Offshore outsourcing / BPO

Over the last few years I have been keenly watching developments on the efforts underway to increase the pool of skilled, cheaper labour available to businesses.

It would appear that just as manufacturing jobs previously moved to countries where significantly cheaper labour was available, so too now there is a drive to get “more bang for your buck” in the IT services sector, especially in software development, where staff costs are high, due to the complexity of the subject and difficulty in finding people with the required combination of mature skills.

The term attributed to this phenomenon of shifting work and projects overseas to low cost countries, particularly in the software development field, is called Offshore Outsourcing.

Before I go any further, I would just like to point out that this text is not racist in any shape or form. You can find that kind of thing elsewhere if you’re looking for it. No, my interest is in exposing the tricks used by multi-national companies to profit from cheaper labour, often in a devious and less than truthful way, and showing little concern for the loss of jobs of their employees in developed countries. Although I frequently mention Indian companies and employees in the text, that is only because that is where the current focus and activity within offshore outsourcing / BPO is. In later years this focus may change to Chinese companies if activity moves there. I recognise that these activities are benefitting Indian workers and their families and I am happy to see that happening. I’m sure if I were in their position I would be glad for the work myself! :)

Language and communication

Offshore outsourcing can often result in the redundancy of home-grown IT staff and moving whole projects overseas, India currently being the favoured destination-du-jour, due to (1) the low labour costs of its employees (2) the high number of people with knowledge of the English language, and (3) the availability of large numbers of IT graduates, although there are many other locations soaking up work, such as eastern European countries.

As development of software systems generally requires quite a high level of communication in order to facilitate development teams in implementing the required solutions, you will generally find that language plays a large part in the choice of offshore outsourcing partner. Therefore English-speaking countries seek trading partners with other English-speaking nations (like India), whilst French-speaking countries seek other French-speaking destinations. Quite often, it seems, these cheaper destinations are former colonies of the work-sourcing countries: e.g. India for the UK, north-African countries for France. China is the favoured cheap labour destination for Japan due to similarity in their cultures.

Ironically, this use of language to select work export destinations has had some funny repercussions. For example, a UK company might select an Indian company to write some software for them. In theory, the company workers, at least some of them, speak English. In practice, what has happened with many projects is that when the UK company needs to check up on progress, or communicate generally, it has been found that often one party cannot understand the other due to many differences in the way that English is spoken.

Quality

As well as price, quality should always be considered when buying something. There have been many cases when software projects have been delivered, where it has been discovered that the quality has been terrible. This risk can often totally negate any advantage in taking the cheap option, as badly-written software is extremely expensive to maintain. Indeed, many projects developed using offshore outsourcing to reduce costs have ended up costing much more after the cost of fixing the mess has been taken into account. In the race to save money and increase profits, this risk is often overlooked.

The bottom line

The attraction for business in following this path is in the potential for reducing costs and improving profit margins, in theory leading to shareholder nirvana.

However, whilst being potentially good for company profits, understandably, many employees kind of dislike being made unemployed and replaced with cheaper workers. Therefore companies pursuing this path are often in trouble with trade unions who try to protect their jobs.

Offshore outsourcing damaging local talent pool

There has been evidence that fewer university students are choosing IT courses in developed countries because they believe that their jobs will disappear at the hands of offshore outsourcing as more and more global companies invest large sums in places like India. See Intel’s Eager Passage to India for a feel on this subject. While Intel invests more than $1 billion in India, Craig Barrett, CEO of Intel, is wondering where all the U.S. science graduates are! Wow, what a tricky mystery to solve — let’s get Sherlock on the case right now ;-) See Science Grads, Where Are You?. Also this week, Microsoft has announced it is investing $1.7 billion in India.

Protectionism is not the way forward

Apparently protecting workers from these trends is not the way forward, although one cannot help but think that if western labour markets were completely opened up to cheap foreign competition, we would see at least the following things occurring:

  • local workforce aggrieved at being replaced by cheaper foreign workers
  • local employers delighted at lower labour costs
  • local recruitment agencies, if used, concerned at reduced margins on lower rates

GATS mode 4: You scratch my back, and I’ll scratch yours

Developing countries are fighting to have access to western economies for their workers in exchange for allowing western companies access to the developing countries’ markets. So, in essence, HP could open an office in Mumbai and employ local workers if western countries allow Tata or InfoSys to have workers sent to Europe or USA, for example. Lookup GATS mode 4 on Google for more information. Here are a couple of links for starters:

One problem though for, say, an Indian company sending Indian workers to work in Europe is that the worker needs to live in Europe, and therefore he/she is at the mercy of the high cost of living in Europe, just like the indigenous workforce. This high cost of living would limit the cost savings possible, because the company would need to pay these costs one way or another. Of course, there could be resentment from the local workforce too if vast numbers of foreign workers appear, whilst, at the same time, large numbers of local workers are losing their jobs.

