is immense. In revenue terms, the BPO industry is expected to be around $28 billion by 2008, while its job-generating potential is around 1.1 million. (See box: Stakes involved) This segment is one of the few that received investments as high as $300 million last year, taking total investments to $800 million. The stakes involved are high; there’s no doubt about that. Yet the ITES/BPO sector has not gone all out to protect its interests in the world market, say analysts.

“Indian companies are taking some steps but most of their efforts can be characterised as being too little, too late. The primary responsibility for this should fall on industry bodies such as Nasscom, the Indian government and the bigger companies, which have the necessary clout, influence and sophistication to make a difference,” says Inductis’ Saxena.

The Indian industry does prefer a low-key approach. “I do not believe that this is an issue for the Indian IT industry to be overtly worried about and lose sleep over. There will be no immediate impact on the Indian ITES-BPO market from these anti-outsourcing Bills. This is a result of depressed economic conditions worldwide.

Outsourcing is imminent and we believe this trend will continue as there are tangible benefits in terms of cost savings, quality and productivity benefits,” says Nasscom vice president Sunil Mehta.

Adds Sethi, “It [BPO] is a competitive market place, which is highly capital intensive and it is not a space for those seeking quick returns. The business has sound fundamentals and a solid proposition and is here to stay.”

Another way forward could be to go beyond the US market, where the backlash is at its peak right now, and tap new markets. The US, which is the first and biggest client for Indian BPO outfits, accounts for about 59 percent of total worldwide spend on outsourcing. However, it is also the slowest growing market. Hence BPO players are actively cultivating markets in Europe and Asia-Pacific. But these are still nascent markets and language barriers are proving to be a major hurdle. However, in the long run it makes better business sense to have a wider customer base, agree BPO players.

These are crucial times for Indian BPO players. The good news is that in matters of business, it’s the head that rules. And going by this practical approach India should emerge the winner. But for now, the jury is still out and the decision could go either way.