The Outsourcing War: Let Economics Triumph Over Politics
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Authors
Authors: Sanjib Dutta, Abdul Khader
Senior Faculty Member, Research Associate,
ICMR (IBS Center for Management Research).
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The Economics of Outsourcing Contd...
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There is a definite cost advantage in off-shoring work to India. These advantages are a result of lower wages in the developing countries along with the development of telecommunications in these countries. A report published by HSBC, which has off-shored more than 4,000 jobs to India, says that the telephone costs from India to America and Britain has decreased by almost 80%, since January 2001. The wage difference between these countries is also a factor that forces the companies to outsource their business processes to India. A study done by NASSCOM, says that the average salary of an IT professional in UK is $96,000, in US it is $75,000, whereas in India it is just $26,000. The wage difference between the low end call center jobs of both the countries is also very wide. An average call center employee in UK earns $20,000 on the average. Whereas, a call center professional in India barely manages to earn one tenth of the earnings of their British counterparts. |
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Recently, American Express paid $5,000 to a group of software programmers in India, to develop a package for them. The same would have cost them several million dollars in US. The benefits of outsourcing go much beyond the cost advantage. An article in Mckinsey quarterly suggests that the companies need to look beyond cost savings. The article says that "Companies are merely replicating what they do at home, where labor is expensive and capital is relatively cheap, in countries in which the reverse is true."
Alan Greenspan, US Federal Reserve Chairman, is a staunch supporter of outsourcing. He is of the opinion that any move to curb outsourcing of work to countries like India and China, might give just a temporary relief. Reacting to the proposed legislations in the US banning outsourcing, Greenspan said, "A new round of protectionist steps is being proposed against outsourcing. These alleged cures will make matters worse". Greenspan feels that any effort to protect US jobs through legislation would backfire.
Not all companies have taken full advantage of outsourcing. According to Harris Miller, president of the Information Technology Association of America (ITAA), a lobby group, so far only 3-4 % of all American companies outsource their processes. The remaining still rests with American firms. A report published by Forrester, in December 2003, says that 60% of the Fortune 1000 companies have a negligible or near nil presence in off-shoring. Report also suggests that 40% of the work of these companies could be outsourced. Thus, the potential for growth in outsourcing is still immense.