Meeting the challenge

The challenge presented by the U.S. ban on BPO gives Indian software companies an opportunity to look beyond the cost advantage factor and improve the quality of services they provide.

in Bangalore

THE slew of protectionist measures announced recently by the federal government and the governments of some States of the United States against the outsourcing of jobs to cheaper destinations in developing countries do not appear to have unduly worried the leaders of India's Information Technology (IT) sector, even though India will be the first to be affected by the BPO (Business Process Outsourcing) `backlash'. Reacting to what is perhaps the strongest expression in recent times of protectionist intent by the U.S. government, namely, a clause in a $328-billion spending Bill passed by Congress prohibiting the outsourcing of federal government contracts to India, Kiran Karnik, president of the National Association of Software and Services Companies (NASSCOM), emphasised the relatively minor impact of the law on business in India. The law will be in operation only until September 2004, and its impact can be gauged from the fact that the share of U.S. federal government contracts in exports of IT software and services from India is less than 2 per cent, he is reported to have said. Nevertheless, such a measure "is not in keeping with the increasing globalisation of trade which benefits all countries, and is contrary to the spirit of free trade being promoted by the WTO [World Trade Organisation] and long espoused by the United States," he said.

The reactions from Indian IT business leaders largely echo this sentiment. Underneath it all, however, is some real concern and uncertainty, particularly as the backlash appears to be getting only stronger in the U.S. and Europe. With a projected annual growth rate of 11 per cent, the Information Technology Enabled Services (ITES) segment, which accounts for the lion's share of outsourced jobs, is considered by NASSCOM as representing the "most significant business opportunities for the Indian software and services industry. There are at present 350,000 workers in IT services and outsourcing in India, a figure expected to cross one million by 2008. Any protectionist measure will directly hit this area of huge potential growth.

The outsourcing issue has now taken a new twist with the U.S. government apparently determined to link outsourcing to larger trade issues under negotiation at the WTO. U.S. Trade Representative Robert Zoellick, who recently visited India, defended the U.S. ban on federal outsourcing while suggesting that India should consider opening up sensitive sectors such as agriculture and services as a quid pro quo for the U.S. to consider lifting the ban on outsourcing. The Indian government has rejected this conditionality for the present. However, the pressures on the government to soften its position on the issue are likely to increase, not just from developed countries but possibly also from the Indian IT industry, which has a vital stake in the outsourcing industry.

Most of the Indian IT majors do not currently have federal government projects. Kris Gopalakrishnan, chief operating officer, Infosys Technologies, told Frontline that although his company did not have any contracts with the U.S. government at any level at present, "it is the mindset, the philosophy behind a move such as this," that was of concern. "Is this, the restriction of free trade, an indication of the future?" he asked. As contracts with the government sector are not very different from those with the private sector and would typically involve systems development, maintenance and business process outsourcing, a company like Infosys cannot afford to overlook the opportunities that federal contracts may provide in the future. "As the company grows larger we have to look at new verticals. In that sense we will have to look at the area of federal contracting," Gopalakrishnan said. He said that Infosys was working with the Confederation of Indian Industry (CII), NASSCOM and some of the company's clients who are lobbying with the U.S. government. "We see this as a temporary setback. Once the economy and the job situation in developed countries improve, they will face, in the medium to long term, a shortage of technical resources."

Most companies in the IT sector have been cautiously critical in their reaction to the Bill, but few people believe that the protectionist trend in the U.S. and other developed countries could jeopardise the outsourcing industry seriously in the long term. Jayashree Joglekar, vice-president, government vertical, Wipro, told Frontline that while her company did not have any federal contracts, it did have ongoing projects with State governments. "The outsourcing law will have a definite impact, but at this time it is not very clear which agencies in the federal government will actually adhere to it," she said, a response that reflects the lack of clarity in the industry on what the precise implications of the ban are likely to be.

