Outsourcing Industry: Effects on India

FH Aachen University of Applied Sciences Heinrich-Mußmann-Str. 1 52428 Jülich Report On Outsourcing Industry: Effects on India By Chandra Kanth Kosuru Matr. No- 3055352 Masters in Energy systems International Management Prof. Dr. Ulrich Daldrup

Table of Contents List of Figures... 2 1. Introduction... 3 2. Effects on Indian economy and Unemployment... 3 3. Outsourcing industry in India... 4 3.1 How it works... 5 4. Advantages and Disadvantages... 5 5. Prospects... 6 6. Conclusion... 8 7. References... 9 List of Figures Figure 1: Labor turnover in the Indian firms over time... 7

1. Introduction How would you feel being unemployed after being an eligible candidate for several jobs? How would you feel if the company you had been employed with for several years suddenly told you to that you no longer had a job there? This is not a simple hypothetical situation while this has been the case for several Indian students and employs from the past few years and has been the case in other countries too. Outsourcing has partly solved the issue but the after effects of it have been an influencing factor too in the current scenario. Outsourcing is one of the core features of development in the industrial sector on the world platform. It involves transfer of various divisions of work or components of the industry to an external service provider. They could be a large segment of companies like the productions plants or a team of few people in the offshore places. Various industries have started implementing outsourcing such as Information technology (IT) sector, Engineering, Business sector, etc. [1]. Considering various advantages like world best intellectual and internet sources, low cost infrastructure, multilingual capabilities, etc., India has emerged as one of the most preferred sites for outsourcing. India has emerged as the 21 st century s software power house offering various services especially to IT enables services (ITES) and Business Process Outsourcing (BPO) [2]. Furthermore, India has been the dominant outsourcing market with a $ 52 billion market size, of which the banking and financial services contribute nearly 40 %. But due to the increasing competition and reducing skilled man power more investment is needed in the Knowledge processing outsourcing (KPO). Along with these difficulties the problems faced by the BPO employs such as overnight shifts, sexual harassments have been evident and in case of offshore outsourcing the cultural and language barriers can pose a big risk [3]. 2. Effects on Indian economy and Unemployment Outsourcing in India has helped create jobs; for example, more women are currently in the labor force ever since the advent of BPO. Also, the increased acceptance of technology has boost the performance and effectiveness in the domestic market as a result of foreign companies shipping part of their business processes to India. This has given India a major boot and helped in reducing unemployment by a broad margin. In 2016, India has acknowledged 7.6 % growth in their creation of employment

which has added up to the 6.8 % of the southern Asia. But according to the report of United Nations (UN), there could be a marginal increase in the unemployment between 2017 and 2018. "Unemployment in India is projected to increase from 17.7 million last year to 17.8 million in 2017 and 18 million next year. In percentage terms, unemployment rate will remain at 3.4 per cent in 2017-18," the report added. This has to do mostly with the reducing opportunities and the increased competition of the growing market [4]. China has been a major competitor for the Indian outsourcing industry. But, India offers a cost advantage that is not easy to beat. Rising wage bill of IT professionals and global financial meltdown is challenging India's position as a preferred destination for outsourcing business processes. Also, employing additional labor with the availability of the sufficient number of employs downsides the disadvantage. This negates or controls the wage increase over the margin [5]. 3. Outsourcing industry in India India has been the leading competitor with various outsourcing businesses across the world for an attractive wage margins. Various countries like USA, Germany, etc., have been a part of this business. TCS and Wipro has been the major partners in the IT sector and various new companies have been emerging with time such as Infosys, L&T, etc [6]. Inspite of severe financial and banking crisis affecting the world's economic growth, many of the IT, BPO and KPO companies in India are maintaining good success record. With a huge market size, India's outsourcing is continuing to dominate the global outsourcing market. Though there are many competitors in the market like China, Malaysia, Philippines, etc., it is still the major player in the world in outsourcing due to its many advantageous factors. As a proportion of national GDP, the IT-BPO sector revenues have grown from 5.2 per cent in 2006-07 to an estimated 5.5 per cent in 2007-08. On the export front, revenue from ITES-BPO have shown a year-on-year growth of over 29.8 per cent (from 2006-07 to 2007-08). Also, direct employment in Indian BPO grew from 2, 16,000 in years 2003-04 to 5, 53,000 in year 2006-07. India has already registered its mark on the globe in IT-BPO sector. While, huge opportunities in KPO sector will help the Indian market climb the global value and knowledge chain [3]. In 2008, a study listed 6 Indian cities of Bangalore, Chennai, Delhi-NCR, Hyderabad, Mumbai, and Pune, among the world's top 10 outsourcing destinations. China has been a major competitor for the Indian outsourcing industry. But, India offers a cost advantage that is not easy to beat. But, rising wage bill of IT professionals and global financial meltdown is challenging India's position as a preferred destination for outsourcing business processes. Nevertheless, the big boom in the BPO industry in India has generated a lot of employment opportunities with lots of benefits to their employees [2].