It is for this reason that two things are possible, and probably both will occur at the same time:

  1. Offshore outsourcing/BPO will flourish due to low costs
  2. Importing of cheap labour to western markets, driving down the local pay rates

Move up the food chain

When western manufacturing jobs were lost to the far east, the workers had to train to do other work. And unsurprisingly, that is the exact advice being given to people whingeing about the changes occurring now. Of course, there is the small problem of what do the current highly-skilled IT workers move-on-up to? From what I’ve gathered, it seems that IT people are meant to “move up” the food chain to become more involved in the business side of IT — i.e. becoming involved in understanding the business requirements and being able to communicate this with users and to the developers (offshore) who will implement it. That is, they should become business analysts, systems analysts and software systems architects. However, there are not nearly so many positions requiring these “higher” skills, so the question still remains — what will all the unemployed developers do?

Unless these displaced workers can find some other sphere of work in which they can add value, where the cheaper foreign workers cannot, then I see higher levels of unemployment possible. Perhaps at this point, western governments would take more notice due to spiralling social costs. Until that occurs, businesses will continue to lobby governments for cheaper foreign workers, but by phrasing it something like “not enough skilled people are available to fill the positions available” (at the low price that they want).

BPO

This innocuous-looking term stands for Business Process Outsourcing, and is the equivalent of offshore outsourcing for other business processes such as back-office legal work, clerical work, and, in fact, any business process that can be specified. If the process can be described then it can be BPO’d. This could potentially decimate vast swathes of western jobs. The process is exported to a country of cheap labour and the workers there are trained how to perform the task. After that, the original workers lose their jobs, or are possibly retrained into doing something else. If customer-facing, the cheaper foreign workers are often trained how to speak with a particular accent, and given western-sounding names. This is so that the foreign workers are more likely to be accepted by the customers they deal with (on the phone, in call centres). Dell outsourced their customer support contracts to India, but had to bring the work back to U.S. call centres after receiving many quality-related complaints. The UK National Rail Enquiries service was also outsourced to India, and there have been many complaints about the worker having poor geographical knowledge, which is kind of useful when dealing with enquiries about locations. Of course, management tried to say that quality did not suffer, oh no — it improved! ;-) See here, and here and here for perhaps more accurate information. However, when you only pay less than 12% of the UK wage to the Indian workers, it’s not difficult to see the attraction for the business to do something this silly. I just hope that one day one of the people involved in the decision to outsource the UK National Rail Enquiries system has to ring up the service and waste his time being told to travel from Plymouth to London via Glasgow. Wicked laugh :P

Fat cats and hairdressers

There has been speculation, that if these currently occurring trends continue to the point where they reach extreme levels, western economies could predominantly consist of vast numbers of low-paid, low-skilled workers at one end of the spectrum, with highly-paid company directors at the other end. The term banded around for this scenario is labelled “fat cats and hairdressers“.

Professor John Quelch of Harvard Business School, who is also a former dean of London Business School, says people, especially in Britain have so far taken a “myopic” view of the job migration.

“It is not about some call centre being shipped off to India, it’s so much bigger than that. If you look at the speed with which the Chinese economy is developing, in 10 years’ time white-collar jobs we once thought of as invulnerable will move overseas.”

Did you say ICT or ICT?

It is well known that ICT stands for Information and Communications Technology. However, it also means Intra-Company Transfers, and this devious technique is increasingly being used to import cheap labour into a developed country via the back door. For example, in step one, HP or IBM may open an office in India. Then in step two, the company imports the Indian workers into the UK for a period of time, often many months or longer. The company may then charge out the worker at local UK rates, whilst paying the worker the comparatively small rate that he is used to in India. The company usually adds a small “per diem” allowance to make living in the UK possible, and may pay the employee’s hotel/hostel fees. The profit margin on charging out this Indian worker at UK rates but paying him his Indian wage (plus a small per diem) is enormous for the company. Sneaky, huh? Especially when you consider that the company has often not even bothered to advertise the position on the local UK market, as they can make more profit by importing cheaper labour (see evidence of this abusive practice within the links shown in the following paragraph from the PCG — Professional Contractors Group).

Now you see why these multi-national companies are foaming at the mouth with delight at the benefits to them of using these tricks? Because of these huge profit margins, companies using intra-company transfers are keen to open the doors as wide as possible to enable them to accelerate their profit-making agenda. Anything in their way must be eliminated, and so political lobbying is used to try to hoodwink politicians into making policy changes to enable them to import cheap labour. They do this under various guises, the most popular of which is that there is not enough skilled labour available to them, thus they tell the politicians that their Indian office has got the people they need, but the current legislation needs to change to enable them to bring them in. They even tried this lie during the recession of 2001/2002. See PCG Calls for Transparency in Immigration Debate. To see how companies tried to abuse intra-company transfers or fast track visas (FTVs) via the “not enough local skills available” trick, even during the recession of circa 2001/2002 see PCG warns ‘Wrong time to relax work permit regulations’ and Work Permits for Shortage Occupations: ’Fast Track Visas’ – How the scheme is being abused.

