India - the world leader in outsourcing

There was a time when business process outsourcing (BPO) or offshoring to one of the world�s most populated and poorest countries caused a stir but those days are long gone, as Richard Willsher discovers

When Royal Dutch/Shell announced in April that it would be moving information technology jobs to India it caused anger among shareholders but little surprise. In business circles business process outsourcing (BPO) has become a key business strategy and, in some cases, a necessity during the long downturn and India leads the field by some margin.

In its recent report, Making Offshore Decisions, consultants AT Kearney places the subcontinent firmly at the top its 2004 Offshore Location Attractiveness Index. It is well ahead of closest rivals China, Malaysia and Czech Republic on the basis of 39 different criteria grouped in three broad categories: financial measures - such as cost of labour, infrastructure and tax regulatory costs - the availability of people and skills, and the business environment of the country.

India is highly competitive on all three but is the world leader among 25 countries when it comes to �people skills and availability�. Each year the country�s universities turn out two million highly motivated English-speaking graduates with strong IT and other skills but staff costs are a fraction of those in the West. A new graduate hire is likely to cost between US$2,000 and $3,000 per annum and that is a �fully loaded� costing, inclusive of all social costs, holidays, pensions, computer time, office accommodation and secretarial and other support services. Compared to European or American remuneration levels, and the increasing burden of employment legislation and compliance, it is easy to see why outsourcing to India is appealing.

The AT Kearney study is concerned principally with IT outsourcing and there is no shortage of examples. One of the biggest players in the market for example is IBM, which has established itself as a major employer in India, offering BPO to clients across the globe. Perot Systems provides software development services out of Bangalore and Delhi, EDS has 1,000 employees based in Mumbai and is reported to be examining other locations at present. Teletech Holdings is reported to be planning to place 1,000 jobs in several different centres at a cost of $21m. NASSCOM, India�s National Association of Software and Service Companies, has calculated that, by 2008, IT software and services market could be worth $60bn, with a quarter of all Fortune 500 businesses outsourcing some of their operations to India.

But India has become the destination for a much broader range of jobs. As a location for call centres, financial services companies have long been using India as their offshore location of choice for customer services jobs. Institutions including the World Bank (Chennai), HSBC (Hyderabad), Prudential (Mumbai), Standard Chartered (Chennai), American Express (Delhi) and Citibank (Mumbai) are some of them. These jobs have included loan enquiries, credit card work, accounts reconciliation, the processing of insurance claims, bank transactions, invoicing, collections, and even cheque writing requiring relatively low level skills, but this is changing rapidly.

Wall Street investment banks such as JP Morgan Chase are now hiring research department staff in India, where the cost of analyst staff is a fraction of what it would be in New York. An article in the Wall Street Journal on 19 August 2003 quoted the cost of an MBA trained junior analyst based in Mumbai as being around $25,000 as compared with $100,000-$145,000 for a US-based employee.

Expanding scope

Other recent developments in Indian offshoring have included the Swiss pharmaceuticals group Novartis Pharma AG, establishing a specialist drug development software operation in Mumbai, while Universal Studios and Walt Disney have outsourced animation production operation to Bangalore-based JadooWorks. It would be quite blinkered at this point to see India as merely an IT development and call centre location. It is expanding the scope of its offshoring business by leaps and bounds.

Not surprising then that India is booming. The Asian Development Bank has calculated that India�s GDP growth was over 8% in the year to March 2004 and forecasts 7.4% for 2004-2005. In a country with over one billion people, the rising, affluent middle class is now said to number 200m, roughly equalling the entire populations of France, Italy and the UK added together. The IT and communications sectors play a major role in fuelling this success. However India is not a promised land of success and prosperity. Its per capita GDP was estimated by the American CIA to be $2,600 in 2002 calculated on a purchase power parity basis. Comparable figures for Western countries are US$36,300, Germany $26,200 and the UK $25,500. This indicates the vast underbelly of poverty and lack of education that India possesses. And, as a classic emerging market, the country poses some risks to business that need to be reckoned against its advantages as a business location.

Civil unrest has been a virtually permanent fixture of Kashmir and its border with Pakistan since its partition in 1948. Outbreaks of religious conflict have been a relatively common feature as compared with most Western democracies. Although India is billed as �the world�s largest democracy�, allegations of electoral corruption and vote buying have persisted during the recent election.

The growth in demand for electricity and telecoms services imposes strains on the country�s infrastructure, and the building of new capacity has not kept apace. Specifically as concerns business risk, the aforementioned AT Kearney report cites �failure to meet expectations� as a reason that may have led to the withdrawal of call centre operations of computer hardware giant Dell and Lehman Brothers, the investment bank. Allegations were of spoken accents that were difficult for customers to understand and long waits for calls to be answered. How much of this was due to localised management failure is not clear. Recently, there has been press coverage of rogue employees attempting to sell bank customers products which were not part of the their employers offering, and using inappropriate selling techniques.

Given the scale of outsourcing to India at this point it is not altogether surprising that there have been some mistakes made. Furthermore, staff dishonesty is a human characteristic by no means unique to India. In fact the greatest long term threat to India�s phenomenal achievements in BPO may lie within its own success. As income expectations rise among its workforce their competitive cost advantage can be expected to erode. In addition, a number of other countries, notably China, Philippines and several south-east Asian competitors, are keen to climb on the outsourcing bandwagon and are succeeding in doing so already. That said, they cannot all claim to offer such a massive pool of skilled, English-speaking labour to draw from as can India. For the immediate future, however, India�s dominance is not under serious threat and it is likely that the stream of almost daily announcements of new Indian outsourcing deals will continue for the foreseeable future.

Richard Willsher is a financial and business writer with a background in investment banking. He is former editor of The Investor magazine.