European Journal of Developing Country Studies, Vol.2 2006 ISSN(paper)2668-3385 ISSN(online)2668-3687 www.BellPress.

org

Outsourcing: Blessing or a Curse; a Comparison of Economies

Shamaila Burney Department of Public Administration, University of Karachi Main University Road Karachi 75270 Pakistan Syed Shabib ul Hasan (Corresponding author) Department of Public Administration, University of Karachi Main University Road Karachi 75270 Pakistan Tel: +92-3213763430 Email: sshassan@uok.edu.pk
Abstract The paper examines the basic trends and concepts of outsourcing and its impact on a countrys economy, with its potential costs and benefits to both developed and developing nations. Over the years, with ever changing business environment, outsourcing industry is also changing its patterns and is moving from simple business operations to niche business process outsourcing. Outsourcing is now acting as a strategic weapon for many firms in both developing and developed world .The aim of the paper is to investigate the role outsourcing is playing in shaping a countrys economy. To explore how despite of all the benefits of outsourcing that both parts of the world are enjoying, Is it really a curse or a blessing for a country? The proposed study is divided into different sections Section 1 introduces topic with its potential costs and benefits for the developed and developing nations, Section 2 literature review is given that aims to establish a strong theoretical base related to the concept and trends of outsourcing .Section 3 Discussion and analysis of research findings and final Section concludes discussion with concluding remarks and recommendations. The proposed study explores qualitative tools of research and is mainly based on the data gathered through Desktop research (Secondary), articles and books. Further case studies of two countries are taken for study, USA a case of developed nation and India as a case for developing nation to prove the main objective of the paper. Keywords: Outsourcing, Developed Nations, Developing Nations Blessing, Curse Economy.

Introduction As countries are experiencing economic slowdown all over the world, outsourcing is becoming very controversial topic and a basic theme of all professionals discussion. Outsourcing is now affecting businesses from every aspect i.e. from manufacturing to design, logistics management, financial controls, customer management and sales. Economist envisaged companies motivation for price cuts, low cost production, low wage labor , their efficient ways of doing work and spur for creativity with innovation using advanced approaches as some of the key reasons giving boost to outsourcing industry all over the world. Outsourcing Industry is now experiencing a transformation from performing niche business activities to main stream strategic operation for companies. Firms from developed economies finds it more efficient, cost effective and successful way of reducing operational costs by outsourcing the tasks rather than carrying out work themselves. Further it also enables companies to focus on their core competencies and to structure and streamline their business operations and management in a more effective manner. Similarly low salaries of labor from other nations, zero level investment on fixed assets (capital expenditures) like machinery equipment purchase and maintenance, high quality products at a cheaper rate with better customer service, are some of the potential benefits of outsourcing. But to flip the other side of the coin, loss of infrastructure and skilled labor, increased unemployment prospects and lack of infrastructure are the negative impacts that outsourcing is bringing to developed nations. In comparison, progressive trend in economy is witnessed in developing nations. As work is coming home, with monetary gains in terms of cash inflows as labor is being paid good wage rates, enhanced skills, technically sound workforce and improved infrastructure with most modern and up-to-date equipments and software. Similarly increased employment opportunities are the benefits that developing nations are reaping from outsourcing. On contrary, its not that outsourcing always works in favor of developing nations, one of the major challenge that outsourced businesses are facing within developing world is of stiff competition, for grabbing outsourced businesses from other developing nations. India, the leader of outsourcing industry since 1990s, is finding her competitive position at risk because of increasing wages trend in Indian Market compared to economies like China, Philippines, Latin America, Eastern Europe and from emerging and budding low wage

