India's outsourcing dream faces threats from protectionist legislation in the United States and new doubts about the quality of its service.
IT was hardly the stuff that headlines should be made of. Computer major Dell, it appears, had decided to stop routing calls from some corporate and institutional customers to its India-based call centre, and take them in the United States instead. The decision ostensibly was a response to customer complaints about the services provided by the call centre's employees and their difficult-to-understand `thick' English accents. The re-routing decision, reports said, did not involve any cut in the size of the India operations. Dell itself denied that there was any plan to downsize. Yet, the media have been agog with the implications of the decision for India's outsourcing future.
While it would be partly correct to dismiss the attention devoted to this relatively minor incident as mere media sensationalism, it does point to the importance given to outsourcing in India's post-liberalisation growth strategy. It cannot be denied that export revenues from software and Information-Technology-enabled services (ITES) have increased at remarkably high rates over the last five years. In 2002-03, National Association of Software and Service Companies (NASSCOM) estimates that IT software and services yielded Rs.60,000 crores as revenue or about 2.4 per cent of India's gross domestic product. Exports accounted for a large part of these revenues, accounting for Rs.47,500 crores, or close to 80 per cent. Further, in recent times, the growth of these revenues has been sustained by the rapid expansion of ITES. While revenues from IT services, which still constitute 65 per cent of the total, grew by 18 per cent in 2002-03, those from ITES grew by 67 per cent (albeit from a smaller base). Finally, while just 35 per cent of these revenues were earned through offshore delivery as recently as 1999-2000, that ratio had risen to 58 per cent by 2002-03.
Rising offshore delivery reflects the ability of Indian firms to exploit in full the advantages of the new technology. Prior to the digital revolution's transformation of service activity, the provision of most services required the presence of a service provider at the point of delivery of the service. As a result, services export took the form of migration of personnel to the location where the service was provided, as epitomised by the migration of skilled technicians, doctors and nurses to the U.S. and of semi-skilled and unskilled workers, including carpenters, masons, chauffeurs and housemaids to the Gulf countries from India. Benefits to the home country came in the form of remittances of hard currency earnings by these migrants to their families, which augmented the scarce pool of foreign exchange available to these countries. But the magnitude of such income was limited by the restrictions on the movement of skilled and semi-skilled and unskilled personnel set by the immigration laws and practices of countries where the relevant service demand originated. In the IT services area, this form of delivery was reflected in the use of H1B visas to provide IT services onsite in the U.S., India's principal market. The "BPO backlash" resulting from complaints of loss of jobs for American citizens or legal "aliens" has resulted in a decision by the U.S., to reduce the number of such visas from 195,000 to 65,000 starting 2004.
The digital revolution has helped overcome this obstacle. Now there is a range of services being provided by workers located in a country different from the one in which the service is actually delivered. These services are out-located or outsourced and delivered via telecommunication or data networks from remote locations like India's metropolises.
The rapid increase in revenues from this form of delivery is what gives rise to optimism about the role that IT services can play in growth. The strategy driven by that optimism implicitly sees growth in services as more likely to deliver employment, income and export revenue increases than that in the commodity producing sectors. This, to some extent, allows the government to ignore the fact that growth of employment in the commodity producing sectors has not merely decelerated sharply but is increasingly less responsive to increases in output - the jobless growth syndrome. Needless to say, growth in IT services employment is relevant only to those capable of finding employment in the organised sector and even in that sector, the share of IT services is still a small proportion. IT services generate optimism only because this is the only segment where employment is increasing significantly. The outsourcing dream is really confined to the bedrooms of India's numerically large but still minority middle class.
