OVERSEAS OUTSOURCING - 2003 IN REVIEW
February 2004 TrendsUpdate
By
Kumkum C. Dalal
Global Reach Consulting, Inc.
“Your Guide to Overseas Outsourcing”

This is a quarterly update on what is happening in the overseas (also known as offshore) outsourcing market. Although outsourcing is a global phenomenon, we focus on what is happening in the US and our supplier country of choice - India.

Offshore outsourcing has been in the news more and more of late, particularly as the downturn in the US economy deepened and large US companies (telecom manufacturers and IT firms leading the pack) laid off workers. For the first time white collar workers have been directly affected by the job loss. There are many reasons for the economic downturn (lack of corporate accountability, telecom collapse, demise of the dot.com decade). However, the one that has broad emotional appeal is overseas outsourcing.

So let’s take a closer look at some facts and figures that appeared in the print media during 2003 and see what is in store for us in 2004. Due to space considerations, we’ll take a look at the supplier landscape in a subsequent issue of TrendsUpdate.

Perhaps the most interesting recent trend is that outsourcing is no longer restricted to large corporations such as IBM, Motorola and GE - as was the case in the 1990s - but smaller and
privately owned businesses too are starting to send services and service development work overseas. From 2001 to 2003, the greatest percent growth in outsourcing occurred among firms with less than $20 million annual revenue (“Global Outsourcing Market”, Michael Corbett, June 2002).

Another recent trend: outsourcing is not limited to Information technology. Now business process outsourcing (generally referred to by its acronym BPO 1 ) is becoming increasingly common. The volume of offshore business-process outsourcing services was projected to increase from $1.3 billion in 2002 to $1.8 billion in 2003, a 38% increase ("Offshore Outsourcing Moves into the Back Office," Information Week, July 14, 2003).

Cost savings is the primary reason for outsourcing to countries with lower labor costs. Typically it is the standardized and low value jobs that move abroad. According to Business Week (Feb. 3, 2003), outsourcing to India can result in cost savings of at least 50-60% on a multitude of tasks, 
including,

Number Crunching of any kind…..

However, cost savings alone does not describe the whole story. By moving jobs abroad
companies attempt to provide round-the-clock service. To that extent overseas outsourcing
directly improves efficiency. (“Stolen jobs?” The Economist, December 13 2003).

A benefit of cost savings is the opportunity to get more for the same R&D dollars, such as speed up product launches, develop more prototypes and improve quality. (“The Rise of India”, Business Week,
December 8, 2003).

The main reason why companies in the U.S. outsource is to increase productivity, increase operations efficiency and most importantly survive as a business. These were the same reason why in the 1970s, automobile, clothing and the electronics manufacturing industries went overseas to markets where the cost of production was lower. Now as the leader in high tech and the services sectors, the U.S. faces the same challenges to be globally competitive. So it is not surprising that overseas outsourcing continues. A much quoted figure from Forrester Research predicted in 2002 that 500,000 IT jobs would move abroad by 2015. We’ll take a closer look at the U.S. IT industry in another issue of TrendsUpdate.

There is at present a huge fear in the U.S. that our jobs are being taken away by the Indians and the Chinese. This is an understandable fear for all of us who work in white collar jobs in areas where our function can be performed at a lower cost overseas. However, did we not see this coming? Did we think that the business challenges to the service sector are fundamentally different to the manufacturing sector? Are we focusing on outsourcing because of the economic downturn? In reality, the growth of outsourcing is inevitable in a globally competitive marketplace and it is here to stay.

Our state of Illinois, the 4th largest manufacturing state, has been seeing job losses due not just to outsourcing, but also to factory automation, and the impact of the high cost of steel on small and mid sized manufacturers forcing them to cut back on production. (“A State in Transition”, Daily Herald, November 30, 2003). In Chicago: In 1990 manufacturing accounted for roughly 622,000 jobs. Today there are more jobs in education, healthcare and government than the current 475,000 manufacturing jobs. (“Diversity has helped Chicago weather the storm,” Daily Herald, November 30, 2003.)

Another trend in outsourcing is that labor and investment move to jobs higher up in the economic value chain such as healthcare and education. More investment in R&D spurs innovation. (The Economist Dec 13 2003). A word about U.S. innovation: The U.S. has always prided itself as being the foremost innovator in science and technology. The same issue of The Economist reminds us that most new products and services are developed in the United States; innovation needs the right culture to flourish; Chinese and Indians in California generate more new ideas then they do in their homelands.

The phenomenon we are seeing in the U.S. is the logical consequence of freer trade and increased globalization. Being competitive in a global economy is only possible if industries maintain their cost competitiveness. As barriers to international trade and the international movement of labor are reduced, the rational enterprise will seek to enhance its competitive position by taking advantage of cost savings wherever possible. As noted earlier, successful, large corporations such as IBM, Whirlpool and GE have been doing this for some time, and continue to expand their outsourcing activities.2 It is not surprising that smaller business entities in search of higher profits are following suit

We are out of space. More next time.
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