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European Journal of Developing Country Studies, Vol.2 2006 ISSN(paper)2668-3385 ISSN(online)2668-3687 www.BellPress.org
countries like Egypt, Malaysia, Pakistan and Thailand. It is predicted that these low wage countries can also contribute in taking away approximately 40 percent of Indias market share from outsourcing industry. Similarly the risk for developing countries emerge when the external outsourcing service providers goes bankrupt or closes their businesses ,in said situation companies need to search for new companies with same business needs in order to save and keep in use their precious resources from being obsolete. At the same time another downside of outsourcing is the risk of labor attrition, which may bring sudden and unpredictable shortage of labor resulting in reduced workforce without management taking any overt action. Outsourcing is becoming very controversial and a focus of debate between developed and developing world businesses and economies. As developed nations like America at one side bringing in the benefits of outsourcing, the other side reality is that, many Americans are viewing it as an Evil for taking away all the jobs to other countries of developing world. According to research, America is experiencing a loss of more than 400,000 U.S. jobs that are outsourced to other countries, and the flow is expected to reach 3.3 million by 2015. The long term impact of this trend would be rise in unemployment rate and the most troublesome factor for Americans in this scenario is not only the loss of lower level jobs but also the risk of middle level professionals jobs loss that are now being outsourced to low remuneration employees countries. This threat is also there among developing countries too. As in IT industry competition from China and Vietnam took away Indias market share and work. A part from all the competition among developing nations, the long term benefit of outsourcing over developing nation would be development of the economies because of influx of jobs for the technically sound and skilled workforce. The rationale for writing this paper is to investigate the role Outsourcing is playing in a countrys economy with a comparison of developed and developing nations, to identify who is in reality benefits from outsourcing? And to investigate if its cost effective, efficient, beneficial, productive and a Blessing for nations or merely a tool of money grabbing, destruction, destroying communities and nations as an evil i.e. a Curse for countrys economy. The paper is divided into four sections each covering an important aspect related to outsourcing Section 1 introduces topic with its potential costs and benefits for the developed and developing nations, Section 2 literature review is given that aims to establish a strong theoretical base related to the concept and trends of outsourcing .Section 3 Discussion and analysis of research findings and final Section concludes discussion with concluding remarks and recommendations Literature Review With businesses being done round the clock i.e. 24/7, its becoming difficult for companies to execute all their business functions in-house, companies are turning over their all or few business activities to other outside vendors (Richard C.Insinga & Micheal J.Werle, 2000), in order to remain competitive with less capital commitments and cost structure, with the aim of improving performance and to focus on companies core businesses. The process of approaching outside vendors for carrying out business activities is called Outsourcing. Vendors, Service provider or third party providers are the labels that are given to firm to which work is outsourced. Outsourcing is the act of one company contracting with another company to provide services that might otherwise be performed by in-house employees. The tasks that companies choose to outsource can be performed by company in-house, but since outsourcing has financial benefits in terms of reduced operating cost, capital investment, overhead and fixed cost (Aminul Islam & Farid Ahammad S., 2008) firms usually outsource its non-core work activities to other third party or other low cost destinations/ countries. Types of Outsourcing Outsourcing is now an important part of many large corporations growth strategy, in surge of enhancing competiveness and to gain competitive edge over other companies with fewer resources and at a faster pitch. Outsourcing can be done in predominantly in two different ways called Business Process Outsourcing (BPO) and Knowledge Process Outsourcing (KPO) and the third type that emerged is ITO (Information Technology Outsourcing). Business Process Outsourcing (BPO) is a kind of outsourcing, that involves organizations contracting their business responsibilities or specific non core activities to third party business providers outside a companys home country to other country also known as Offshore Outsourcing. This type has a lot of scope and is the most common form of outsourcing. India is a leading choice for big corporations in BPO. It includes call centres, payroll activities, data entry, marketing and other non core business activities. It has benefits of being fast, flexible and cost effective strategy as the outsourcing firms through BPO are cutting cost by converting fixed cost into variable cost structure that makes adapt to changes more convenient and with no investment on assets. Simultaneously, companies need be vigilant since flexibility can be a threat for companies

