- BPO firms are growing at a scorching pace.
- Last year’s sale was $16 billion, three-quarters of which was exports. 2008 sales projections are expected to reach #21-24 billion as per NASSCOM
- High value activities like stock-valuation, insurance underwriting and paralegal are being routed to India in addition to the call centres and low-value data work.
- Indian BPO outfits contribute 4% of Indian GDP and employ one million people (includes software and IT contribution).
- BPO “captives” like GE and Citibank are forced to sell out in order to remain competitive with the other Indian firms.
- The IT and PBO industry employs around one million people.
All in all, it seems a pretty rosy situation to be in. India is by now a known and established IT power. Add the fact that Indian companies like Infosys and TCS are opening up global centres and buying up companies in Europe and Asia, one can feel reasonably secure and optimistic with the present state of affairs. However, some of these things warrant a closer look.
India derives 55% of its GDP from service sector. Agriculture contributes around 28% to the GDP while nearly 70% of the population resides in the countryside and is engaged in it directly or indirectly. If we look at the poverty and socio-economic situation of the rural population, it is clear that they are not in a position to consume most, if not all the services that are being generated by the economy. Indian economy is graduating directly from agri-based to service oriented without the intermediary manufacturing industry support. One may ask, how are BPO and agriculture inter-related? BPO and IT are export oriented, while agriculture and manufacturing are primarily catering to the domestic demand. BPO contributes just 4% to the services kitty. What is the relationship that can be established between the two?
India offers huge economies to the foreign firms. However, why are the “captives” selling out? Citibank to Polaris, GE to Genpact, Dun and Bradstreet to Cognizant, Deutsche Bank to HCL – the list of captives selling off is large. On the other hand, big global IT companies like EDS, Accenture and IBM are ramping up rapidly in India and have adjusted to the cheap competition from India by locating themselves here. At the same time, Indian BPOs are rapidly climbing up the value chain of the work ladder – from low end to higher value.
Let us see what BPO mean to India. Can it help India become less poor? The answer to this lies in the fact that all the consumers of the BPO outfits are either foreign firms or the clients of foreign firms. Without being jingoistic, it is clear that this operation is in no way contributing to the domestic demand and supply. What about the trickle down effect of the economy? Yes that is a factor, but only when the domestic consumption attains a critical mass. With 70% of the population languishing in the villages with bare sustenance consumption, this is not going to happen anytime soon. We can all argue endlessly about infrastructure, corruption and bureaucracy, but the basic motors that run the BPO boom in India are powered by the global consumption needs. India faces a threat in outsourcing from Asian economies of Phillipines and Indonesia, in manufactruing its way behind China and in IT Russian and east European block’s threat looms large. The selling off of captives is a clear indicator that foreign firms are able to leverage better costs from the market, rather than by owning these specific assets with themselves.
Let us take the case of Elcoteq, a Finnish firm that makes mobile phones for Nokia and other companies in Tallinn, Estonia's capital, having a workforce of around 3,000, modestly paid and fully local. The business model of Elcoteq is struggling, as due to increase in labour costs owing to increase in prosperity, it is no longer competitive in comparison to China. Since Estonia is a small country with a population of 1,415,681 (as per 2002 estimates), Elcoteq has faced the full cycle of growth, boom and decline already. And this is just after a decade of its operation. The boom in the economy lead to increase in buying power, and quickly eroded the purchasing power parity that was itself the source of the competitive advantage for outsourcing in Estonia due to lower wages. On the other hand the product company Skype, which is also based in the same location, have been gobbled up by eBay for $2.6 billion. The diffference is that Skype helps eBay maintain its competitiveness in eBay’s home markets and ends up serving the home consumers, while Elcoteq offers no such competitive advantages and thus firms like Nokia may end up looking elsewhere to outsource their production. In the end, outsourcers like Elcoteq are treated as replacable commodities and are only in favour till they offer cost cutting and pricing advantages. Once this advantage is lost, the foreign firms will either stop outsourcing or end up scounting other favourable territories for the same advantage.
It is true that costs are only one component of the overall picture. However, it is easy to lose sight of this in view of the issues of intrastructure or availability of talented manpower. They all matter, but ultimately the driver for outsourcing is cost advantage which is leveraged by purchasing power parity. The Economist states (in “The Place to Be” Nov 11 2004):
This is true only under the assumption that costs will continue to remain lower in India. Since India is a large country in size and population, it may be possible to maintain regional balances by developing clusters with progressive better infrastructure. However, this is just delaying the inevitable, as the case of Estonia suggests. India has a large population, a lot of competitve advantages in factors of production, and high momentum. But is it sustainable? We can postpone the inevitable, but cannot avoid it totally in the long run. An Infosys or TCS may survive, but will the Indian BPO and IT economy survive in the overall run?
In the longer term, India's success at winning global white-collar work will
depend on two things: the supply of high-quality technical and business
graduates; and, more distantly, an improvement in India's awful