Out Sourcing: Part
I of 3
A Call Center in India: While American companies are saving a
lot of money,
their employees are looking at pink slips.
SAN FRANCISCO: Will the next wave of globalization come in services?
Though moving service activities offshore is not entirely new,
the pace has
quickened of late.
Increasingly, components of back-office services, such as payroll
and order fulfillment, and some front-office services, such as
customer care, are being relocated from the United States and
other developed countries to English-speaking, low-wage countries,
especially India, but also other nations, such as the Philippines.
While increased wages would create greater purchasing power in
the developing nations, making them consumers of imported goods
from the West, this would not happen quickly enough to calm the
protests of those in the US who lost their jobs to India or the
Philippines. To bring wages in developing and developed nations
in sync would require putting them on a global agenda of poverty
alleviation.
The services commonly known as 'business processes' (BP) are
among the
fastest growing job categories in the United States.
A new phenomenon marking major companies is their increasing
willingness to
outsource what formerly were considered core activities. It is
significant that a substantial number of service activities might
move offshore, because it was once thought that service jobs were
the future growth area for developed country economies.
By contrast, it was accepted that manufacturing would relocate
to lower labor cost regions offshore. Should these white-collar
jobs begin to move offshore, new government policies may be necessary
to accommodate a changing, less certain, labor market.
The reason for relocating offshore is the potential savings in
cost while retaining acceptable or even better quality facilities
and products. According to an interviews with India-based outsourcers,
it is axiomatic that the savings on a given activity have to be
at least 40 percent to make relocation worthwhile.
Often savings are actually higher. One Fortune 500 firm that
moved fulfillment operations to Bangalore reported that the overall
cost savings were 80 percent.
A 2002 report jointly produced by India's IT industry association
NASSCOM and
McKinsey found that General Electric, one of the pioneers of outsourcing
service operations to India, has achieved an annual savings of
$340 million per year from its Indian operations, now seven years
old.
Even if these numbers are inflated, the savings are remarkable
and accrue
directly to the firm's profitability. According to NASSCOM, an
Indian trade
body, the most reliable estimate of offshored BP employment was
171,500 in March 2003, up from 106,000 in March 2002.
The NASSCOM-McKinsey report estimates that business process outsourcing
(BPO) operations will employ at least 900,000 persons in 2008.
The business model for such offshoring is still being perfected.
It is likely, however, that it will encompass a variety of organizational
forms, ranging from captives to independent firms, both domestic
and international, and kinds of work, ranging from stand-alone
call centers to globally-integrated post-sales services. It will
also likely encompass increasingly sophisticated work such as
actuarial services and medical diagnosis.
The relocation of services could be as significant to the US
economy as was the relocation of manufacturing to East Asia in
the 1980s. Alternatively, it could be a phenomenon comparable
to the rise of the Indian software industry , important to the
Indian economy, but with only minor impact on the United States
and the global economy. For the English-speaking developed nations,
the job implications of what some observers are calling 'lift
and shift' during the next five to ten years are
clear, there will be some job loss, but of uncertain magnitude.
To reiterate, no one at this moment is sure of the dimensions
of this transfer process, though the numbers could be very large.
For example, a recent report by Deloitte Research (2003) estimates
that two million jobs from the largest one hundred global financial
institutions will be moved to India by 2008.
Every large financial firm has large numbers of employees discharging
routine back office work that does not need to be located in developed
countries. One troubling element of BP offshoring is the rapidity
with which it might occur. 'Manufacturing's move to offshore facilities
has occurred gradually, since at least the early 1960s. Though
punctuated by dramatic factory closings, there was ample opportunity
for the US economy to adjust. This may not be true in services
where the 'objects' are pixels and electronic pulses, easily transmitted
by photons and radio waves.
Formerly, such service jobs were rooted relatively close to where
they were generated, due to the sheer logistics of moving paper
documents and the formerly high telecommunications costs. Now,
they have been made mobile by technological improvements and a
willingness on the part of management to consider offshore processing
facilities. It is now possible that during the next decade, the
winds of globalization will sweep through the formerly cosseted
ranks of white-collar workers. The old image of the developed
nations concentrating on information services, data processing,
and knowledge creation will give way to a world in which knowledge
creation will become the critical factor, data and information
will simply be commodities processed in Third World factories.
My Research, combined with those of other scholars who are examining
industrial globalization, provide grounds for further speculation.
Regardless of the speed with which services move offshore, developed
nations have little recourse but to further increase their workers'
creativity. For example, despite the fact that the world's athletic
shoes are produced in low-wage environments, their design remains
firmly rooted in developed nations.
Even today, despite the fact that electronics manufacturing is
located exclusively in developing nations, the bulk of the value-added
design remains in the developed nations. Similarly, even if much
of the animation for feature-length films relocates to India or
the Philippines, the design and marketing of those films will
remain firmly rooted in Hollywood.
In aggregate, international trade has been an enormous benefit
to developed nations, and particularly the United States. However,
there is the possibility that , depending upon how many service
jobs are offshored , the current process could contribute to US
unemployment problems, especially among less skilled citizens.
The historical record shows that in the past, when manufacturing
was moved offshore, the US economy responded by creating new jobs.
Obviously, many Americans also lost their jobs, causing severe
hardships for those affected. Should the offshoring of services
grow as large as some believe it might, the US economy's remarkable
ability to create new jobs will be tested again. It will be important
for the US to develop positive responses to these changes by moving
its economy and workers up the economic ladder. Protecting past
arrangements is unlikely to offer a long-term solution.
When discussing the costs of moving work offshore, few recognize
that these workers may also become consumers, and often have the
same consumption patterns as their counterparts in developed nations.
These Indian service workers could provide a market for US consumer
goods, especially as their workplaces consume Dell personal computers,
Cisco switches, and Avaya telecommunications equipment. In the
future, it may be important for policymakers in developed and
developing countries alike to consider a more comprehensive initiative
that increases the consumption opportunities in developing countries.
Increased wages would create greater purchasing power in the
developing
nations, making them consumers of imported goods, thereby creating
a positive
feedback loop. Though it is unlikely that such a radical notion
can yet be placed on the global agenda, current economic difficulties
in the developed nations could alter recent thinking and create
interest in a more comprehensive solution.
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