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European Journal of Developing Country Studies, Vol.2 2006 ISSN(paper)2668-3385 ISSN(online)2668-3687 www.BellPress.org
as this can result in facing issues regarding malfunction in meeting service expectation, ambiguous contractual issues, everyday changing business needs and rise in prices, which companies need to take in consideration such issues before getting into BPO. Knowledge Process Outsourcing (KPO) unlike BPO deals with the core business activities that plays a central role in companys value chain. To perform these core outsourced activities KPO involve the use of highly developed analytical and technical skills. It requires workers with high intellect and expertise as it involve high level decision making than workers in BPO work. Another type i.e. rapidly gaining prominence in outsourcing framework is the buzzword, ITO (Information Technology Outsourcing) as the name is self explanatory this type involves services that satisfies companys IT needs and provide IT resources to the companies and is witnessed in all types of companies. ITO makes possible for companies to remain cost effective by cutting cost of purchasing expensive soft wares ,web servers ,Human resource and most importantly no maintenance cost. The service provider does all the IT tasks of the companies like web hosting, developing reports for management, maintaining and managing soft wares and equipment etc. Risks associated with Outsourcing Every business strategy has some benefits and risks associated with it; similarly in outsourcing too firms adopting it have to face some inherent risks that are linked with it. Broadly, these associated risks can be listed as, Operational risks: Risk that appears when outsourcing firm losses direct control of its functions and people, processes, system associated with those activities if the service outsourced is a core function of the organization unlike non core activities, it can create a negative impact on the operations of the firm. (Securities and Exchange Board of India, SEBI, 2011) Reputational risks: Such type of risk materialize because of the malfunction by third party that may result in the providing deliverables without keeping in mind the regulatory standards that ultimately leads to regulatory actions. (Securities and Exchange Board of India, SEBI, 2011) Loss of control: The firm that outsource its operations to other firm or offshore it to other countrys firm losses its control over its activities and at the same there is also a risk of having difference in motivation level, attitude ,goals achievement between workforce of third party service provider and internal staff of the firm. Legal risks: Legal risks can also hinder outsourcing relationship predominantly when legal documents and contractual relationships are not redefined or renewed with the changes in outsourced activities takes or come to an end. (Securities and Exchange Board of India, SEBI, 2011) Risk of Quality Standards: Every service provider country has its own quality and performance standards according to the demands of their local customer that can sometimes adversely affect the outsourced functions and might result in risk of getting poor quality of deliverables. (Subhankar Dhar, Bindu Balakrishnan, 2006) Miscommunication: Since outsourcing decisions are being taken at different levels, between outsourcing firms and service providers there can be a danger of miscommunication in product/service specifications, contracts and legal agreements that can impact outsourcing decisions and deliverables (service /product being delivered.). Vendor failure to deliver services on time: Another risk unfavourably effect outsourcing especially in the case of outsourcing of IT services is the risk of getting system crash and ultimately failure to deliver on time solutions to firms outsourcing functions/needs, so major suggestion for the outsourcing firm is to always search firms with better contingency plan so that companies always provide services on time and have a back up plan in store in time of unforeseen circumstances.( Dean Davison, 2003) Cultural risk: Culture also plays an important role in how the workforce of offshore outsource country behaves, deals and reacts to different business situation like for example if call centre services are outsourced to other country as in Pakistan the accent and pronunciation is entirely different form that of America, UK and other European counties so there will be a need to train call centre employees according to the accent of firms home country, at the same time dressing style social activities, customer services and dealing ,religious practices and the way of dealing customers all will have a reflection of third partys country culture that can sometimes contribute as a risk factor in business dealings. Viability of service provider: Outsourcing customers are more concerned nowadays about the viability of the service provider, as there can be a risk of failure in providing services and the danger of leaving firm without giving access to all the products/services outsourced (Berinato, S., 2001). Such failure create security concerns for outsourcing firm and sometimes losses in business too due to which it becomes difficult to stay in business

