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How Indian BPO model is evolving
September 16, 2005
Outsourcing is slowly moving from the low to higher ends of the chain.
It is an old saying that if the mountain will not come to the Mahomet, then Mahomet will go to the mountain. Likewise, if the developed countries will not allow cheaper labour to come in, jobs will go off where labour is cheaper.
This process has now been dignified by names like outsourcing, offshoring, BPO and so on. But the basic idea remains what Paul Samuelson and Wolfgang Stolper had predicted eons ago, namely, that if factors of production can flit hither and thither across borders, without let or hindrance, returns to them will eventually equalise everywhere.
Of course, if you don't want them to equalise because your voters will send you packing, which is what immigration control is all about, then you will not allow them unhindered passage. This is the situation in which the West finds itself.
Its capital is seeking higher returns but so is its labour. Result: capital, as ever seeking higher returns, is sneaking off to places where labour is cheap. So jobs are flooding out, which means a few are earning a lot while many are earning nothing.
Naturally, politicians are getting their knickers in an almighty twist and researchers are trying to un-knot them. The latest effort in this direction comes from Hitendra Wadhwa, Rohit Arora and Harpreet Khurana, all from Columbia University.
In a recent paper*, they recognise the inevitable and try to offer some pearls of wisdom to those who have to formulate business strategies.
"What is the totality of risks and rewards that offshoring offers today? What areas are more or less advanced? What are best practices in the design and implementation of offshoring? What learnings have the pioneers accumulated along the way, and what models have they developed to maximise the impact of their offshore operations at a global level?"
They have examined offshoring in financial services in respect of venture capital, private equity, retail and institutional banking.
Their main findings are that although more and more firms are going in for offshoring, the process is still very far from maturity and that "different companies - and in fact, different industry segments - are at different stages of adoption while offshoring is now a standard practice for certain business processes, it is still at an experimental stage with other processes."
They also find that venture capital is by far the leading adopter. "This can be attributed to their technology focus, which led them to get an early taste for offshoring in the 90s through IT initiatives. In recent years, the increased pressure faced by VCs to make better use of capital has led them to aggressively grow the offshoring model."
Venture capital is followed by retail banking. The fact that since it is a low-margins business, they have a lot to gain from small percentage improvements in operating costs that offshoring provides. But the risks go up as you increase scale, "from a pilot to a full-scale operation."
At the bottom come the institutional banks and private equity firms. They are basically risk averse and conservative. Also, since they look for higher skills, the low wages, low skills of offshoring don't hold much attraction.
Until now, the authors also say, it was mostly low-end jobs that were being outsourced. But the good news is that "the landscape is starting to shift substantially as firms grasp the full potential of the talent pool they have access to in offshore locations."
But now firms are "tapping offshore teams for 'high-end' processes that are complex and high-risk often, offshoring gives firms the ability to perform complex assignments that may otherwise have never been executed."
Where is all this going to end up? The answer becomes evident when you realise that this is the first time ever in the history of mankind that both capital and labour are in excess supply, without the natural stoppers that limited their supply in the past.
The US can go on printing notes and we? We can go on producing babies.
*Beyond Cost Reduction: The Risks and Rewards of Global Services Sourcing; www.columbia.edu/cu/ciber/ research/Outsourcing Paper.pdf
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