Is Outsourcing Beneficial?

Outsourcing and BPOs seem to have shaken up the American economy much more than actually required... or maybe they are right, there is a reason to be afraid.

The education system in India, set into motion under British rulers, is the single biggest reason why the problem of outsourcing jobs to this third world country is becoming such a bone of contention in the US today.

Indian students are drilled with information, stuffed with English language skills (indeed, in India educated means English speaking), and converted into veritable encyclopedia on two legs. They may lose the ability to think out of the box in many cases, but they get to sharpen their knowledge skills, and software is one such.

As a result, today India produces 3.1 million college graduates a year, and the number will be close to 7 million in another six years. The number of engineering colleges is slated to grow 50%, to nearly 1,600, in four years.

Of course, the engineers thus produced may not be world-class, but they are skilled engineers nevertheless, and can be trained to the best advantage.

Slowly but surely, the land of snake charmers and fakirs has started catching the attention of cyberspace, more so highly skilled levels of workers. Migration is not easy, so as per the phrase 'the mountain comes to Mohammed', outsourcing is what follows.

With amazing speed and efficiency, India and its young brains are making deep forays into world-class engineering, business and medical sciences industries. The impact has been stronger than most Americans could imagine possible.

"India has always had brilliant, educated people," says tech-trend forecaster Paul Saffo of the Institute for the Future in Menlo Park, Calif. "Now Indians are taking the lead in colonizing cyberspace."

This techno takeoff is a great idea for India, its economy as well as society, but seems to have shaken the foundations of the American faith in their superiority. The storm that is brewing, is taking over the American vote bank faster than politicians can fight it, so much so that it is now taking center stage for this year's elections.

India gets almost 60% of all outsourcing jobs. Indian brainpower is increasingly being utilized to manage everything from accounting to their food-stamp programs; the latest entrant is the U.S. Postal Service! At this point, statistics say that almost a third of the new IT development work for big US companies is being done overseas, and bulk of it in India. As a result, Bangalore alone today has a hundred and fifty thousand IT engineers, about thirty thousand more than Silicon Valley.

By 2020, 47% of Indians will be between 15 and 59, compared with 35% now. The working-age populations of the U.S. and China are projected to shrink. So India is destined to have the world's largest population of workers and consumers. That's a big reason why Goldman, Sachs & Co. thinks India will be able to sustain 7.5% annual rate of growth after 2005.

The first reason for this is the fact that this skill comes at a fraction of the cost in the US. A top chemical or electrical engineer from one of the Indian IITs gets a starting salary of $10,000 a year, while a similar American employee will get about $80,000. With this kind of economics at play, this seems to be best place to squeeze profits from. Besides, big US companies are, at this point, getting rid of almost 500 to 2000 IT staffers because of their inability to update their skills, or their packages. This is where Indian brains move in for the kill.

China, the other Asian tiger, somehow does not seem to be a real threat to this field. Maybe it is because of the English skills that India boasts of, despite the fact that the Chinese economic liberalization began almost 12 years before India opened up in 1991.

It was actually only in 1999 that Indian software got their big break, with the likes of Infosys, Tata, and Wipro getting their big breaks during the Y2K scare, when U.S. outfits needed all the software help they could get. Though India still has cornered only less than 3% of the market, it has definitely changed the market appearance, the pricing structure by undercutting options like Accenture, IBM, and Electronic Data Systems by a third or more.

The reaction from the American workforce has been instant and uproarious. Politicians are starting to view outsourcing as a threat to the economy, the worker unions are viewing it as a threat to their bread and butter and the government is in a spot, because the issue has become an election gimmick now.

Figures say that due to outsourcing, the rate of unemployment among software engineers in the US has more than doubled over the last two years, to 4.6%. The same applies to chemical and electrical engineers. In total, the Bureau of Labor Statistics reports that 234,000 IT professionals are unemployed.

Today, like it or not, almost two-thirds of the Fortune 500 companies are outsourcing from India, and corporate America is not in a position to overlook the implications. According to Forrester Research, the amount of work done for America, out of India, is expected to more than double this year.

It is a great economic option but a greater employment threat, at least to a part of the country. There are frantic moves, political lobbying, and all sorts of logic put forward to thwart the growing trend.

There are arguments that there still exists a cultural lacunae, service level expectations are supposedly, still not met and the transitional costs can be foreboding.

While these things may sound like real issues, in the face of billions of dollars worth of savings, they appear insignificant. Besides, outsourcing will benefit the US economy, because companies will now be investing greater savings in other job-creating activities, which will more than negate the number of jobs lost to India. In any case, the number of jobs lost is only a very small fraction of the 138 million-labor force. But this small crumb of the pie, has the power to impart a growth rate of 8% to the Indian economy.

In a worldwide survey that McKinsey recently conducted with 7300 senior executives, it was found that almost 80% are of the opinion that outsourcing is good for the global economy. But only 58% of US senior executives believe it is a good phenomenon.

The latest on the US elections gives another perspective to the problem. The battle for the top job of the country now has John Kerry and John Edwards in the race, and the issue of outsourcing is one major player in the field. The issue is being used to whip up votes but like politicians anywhere, they will use it only as long as it suits them, Those who are actually effected by the outsourcing of jobs are least likely to be effected by their rhetoric, and whoever wins or loses the elections, it will be ultimately the common man who will be effected.

UN agencies like UNCTAD continue to assert that outsourcing is a legitimate part of international trade, but then again, who is to decide the right balance between profits and manpower welfare?

As secretary general of UNCTAD Rubens Ricupero has been reported as saying, "Off shoring was a legitimate part of global trade liberalization, and this enabled developing countries to leverage their competitive advantage -- abundant, competitive labor and lower cost environment."

It will not be easy for the US economy, nor the citizens to adapt to this paradigm shift in skill sets and jobs. There will be trauma, layoffs as well as refurbishing and training involved, but they will just have to do it. There's no escaping the roll now, the business economics is making just too much sense for any company to backtrack.

What has to be considered is that the 'India outsourcing' is giving US an immense opportunity, to turn the tide in their favor. Handling the reverse brain drain rightly, will turn the tables in the favor of the US economy, while making a hue and cry about lost opportunities and lost jobs will not!!

It is an ideal opportunity for the US to make ideal business partners out of one of the most populous and industrious country in the world, specially given the fact that it also has a brainpower that in many ways far exceeds that in the US.