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scenario. In order to evade such failure situation, firm should take proper clear agreement and keep into consideration the contingency plans to deal with such situation (Allen, J., et al., 2003). Political and country risks: The risk arises if the political environment of the service providers country is uncertain to outsource companys functions. Similarly there can be a change in the political conditions or in governments policies towards outsourcing industry that can influence Companys outsourcing agreements. Therefore, its essential to first scan the political condition of the third partys country before taking outsourcing decision. (Simon Seth, CSO online, 2008) Whenever companies are taking decision to outsource their functions they need to keep into consideration all the mentioned inherent risk associated with it that needs to address during decision making. In order to manage these risks, there is a need to devise Proper risk management plan by both the firms engaged in outsourcing. Likewise some precautionary measures should be adopted by outsourcing firms with and structured approach at the time of contractual agreements and contingency planning should be kept in mind to deal with unforeseen circumstances .Quality standards should be determined before hand and there is a need to maintain proper outsourcing long-term relationship between outsourcing firm and third party service providers. Comparative Analysis of Developed and Developing Nations Outsourcing Industry In todays competitive business landscape with frequent changes, Companies are devising and adopting different business strategies (like vertical integration, product elimination strategy , Mergers stability and growth strategies) to run their businesses with improved business processes within least possible cost structures, in order gain competitive position in global market. One such latest strategy is Outsourcing. The growing pressures on companies to outsource is the thrust to remain competitive by achieving more with less inputs and that too at a faster rate. With this recent trend multinational organizations from developed world are approaching developing nations to carry out business activities. The paper is an attempt to identify the role this latest outsourcing trend is playing in shaping business environment and country economy in both developing and developed world. The case studies of two countries are adopted i.e. USA (developed country) and India (developing country) to prove the main objective of the study. FIGURE 1 Ccomparison of a developed nation - USA and Developing nation Indias outsourcing statistics Country Type Developed* Developing* Country Country Rank USA India 35 01 Overall Outsourcing Rank 4.2 7.1 Cost Competitiveness Index 1.7 8.3 Resources & Skills Index 6.9 6
th

Business & Eco. Environment Index 8.3 4.2

Source http://www.sourcingline.com/top-outsourcing-countries accessed 11 June 2012 , 11:15 am . * Developed case in point USA-adopted as a company who is outsourcing services to developing world * Developed case in point India-adopted as a third party service provider country, who is receiving all the outsourced services from the developed world Outsourcing in Developed Nations- Case in Point- United States of America United States of America is one of the leading players among developed countries in outsourcing industry with highest demand for seeking outsourced services from vendors or third party service providers. USAs economic competitiveness scores high with GCI index of 5.8 which is highest among sourcing nations with average microeconomic stability of 4.4 index. US have one of the strongest and technically advanced economies. India is a major player in the outsourcing market and is the primary and preferred choice of Americas big corporations when it comes to outsourcing. Americas most of the outsourced assignment went to India. The emerging trend of outsourcing has been a spotlight for the past few years and a burning debate between American corporations and workers (US citizens). As corporations are enjoying the benefits of this emerging trend in the form of cost advantages, work flexibility, less investment on fixed assets like machinery, softwares and equipments etc. improved customer services with excellent product quality, latest innovation, ideas, expertise, cheap labor and productivity .As now the work is being done round the clock 24/7, the time differences between nations results in increased productivity which shows positive increasing trend in USAs economy in strengthening it. Moreover professional expertise, innovative ideas, latest technologies and resources are also accessible because