3.1 How it works I have been a part of the outsourcing business for almost 2 years as an executive engineer in a renowned company. Sharing my experience about this business would give an idea on how it actually works. The major work is to provide the American manufacturing company with the necessary inputs for their production process. In the hind side the major job of planning, designing, modelling and giving the details of components with their complete dimensions, raw materials required, manufacturing processes that should be done and the scrap percentage was the major part. This ensures a proper manufacturing of the components and further assembling them with the detailed drawings provided. The team is situated in the offshore (India) and an onsite manager (USA) provides with the necessary input for the offshore team. So, a major part of the work has been dealt with the offshore team and the input from them helps in the production of the American company. The input must be delivered from person to person which takes place between 4 people (customer to onsite manager then to offshore manager then to the allotted person for the work) which reduces the quality due to various reasons and finally reduces the quality of final output. The team working for 8 hours including both nightshifts and morning shifts also affect the output. This leads to the loss of credibility of the company and affects the working person mental and physical health due to these dynamic timings and work pressure. The pay for the respective work is just 50% of the actual cost which would cost the company if the work was done in the USA. This is further divided to the working people after remitting the companies profits and expenses of the infrastructure. This led to a reduction of 60% on the total wage of a single person when the work is outsourced to India. 4. Advantages and Disadvantages The main motive behind business process outsourcing is to allow a company to invest more time, money and personal in their specialized activity without losing quality. Thus, cost advantage followed by increased ability to focus on core competencies is the major driving factor. Some of the major advantages contributing are [7] Improved efficiency and operational performance; Productivity improvements; Access to expertise and superior competency; Operational cost control;

Improved accountability; Shorter project delivery times; Opportunity to focus on core business concerns; Enhanced employment opportunities; Handling of miscellaneous jobs; Access to newer markets (in case offshoring); Thus, business process outsourcing assists in increasing a company's profits as well as shareholder value. Software companies are trying new avenues through business process outsourcing to increase their revenues. Some of the major risk factors in outsourcing are: [7] Service expectation mismatch; Lower than anticipated cost savings; Data theft; Intellectual property protection; Higher training costs; Monitoring costs; Loss of control; Customer dissatisfaction; etc. In case of offshore outsourcing, cultural mismatch or language barrier could pose a great challenge. 5. Prospects With emerging companies and the competition, the employment rate is expected to increase for the future. But the increase in the wages of the current employees and including their benefits provided by the BPO has made the foreign companies to reduce the outsourcing business. For IBM, says Bundeep Rangar, chief executive of IndusView, an advisory firm, the total cost of its employees in India used to be about 80% less than in America; now the gap is 30-40% and narrowing fast. These factors affect the ingoing outsourcing and the competitors such as China; tend to increase with the competitive prices to pull the business to them [8].

Figure 1: Labor turnover in the Indian firms over time With Mr. Donald Trump being the new president of USA, many factors has influences these business over the short period of time. The $150-billion Indian outsourcing industry has been a favorite punching bag of American politicians for over a decade. Senator Jeff Sessions, who has been a critic of the H-1B visa process, referred to "abuse of H-1B visas for foreign workers". But the Indian IT industry has maintained that it does not abuse the process, and invokes the lack of skilled labor in the US as the reason for workers to travel to on-site locations. Major companies such as Infosys and TCS have already been warned for their foreign hires due to the new H-1B visa rules and it limitations. These new rules can also result in many onsite people travelling back to their home countries [9 11]. All this has sent the Indian IT and BPO industry into a funk. There are fears that it will either stop growing or be forced to accept much lower profit margins as demand for its services falls. For Indian IT vendors, demand for traditional outsourcing, meaning routine software and application development and maintenance, is already levelling off, says Pankaj Kapoor, an equity analyst at Standard Chartered Bank in Mumbai. The work used to roll in at you, explains an executive at one large Indian vendor; now you have to go out and search for it [6, 12]. It is not only that the offshoring of jobs is reaching saturation point, but also that Western companies, after a decade of experience, are changing their attitude to the practice. KPMG, a global consulting firm, even announced The Death of Outsourcing in a research paper last year. After all, offshoring important tasks to an outside provider are quite a risky thing to do and carry significant hidden costs. Companies in services as well as manufacturing are now far more aware of the pitfalls. Until recently the most important reason for companies to send large chunks of important business functions abroad was to drive down costs. A decade ago wages in emerging markets were a tenth of their level in

