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The Economic Imperative!

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DQI Bureau
New Update

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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Ganesh

Natarajan

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.

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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

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