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of offshore companies collaboration from different parts of the world. On contrary US workforce and general citizen perceives this global phenomenon as an evil for themselves and for the US economy by associating it with the model of downsizing. The phenomenon that observed during study was that multinational organizations used to replace their employees with the workforce of outsourced or third party service provider with the aim of enhancing work efficiency and profitability, because of which unemployment rate in US is increasing at a fast pace .An even more alarming fact that is predicted by researchers is the probability that expected job loss figure could reach to 3.3 million by 2015. The fact is too threatening for US economic growth that it was even identified and addressed by US President Obama in one of his State of the Union speech and even pledged to bring US firms jobs back to home. Even though he is cognizant of outsourcing importance that he will take calculated risk in amending US outsourced policies as amendments should be made with perspective of safeguarding the interest of both the corporations by providing them opportunities to be competitive and go global and to protect the jobs of US workforce from off shoring. This is indubitably an issue that will have a long term repercussions and implications on US outsourcing industry that can either damage its effectiveness or will pave way for US workers in getting their jobs back to home. Yet a critical point has been lost in the debate: The interests of U.S. corporations are often not the same as those of the country and its citizens. As getting staff hired from developing world may help big corporate giants like IBM,DELL Microsoft and others in reducing their cost and boost up their profits but it will going to harm the morals of the US based workers who lost their jobs and of those who lost the hope of getting jobs. Another unknown fact to US economy that is silently eating its share and will have long-term implications to be faced by , US economy and the global economy (i.e. developed nations of the world ) is the fear of losing their infrastructure ,as companies engaged in off shore outsourcing services to other developing countries like India , china , Pakistan & Malaysia etc , all the manufacturing plants and IT centres are now being developed in these developing nations to provide services to the developed world ,which in return though benefitting America and other developed nations in short run by having less investment on infrastructure and fixed assets and their maintenance but knowingly or unknowingly the trend of outsourcing is having serious impact on their economy as after some time all the modern setup, latest equipment , soft wares, Professional HR (Manpower) will be in the hands of developing world and developed nations will be left with no other option. This is another issue that seriously needs to be addressed by US and other nations of developed world to sustain their strong competitive position in the business scenario. American corporations are not only sending jobs to other countries but also their talent, technology and innovation that they gained over time back in 1990s. Outsourcing in Developing Nations- Case in Point- India Outsourcing in case of developing economies provides a lot of potential for growth, as a lot of cash inflow is coming home from developed nations. With a lot of services being outsourced developing nations are also building latest infrastructure and a strong professional technically competitive workforce by providing opportunities to its citizens to enhance their knowledge, skills and attitudes to perform all the outsourced tasks send by developed world. As outsourcing industry is witnessing a boom, the rancorous debate that is emerging out of this phenomenon is what will be the benefits and consequences of outsourcing for developed and developing world economies. The veiled aspect and assumption of this debate is the reality that offshore outsourcing has always been favourable towards developing economies and has shown good affect on developing countries economic growth where the jobs are moving, India is considered as the leading beneficiary of this phenomenon similarly China, Malaysia, Philippines, Thailand, Sri Lanka, Pakistan, Bangladesh etc. are other developing nations reaping the benefits outsourcing Business strategy. Despite the fact of having immediate benefits of outsourcing to developed world in terms of cost structures and work flexibility etc, it is believed that for developed world, this phenomenon will bring serious repercussions to deal with, in long term. India among developing world is a market leader of global outsourcing industry since mid 1990s and is a leading choice of countries when it comes to offshore outsourcing, as its strength lies in its high tech English speaking large workforce. Another added advantage for India to bring outsourced services to home, is its low cost structures, quality products and cheap labour. India economic competiveness score is average with GCI index of 4.3 as compare to China score best among outsourcing destinations i.e. 4.7, (World Economic Forum, Global Competitiveness Report 2010-2011) Indias overall outsourcing Index is 7.1 highest among developing world so far .Indias Resource and Skills Index score 6, as it has massive resources and skill base but the educational challenges and producing skill graduates or a quality workforce is becoming a challenge for India that business and economic environment in long run can prove to be strenuous. Outsourcing for India proved to be very favorable and blessing in disguise, as it changes Indias landscape from a country with tags of poverty and social backwardness to a country with tag of potential economic power. Bangalore, Hyderabad, Chennai,

