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The outsourcing catch

The Outsourcing Catch

In his first address to the joint session of the US congress President Obama said that his government will not give tax breaks to US companies that ship American jobs abroad. If this move is made legislation it will hurt India’s BPO sector. India Inc is reacting to these statements very cautiously. Will these moves affect Indian or American companies, and given they do, which of them will get affected to a greater extent.

From the American perspective it is natural for the just elected President to be protectionist given the alarming state the country is in.

8,00,000 American white collar jobs believed to have been lost to outsourcing in India and elsewhere between 2000 and 2006. 14.1 million Americans currently holding jobs considered to be at the risk of being outsourced. 57 % of Americans with income over $ 100,000 actively supported free trade in 1999 that was when white collar jobs were not moved abroad number fell to 28 % in 2004 after outsourcing became common. From $ 5 billion dollars spent in 2000 the amount spent by US firms on offshore services from third party outsources rose to $ 78 billion in 2006. 66% of US workers feel outsourcing is harmful to the economy.24% of American customers indicated in 2004 that they would stop doing business with an American firm that outsourced their support staff. 44% of the amount of market for software and back office services outsourcing is currently controlled by Indian firms. According to the Bureau of Labor Statistics, unemployment in the US is down to 5.2%, and is expected to decline further.

Much of the Indian economy has become dependent on the BPO sector. Lakhs of jobs have been created in India thanks to the BPO industry. For FY07, the total IT industry (including domestic segment and hardware) was $48 billion. Of this, the total revenue from software and services (exports) was $31.3 billion and ITeS-BPO revenue was $9.5 billion for FY07. Nasscom said, out of the the domestic market contributing the balance. US continues to remain the biggest market for India’s software industry with a share of 61 percent. Given all this at stake it was expected that the statements made the president makes would grab headlines in our daily newspapers.

Let us take a look at the earlier part of the decade. Outsourcing all started at that time when American companies started realizing the huge benefits they were gaining from getting work done outside America. It is safe to say for India it was “only making hay when the sun shines”. Indians were surviving before outsourcing and will survive even if it is reduced. In the event of job losses the educated Indian populace will be compelled to look for greener pastures. Indian companies may be forced to look for innovative methods and look beyond the crisis.

This sentiment was also voiced by industry gurus like FICCI general secretary Amit Mitra who said,” This is a matter of grave concern not only for India but for the US also. Perhaps what is wrong in this is, he may not have had the opportunity to read the literature of his own US Chamber of Commerce. When he does and if he does, he will know that he is really punishing American companies, not Indian companies only. Our sense is that this is something that has been in the offing. My feeling is that they are cutting their own nose to spite the phase”.(source : economic times)

The Indian outsourcing business grew out of a more basic industry providing Indian computer programming and code-writing expertise to American hardware and software giants. When Indian firms entered the outsourcing business serving firms, a business then dominated by the likes of IBM and EDS, much lower labor costs held the key to its rapid revenue growth: over 50 per cent a year in 1994-2001. The time difference also gave India a selling point. Thanks to, say, the ten-hour time gap between America and India, American clients could offer 24-hour estimated $31 billion from IT services, $23.1 billion came from exports, with  service by switching to Indian workers during the American night.

A simple case study in this regard can be seen through the offshore outsourcing of Guardian: Offshore outsourcing has proved a money saver at Guardian, letting it cut $13.5 million out of the annual software development budget by sending 40% of that work overseas. Guardian outsources to India through Patni Computer Systems Ltd. of Mumbai. On the brighter side: The availability of jobs requiring low and midlevel skills in the US may be slowing down, but the opportunities to make money are not. After so many hue and cries over outsourcing for the past few months, this same is benefiting America.

Outsourcing is not only limited to big companies like GE but has opened the door for smaller companies and virtually anyone can outsource their job via Internet these days. For instance, a person from Florida who lost his job due to outsourcing started a business in web programming and internet marketing and outsourced the whole of his job to Delhi, where he gets everything done in almost $100 per month for the worth of $5,000 per month. He earns twice what his job used to pay him.

Having cited the above cases there are questions that remain to be answered:

Who will be ultimately punished if the ban on tax cuts is made legislation?

To what extent will the smaller firms that outsource work to India be affected?

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