Is it addictive or purely recreational?

I read this page, apparently written by an agent in the offshore outsourcing game. They attempt to convince the reader that offshore outsourcing, far from harming the employment prospects of developed countries’ workers, actually helps them instead. Quite amazing stuff indeed! I tried to follow the logic presented, that went along the lines of: (1) a developed country business offshore outsources project(s) to a developing country and saves lots of money, so (2) invests the savings made into locally-developed projects.

The slight difficulty I have in understanding this logic, is that if the business saved so much money by using offshore outsourcing, why would they then want to go and “lose” the gains made by investing in development projects at “home”? Surely, being a business, and therefore being driven by shareholder demands, the business would be virtually forced to continue making more profits by increasing usage of offshore outsourcing, or am I missing something fundamental and hidden here?

Once business gets hooked on the crack-cocaine of offshore outsourcing savings, what would make them give up the current suppliers? Perhaps when the cost rises significantly, eroding many of the potential savings benefits? This is already happening in places like India due to wage inflation caused by worker demand and churn. Then, businesses will have to look beyond current offshore outsourcing destinations for further savings to satisfy their craving. When this happens, which it is almost certain to, we will see if companies like the one above embrace free trade so much ;-)

India worrying that it is now becoming too expensive

Due to high wage inflation, it appears that Indian software development companies are now worrying that they may lose favour as an offshore outsourcing destination. Thus, they appear to be attempting to act as a middle-man, outsourcing the real work to China — see Will India price itself out of offshore market?. But how long will it be before businesses become wise to this practice, and go direct to China, to avoid paying the middle man? After all, the goal is to get the cheapest price. Perhaps now would be a good time for Indian software companies to try to reduce their current heavy reliance on western business, and try to develop their own business internally – e.g. develop their own software products and web services, instead of relying on projects to be outsourced to them. After all, if business moves to China and Indian companies are leap-frogged, they will not be able to use the very protectionist measures they accuse developed economies of employing. This is simply the cold reality of free trade – is it not?

Davos 2006: participants grapple with globalisation & employment issues


“On a macro level,” says BT’s Ben Verwaayen, “it is easy to see the win-win.” But if your job goes overseas it is difficult to be positive, he warns.

The fate of the victims of globalisation worried many Davos participants. “How can workers in the West hang on to their jobs?” was a much debated question.

Be flexible and don’t specialise too much, said Jagdish Bhagwati of Columbia University. Health and pensions systems should not be set up so that workers find it difficult to change employers, he added.

Others said lifelong learning could be the answer. Make your job, your work, your knowledge ever more valuable. But obviously Chinese and Indian workers are doing just the same.

It’s wrong to tell people that going to university will guarantee them a job, says Adair Turner, the chairman of the UK’s low pay and pensions commissions, because the technology sector simply won’t offer that many jobs. “Everything that can be automated will be automated,” he predicts. “Already we only create jobs that are face-to-face… in hospitality, retail, tourism, healthcare,” says Mr Turner.

Chris Dedicoat of technology giant Cisco echoes the argument and says: “The stigma of vocational training has to be removed if the economies of Europe want to have jobs for all”.

So should we all become nurses, plumbers and hair dressers? Not really. Some of India’s and China’s cost advantages are disappearing already. It is now more expensive to employ an engineer in Shanghai than in Slovakia.

In Indian call centres, says Jean-Herve Jenn of outsourcing specialist Convergys, wages are rising by 15-20% a year.

For the full story see this.
For some interesting BBC readers’ comments on the question of “Are you worried about keeping your job?” see here (most recent comments) and here (most recommended comments).

Wait and see

Well, we’ll have to wait and see what happens with all of this. There are just too many what-ifs to analyse to predict how this whole subject will pan out, and hopefully things will work out fine, if there is judicious use of offshore outsourcing and BPO, as seems to be built in to GATS, but then isn’t this still protectionism? What do you think?

Update 2007-05-06: IBM project LEAN

Wow, according to this article, IBM plans to fire around 100,000+ of its 350,000 staff. I first read about it here on theregister.co.uk. It seems an extreme plan, and may not happen as described, but there does seem to be some element of truth in it — just read the comments from some IBM insiders.

Popularity: 3% [?]

Share and Enjoy:

  • RSS
  • del.icio.us
  • StumbleUpon
  • Digg
  • Twitter
  • Mixx
  • Slashdot
  • Technorati
  • Facebook
  • NewsVine
  • Reddit
  • Google Bookmarks
  • LinkedIn
  • Yahoo! Buzz
  • email

Leave a Reply