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Mumbai, Pune, Delhi are rated as top outsourcing destinations of India, according to a study conducted by Global services and Tholons Research, Advisory firm based in Bangalore in 2008. USA and Europe are the major and giant customers of Indias Outsourcing Industry, predominantly the major chunk of Indias outsourcing industry is with IT and BPO industry, that also contributed in boosting countrys economy with creating and providing employment opportunities for millions of workers in India. Indian outsourcing industry is engaged in providing vast range of services to its clients call centers, data entry services, software development services, mortgage services, Health care services, Engineering services, financial services, Research and Analysis services etc. Though India has captured lion share almost half of the worlds outsourcing industry and is ranked at number one position in the industry, its not that India is free of challenges and competitions, in order to keep and sustain its position in outsourcing industry , a bundle of challenges and competition are in pipeline for India to deal with, either in the form of in-house increasing concerns like workforce management, labor attrition, increasing cost structures etc or in the form increasing competition from other competing developing nations. One thing is evident; the future of Indian outsourcing industry will be complex and full of challenges. The major threat and competition for Indian outsourcing industry is coming from China ,as it has been already predicted that China will going to take over. Chinese cities like Beijing, Shanghai, Shenzhen, and Dalian also comes among the top destinations for outsourcing businesses. Likewise Malaysia, Philippines, Indonesia, Pakistan, Thailand and other developing nations will also give tough competition to India as more and more low cost services providers countries are emerging in the map of outsourcing. During mid 1990s till 2011 a lot of migration of skilled, semi skilled and unskilled jobs took place from high cost service provider nations to low cost service providing nations. For India its increasing cost and labor shortages moreover dearth of experienced business leadership is a growing concern. As a lot of companies are now shifting their business operations to other developing world outsourcing destinations like Pakistan, having 50% lower labor cost to its credit with production of over 200,000 IT graduates, that is creating a lot of opportunities for Pakistani Outsourcing Industry particularly in IT and BPO sector. Similarly Bangladesh, Vietnam, Malaysia & Philippines that are said to have taken a good share of outsourcing industry, are also on the developed world outsourcing list of the preferred nations to shift business operations. Another challenge for the developing world and particularly to India is slowly shaping trend of outsourcing countries to take jobs back to home with concerns of cost saving and to reduced the risks that are therewith outsourcing decisions like delays in supply chain, language barriers, cultural differences ,distance management , loss of capital and infrastructure, and moreover the loss of jobs f domestic workers as initiatives and concerns have already shown by American President with his drive to take jobs back to home in one of State of the Union speech. Despite of all the challenges and competition to face from other developing world outsourcing Industry, although declined is witnessed in second and third quarter of 2011 but at the same time TCS (Tata Consultancy Services one of the largest IT giants of India) witnessed Increase in revenue by $ 2.4 billion i.e. a rise of 4.4 percent in the second half of 2011. The underlying fact is that outsourcing industry is showing declining trend globally. Global recession, anti globalization movement, further economic instabilities are some of the major reason contributing to this declining trend in the outsourcing Industry on a global level. But for India as competition is coming for example Philippines comparatively a new player in the industry is constantly improving and is on the road to improvement, slight fluctuation and instability is sure to happen that will definitely going to affect Indias position but not to large extend as BPO market of India is already ten times larger than Philippiness market. Moreover, global cues cannot be predicted and some ups and downs will not going to affect the established outsourcing markets like that of India ,China , though threats of ups and downs can hit the emerging markets and that entirely depends on how they take and adapt changes. Conclusion This paper examine the role of outsourcing business strategy in shaping a countrys economy and impact it has on a countrys economy with a comparison of a developed and developed nations economy. The objective was to investigate if its a blessing or a curse for economy. Overall, it was found that Outsourcing is a blessing for developing nations as proved through the case of India, a developing nation and a leader of outsourcing industry reaping the benefits of this newly emerged phenomenon But its not that everything going in favor of developing world , growing competition from other developing nations and with that of native country is new threat for developing world to deal with likewise labor attrition, and cheap labor cost are the growing concerns for developing nations. . To flip the other side of coin, Developed nations, though enjoying the benefits of

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European Journal of Developing Country Studies, Vol.2 2006 ISSN(paper)2668-3385 ISSN(online)2668-3687 www.BellPress.org
outsourcing in terms of being cost effective, productive and efficient for USAs (case in point) big corporations but the future seems miserable, with increasing rate of unemployment in home country with loss of infrastructure, skilled labor, monetary gains more over loss of national wealth by sending money abroad to pay their wages and salaries. It is believed that if the countries will be able to cope up with the challenges and the emerging trends of outsourcing industry than these challenges will not be able to affect much the outsourcing industry in both developed and developing world. However, there is a possibility of emergence of new markets at both the ends of the industry i.e. outsourcing and third party service providers. And things will go back to track for businesses after initial restructuring.

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