the rich world, an opportunity too good to miss. During the recession of 2008-09, says Cliff Justice, KPMG s leading expert on outsourcing and offshoring, the race offshore accelerated, and more higher-value and complex work was sent overseas too [12]. 6. Conclusion To conclude with the topic, the major effects on the Indian economic growth are on a brink which can either be a slump or a raise. But with the increasing unemployment due these effects of reducing outsourcing implies a major chance of declining growth. A major turnaround of the current trend could be the use of the skilled labor and invest in the development of the companies which could evolve in India. For achieving this kind of a goal, the people should take the initiative and start providing suitable inputs for development. The government should help with these startup programs and assist in their growth. This could lead to a self-growth of the country and increase the innovations and inventions which attract other markets to invest in India. The Indian skilled personal who are situated at various parts of the world could be a major contribution for this kind of a project. Considering Indians being a major part of IT growth in America, and investment of such knowledge in India could prove worthy. Raising the standard of education in India and making it accessible for the well-deserved than the well-earned could be an important prospect for the government to invest in. This can reduce the number of students travelling abroad for their higher education. India has been a developing country since decade and to see it to be developed needs well educated or internationally exposed personal in the government who has a proper vision of the future. The factors such as caste system and reservations should be eliminated for the growth of deserved. While these are very small factors affecting the development and also some hypothetical factors which cannot be influenced in the mere future.

7. References 1. Business Portal of India : Outsourcing Industry. http://www.archive.india.gov.in/business/outsourcing/index.php. Accessed 3 May 2017 2. Business Portal of India : Outsourcing Industry : India and Outsourcing. http://www.archive.india.gov.in/business/outsourcing/outsourcing.php. Accessed 3 May 2017 3. Business Portal of India : Outsourcing Industry : India and Outsourcing : Effects on Indian Economy. http://www.archive.india.gov.in/business/outsourcing/indian_eco.php. Accessed 3 May 2017 4. Unemployment in India to increase marginally in 2017-18: UN Report - Times of India. http://timesofindia.indiatimes.com/india/unemployment-in-india-to-increase-marginallyin-2017-18-un-report/articleshow/56512962.cms. Accessed 3 May 2017 5. Outsourcing History of India - Outsource2india. https://www.outsource2india.com/why_india/articles/outsourcing_history.asp. Accessed 3 May 2017 6. Akinyemi, A.: Outsourcing to the Developing Economy: Its Impacts on GDP and Unemployment. A Case Study of India and the United States of America 7. Business Portal of India : Outsourcing Industry : Advantages and Disadvantages. http://www.archive.india.gov.in/business/outsourcing/advantages.php. Accessed 3 May 2017 8. Business Portal of India : Outsourcing Industry : Challenges and Future Prospects. http://www.archive.india.gov.in/business/outsourcing/challenges.php. Accessed 3 May 2017 9. India's $150 billion outsourcing industry stares at an uncertain future. http://economictimes.indiatimes.com/tech/ites/indias-technology-vendors-paddlingshaky-boats/articleshow/56543653.cms. Accessed 3 May 2017 10. Pramanik, A.: Indian IT sector braces for impact of Donald Trump's immigration order. http://www.business-standard.com/article/companies/indian-it-sector-braces-for-impactof-donald-trump-s-immigration-order-117012900803_1.html. Accessed 3 May 2017 11. India s Infosys and TCS warn of Trump impact on US hires. https://www.ft.com/content/d5d19ce0-d98c-11e6-944b-e7eb37a6aa8e. Accessed 3 May 2017 12. India s outsourcing business: On the turn The Economist. http://www.economist.com/news/special-report/21569571-india-no-longer-automaticchoice-it-services-and-back-office-work-turn