The dream is sustained because of the limited amount of reliable information and the hype that surrounds this area. NASSCOM routinely quotes International Data Corporation (IDC) figures, which point to the small share that India has in the world IT services and BPO market. IT services spending in 2002-03 is estimated at $349 billion; in the same year, the share of India's IT services exports is placed at just 2.8 per cent of the market worldwide and 3.9 per cent in the North American region. Further, worldwide ITES-BPO spending in 2001 amounted to $712 billion, with $451 billion of that being accounted for by the U.S. This implies that even now India's share of the 2001 pie amounts to just 0.3 per cent of the world market and 0.5 per cent of the U.S. market. Thus, in this sense, the potential is indeed immense seen.
However, other estimates are less optimistic. According to an August 2003 report titled "BPO's Fragmented Future" from leading technology-impact forecasting firm Forrester Research, talk of a BPO market bonanza is a myth. The core BPO market, Forrester predicts, will grow to only $145 billion even by 2008. This is because firms looking to outsource core business processes like human resource, and finance and administration because of significant cost savings, are not only reporting inability to find a single vendor who can manage such complex offerings, but also the stalling of operations by inflexible contracts, difficulty in managing vendors, and a lack of performance metrics.
As a result, the market is likely to fragment into four segments: simple bulk transactions, such as credit card or stock trade processing (estimated $58 billion in 2008); broad shared services, such as finance and administration, indirect procurement, and human resource ($57 billion); high-volume vertical processes, including policy administration, claims, and loan process applications ($6 billion); and, niche vertical applications, like environmental data reporting and chemical process control monitoring ($24 billion). Of these, the first is the easiest to master and is likely to be, along with the second, the area into which countries like India would enter.
Gartner, the other technology advisory firm, paints a more favourable picture. It has estimated that though the IT services market has been affected by sluggish growth prior to 2003, the BPO market will grow by 10.5 per cent, from $110 billion in 2002 to $122 billion in 2003. Of this, the North American region, which accounts for more than two-thirds of India's exports, accounts for $69 billion or 57 per cent. Gartner's principal analyst Rebecca Scholl is upbeat and argues: "Enterprises around the world are attempting to focus their investments on their core business processes and are increasingly looking at outsourcing non-core business processes. Early adopters of BPO services, primarily large organisations, continue to expand their relationships to include new process areas, and new technology and media are creating opportunities for outsourcing entire lines of products and services, such as online payroll, online benefits administration, online order management and online transaction processing."
Though these estimates do not include all kinds of call centre activities, they do suggest that there is some degree of overestimation by NASSCOM of current and projected market size in the BPO-ITES sector. But, these conflicting estimates and projections notwithstanding, it could still be argued there is substantial space available for expansion for India. Enough at least to prolong the outsourcing dream. The difficulty is that in recent times even this dream is threatening to turn into a nightmare because of the new forms that the BPO backlash is taking. Before the Dell call-re-routing drama, the Indian media were agog with efforts in the U.S. to halt through protectionist legislation the outsourcing surge of the last few years. The stray New Jersey Bill has set off a torrent, and eight States have introduced legislation intended to ban or limit outsourcing of government contracts. In a more dramatic development, the State of Indiana has cancelled a $15-million contract that has been awarded to Tata Consultancy Services. And virtually every major deal involving a shift of workplaces is catching the attention of the U.S. media. If this is the response when India has acquired just a fraction of the market, however estimated, the backlash will only intensify as contracts currently being negotiated come to fruition.
It is in this context that the media attention on the Dell episode needs to be understood. If in addition to a backlash, India's reputation as not just a cost-effective, but a quality provider of ITES is under challenge, American corporates may just choose to save themselves from the criticism of exporting American jobs and outsource at home than offshore. This is a greater danger than the threat of competition from countries as diverse as Israel, the Philippines, China and Romania. The response to the backlash may be alarmist as NASSCOM spokesmen suggest. But it does point to the narrow and vulnerable area in which employment for India's educated unemployed is principally being delivered.
Moreover, outsourcing dreams as well as the nightmares indicate how much the international marketplace rather than the growth of the domestic market has come to be accepted as the principal source of new employment by the Indian middle class. Migration, whether actual or digital, seems to be the limited and tenuous option that the current development strategy offers those who defend it most.