Outsourcing seems to have been rediscovered, and with a vengeance, by
corporations the world over, and if it was the millennium bug that made offshore
legitimate in the late nineties, it is the overall global economic slowdown that
seems to have made offshore outsourcing an imperative in the consideration set
of every CIO in the last few months. A recent research study has predicted that
over three million services jobs accounting for over a hundred and thirty
billion dollars in wages will move offshore by the year 2015. And hold your
breath–70% of those will come to India!
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What are the economics of outsourcing that are compelling every major
corporation to contemplate such breathtaking measures? Statistics show that in
the five year period from 2001 to 2005, outsourced IT services including
application development, network administration, data processing, and
information systems would move from $180 billion to over $300 billion,
accounting for over 44% of total expenditure on IT services in large
corporations. At the NASSCOM conference where many passionate arguments were put
forth both by Global CIOs and Indian CEOs for accelerating the move to offshore,
a few points became evident.
n Financial
advantage is obviously the key driver for this movement. In the area of systems
maintenance, for example, typically 72% of the costs are variable, while 28% are
fixed and the real benefit comes in incurring the variable costs in lower wage
locations like India. Conservatively assuming a 17% reduction and an increase of
9% in making the transition happen, it is realistic to expect a net 8% impact in
variable costs in the first year of outsourcing. On the fixed cost side, a 10%
reduction is achievable, with a marginal 1-2% increase for management overheads.
Hence, total savings of 16% growing by 4-5% every year as productivity gains
kick in is what is being attempted and achieved in many cases with the mature
outsourcers.
n Cost reduction
is king, but there are other benefits too. The ability for the outsourcing
organization to focus on its core competence areas and the possibility of
leveraging technology advances in high skill economies like India make the
possibility of getting higher quality and better methodologies very real for the
companies.
n The advantages
to countries like India of becoming the back office for the developed world are
enormous. The development of infrastructure not just in the main cities but in
thirty or forty locations that are ready and willing to ready themselves for
global centers to come up, the resultant balanced economic development across
regions and the resultant reduction in the digital divide and of course the huge
employment potential are all major advantages. Young cities like Gwalior, Kochi,
Mangalore, Coimbatore, and Nasik are just a few that can tap the immense
potential in this opportunity and prepare infrastructure that would support a
major outsourcing initiative.
There are some challenges too in making outsourcing grow from its current
early stages to becoming a full-blown country offering. The ability to integrate
small scale organizations into the larger outsourcing fabric, the investment in
delivering uniform quality across company sizes and geographies and most
important the ability to counter spurts of resistance like the recent New Jersey
and Washington state bills that threatened to slow down the movement offshore.
Countries like Philippines; where the population has a natural affinity towards
America and Government backed provinces in China, which are developing truly,
world-class infrastructure will have to be watched carefully lest they steal a
march over us.
Is offshore outsourcing restricted to software maintenance and call centers
or is there more to it? In fact, the traditional areas are only the tip of the
iceberg and the floodgates will really open when all forms of back office work–accounting,
payroll, human resources, healthcare administration, market research, legal
brief preparation…the list goes on and just a few of these areas, addressed
systematically and effectively, will provide the millions of jobs that policy
planners in our country have salivated over for decades. Will the job watchers
in the western world and our fierce competitors in China, the Philippines and
even Canada let India take the lion’s share of future services jobs? Watch
this space!
Ganesh Natarajan
The author is the global CEO of Zensar Technologies