"The issue of job losses in the U.S. gets a lot of press and I think the new Bill is part of election year posturing," said Shwetal Mehta, managing director, Cyberwerx Software Solutions Pvt Ltd, a U.S.-based company with a development centre in Bangalore that does software development in the area of network management. "It makes absolute sense for a government to decide that state money should be spent on giving its own people jobs. However, the greater part of outsourcing work is in the private sector on which no restrictions can be placed," Mehta said. On the impact of the restrictions on H1 visas for the IT industry, Mehta felt that it would have a positive impact on outsourcing. "If companies cannot bring highly skilled workers into the country, the next best alternative is to outsource work," he said. This is a view that others in the industry broadly concur with. Baskaran Rangarajan, chief executive officer and managing director of Boden Software Services Pvt Ltd, said: "This is an election year. The Bush government has had a major setback in Iraq and needs to save face, which is why it is raising issues of immigration and outsourcing". According to him, "in the final analysis, considering the demands of industry, outsourcing is inevitable."

The outsourcing of ITES jobs to India has had a major impact on the country's IT industry. There was a time when Infosys, or for that matter any of the IT majors, their sprawling campuses and plush modern offices serviced by food courts and gyms for a large workforce of skilled and highly paid professionals, were the symbols of everything that the new IT-driven economic dream promised. Just a decade into the IT boom, these celebrated success stories have given way to new legends of entrepreneurial achievement. It is now ITES, the fastest growing segment within the IT industry, that is being projected as the promise of the future. The outward signs of the aggressive penetration of this segment of the IT industry are nowhere more dramatic than at the International Technology Park Ltd (ITPL) in Whitefield, on the outskirts of Bangalore, India's IT capital. It is here that a large segment of the city's 100,000 outsourced jobs are located.

As night falls, the ITPL and its surrounding area come to life with surreal effect. Lights blaze from the windows of large, high-security facilities where the real work begins at night. Convoys of sports utility vehicles drive in bringing the ITES labour force - English-speaking men and women, most of them barely out of their teens, who enter the belly of this pulsating conglomeration of BPO units to service the multifarious daytime requirements of their clients in the developed world. Some of the large IT majors like Dell, the GE group, SAP Labs, AOL, Tata Consultancy Services (TCS), and ICICI OneSource have facilities either within the multi-storey ITPL building or in its vicinity.

Indeed, it is the urban call-centre worker who has now become the symbol, in IT industry hard-sell, of the supposedly exploding employment opportunities that globalisation has brought India. Popular media representations of the typical call-centre operator celebrate the new lifestyles spawned by this young, Western-oriented, urban workforce of contract workers, who work by night, sleep by day, and supposedly make enough money to party wildly over the weekends.

More sober and realistic assessments of the growth of the ITES sector and its actual potential to transform, particularly in the context of the real economic slowdown witnessed in the more traditional sectors of the economy, are now being made by analysts and industry professionals. One reason for this rethink has been the `BPO backlash' in developed countries where workers, particularly in the services sector, are losing their jobs to new recruits in destinations such as India, China, the Philippines and other countries of the developing world, at a tenth of their wages. This is similar to what took place in the U.S. and Europe during the 1980s and 1990s when manufacturing jobs were shifted in a big way to China and countries of South-East Asia. Estimates on the number of job losses to outsourcing in the developing world vary. In the U.S., for example, the estimates made by forecasting firms range from 3.3 million to five million jobs in the next five years. For Americans whose jobs are on the line, the promise that a much larger number of jobs will be created over the same period is little cause for comfort. The pressure from unions and pressure groups on governments to adopt measures that will protect jobs may not be able to halt the inevitable trend towards outsourcing. But in a period of sluggish economic recovery characterised by "jobless growth", such pressures have resulted in a string of protectionist measures in these countries. Several State legislatures in the U.S. have protectionist proposals in the pipeline. Recently, an outcry in the State of Indiana prompted its government to cancel a $15-million contract with TCS.

India appears to be riding the wave of the outsourcing revolution. Driven by the need to cut costs, large companies are always under compulsion to focus on their core function and outsource the nonessential ones. This was originally done by specialised companies in developed countries. Once better communications infrastructure and network technology emerged, many of these services were moved to remote locations like India, where a technically trained workforce with the requisite language skills could perform the task at a fraction of the cost. During the initial growth phase of the IT industry in India, Indian companies provided software applications development and management services to clients worldwide. This, however, required the service provider to be at the point of delivery of the service, and therefore also the relocation of personnel to the location where they were needed. The digital revolution and the 12-hour time differential between India and locations in developed countries have changed all that. A range of services - customer interaction services, back office operations, accounting, data entry, HR services, market research and consultancy, to name just a few - are being done in India. There are 185 Fortune 500 companies that are currently outsourcing to India. TCS, Wipro Technologies and Infosys Technologies are among the top 15 outsourcing vendors in the world.

NASSCOM has estimated that revenues from IT software and services yielded around Rs.60,000 crores, almost 2.4 per ent of India's gross domestic product (GDP) in 2002-03. Close to 80 per cent of this - Rs. 47,500 crores - was accounted for by exports. Much of this growth was driven by the ITES sector, which alone grew at over 65 per cent, upping revenues from Rs.71 billion in 2001-02 to Rs.117 billion in 2002-03. NASSCOM quotes the International Data Corporation (IDC), which has predicted that globally the ITES market will account for revenues of $1.2 trillion by 2006.

In this extremely upbeat scenario, it is the import rather than the actual impact of the U.S. Bill that has injected a note of caution into estimates of the sector's growth and direction. "This is a very new industry which entered a growth phase only three to four years ago when there was the equivalent of a `gold rush' into the industry," said Ravindra Datar, principal analyst for IT Services and BPO in Asia Pacific for Gartner India. "There is a lot of hype surrounding outsourcing and many companies entered unprepared for the ongoing investments that need to be made in technology, infrastructure and marketing. The result was a lot of burnt fingers," he said. Datar sees this as a phase of consolidation fuelled by a number of failed ventures on the one hand but with the stabilisation of the larger players who are in it for the long haul.

In fact, not all projections on the BPO-ITES industry are as optimistic about the industry's growth path as NASSCOM is. Gartner analysts have pointed to a slowdown in BPO outsourcing linked to a "period of disillusionment starting in 2004" when several early BPO `mega deals' will come up for re-negotiation after a five-year period. An August 2003 report from the forecasting firm, Forrester Research, titled "BPO's Fragmented Future", says that the core BPO market will grow to only $145 billion by 2008. It says that firms that want to outsource core business processes because of cost savings are finding it difficult to get vendors to handle complex processes and are also coming up against other problems such as rigid contracts.

The trade union movement in India has also condemned the U.S. ban on outsourcing in India. "The WTO Agreement says there should be no restrictions on outsourcing, so this protectionist measure by the U.S. is wrong and we condemn it," said M.K. Pandhe, general secretary of the Centre of Indian Trade Unions (CITU). "However, we must also understand that globalisation has created jobs here but has taken away jobs in the developed world. This is the contradiction of globalisation and I think there must be a dialogue within the trade union movement on working out a common approach to what is happening," he said.

In the wake of the Bill banning outsourcing, and amid growing resentment against outsourcing, labour organisations in the U.S. have accused IT majors Wipro, Infosys Technologies and TCS of abusing the L-1 visa programme to bring in cheap manpower to take over U.S. jobs. The U.S. government has already decided to reduce the number of H-1 visas from 195,000 to 65,000, in fiscal 2004. Such pressures impose on the BPO-ITES industry the need to offer more than just the advantage of low costs to companies that wish to outsource in India. Finally, there is always the danger of developed countries seeking to resolve the issue by arm-twisting developing countries like India into making major trade concessions in sensitive sectors of their economies in forums such as the WTO.