Abstract of the GOA – AGENDA 2005 CONFERENCE

WHITE PAPER

Goa Agenda 2005

Business Process OutsourcingChallenges Ahead

1

Index:

Abstract - Pg.2

Research & Development - Pg. 4

Software Development - Pg. 13

Business Process Outsourcing - Pg. 22

Acknowledgements - Pg. 38

2

Abstract of the GOA – AGENDA 2005 CONFERENCE

The model of Outsourcing is being taken up by both developed and developing economies across the globe. This is an exciting challenge and a lively and controversial topic , and was discussed in depth by the leading visionaries of the industry, academia and technical evangelists who gathered for two days (4 th & 5th

Feb 2005) in the sylvan surroundings of India’s one of the beautiful , serene and promising state i.e. Goa.

The key issues which were discussed and debated included a wide spectrum of topics, which tried to explore as to how this profitable, socially and economically beneficial business model evolved. The experts tried to look into the “Challenges of Outsourcing in this new era “ through a well-defined and structured programme, beginning from evolution to maturity. The structure of the programme was as follows :

a) The Common Impact – Social, Economical and Political Opportunities and Concerns – The issues which were focussed in this topic mainly dealt with how the social and economic factors like cheap labour, cost arbitrage, availability of technical expertise, geographical proximity, employment opportunities etc. The threats of loss of employment in the countries who usually outsource their work, how outsourcing can reduce corruption etc were given more stress and many perceptions and conclusions were drawn. These conclusions and details gathered from the conference forms the basis of this paper.

b) Research and Development -The facts and figures which were quoted by the eminent academicians and Industry Captains included a prominent figure i.e the total R&D expenditure for the current decade will be of the order of US $ 280 billion. The visa difficulties prevent companies from hiring foreign scientists and so the projection of many high quality jobs getting shipped to the developing countries where there is ample qualified personnel available. This portends another very important fact that there can be shortage of highly qualified personnel. Thus more and more universities should fund more quality research projects where the pool of manpower is developed to a large extent. The few concerns which became apparent and unanimous among the speakers were as follows:-

a) Availability of qualified personnel.b) Availability of high quality graduate and postgraduate

education.c) How can the Industry foster more R&D initiatives among the

students, across the Universities?

c) Software and Product Development- The chicken and egg situation evolved out of the discussion. Was it BPO which evolved first or was it Software Development which helped propelled the evolution of BPO sector. The challenges , growth of software industry in India and the various growth

3

prospective ahead were discussed. One area where the experts focussed more was the Open source Software, which has become the real threat for the commercial software market, both across the globe and India. Also there is a trend in the type of work the, being offered by the Software vendors. Its more of a business Solution which is offered by many software vendor. They have graduated from Software Solutions Company to Business Solutions Company, as pointed out by Director on Board of Infosys, Sri Srinath Batni. Moreover , few speakers also put some light on the issue of the current level of education which is demanded by the Industry and what should be the set standards , what are the current evolving technologies and where the Software Training should be heading ahead.

d) Business Process Outsourcing – This was the main theme of the Conference and the ideas which kept generating about the nature of the business and where is this Country which has earned the “Back office” of the World as well as the Global Outsourcing Industry, were very enriching for the delegates and to the overall political, social and economic community of this part of the world. The main issues which the speakers tried to discuss and which ahs been explained in great detail are as follows

How to explore the new opportunities? How to expand in smaller cities and towns and us the cost as well as

technical arbitrage of smaller cities and towns? How can this Industry become a trendsetter in raising social equity and

responsibility to a new level?

This paper will focus primarily on issues, which came up in the conference and the few conclusions, which were made. Its imperative for our nation that the progress initiated by the IT Industry sustains itself and the Industry grows rapidly. We hope this paper will be of help to the government, industry and the community as a whole, and can help focus on issues more effectively, for our nation to take both proactive and preventive actions.

4

Chapter 1 R & D :

`Outsourcing has got a really bad rap. What people don't realize is that it's been going on forever. What do people do when they don't want to do the grunt work? They outsource'Kevin Yan, co-founder and CEO of Arackal/SwiftThink

Outsourcing R&DIndia, the favoured destination for the outsourcing of software development, is also attracting outsourced research and development projects.

A study by Research and Markets of Ireland found that R&D outsourcing to India will grow from $1.3 billion in 2003 to $8 billion by 2010. Growth in R&D outsourcing has been boosted by the outsourcing of services. Now, overseas companies that used India as a low-cost base are beginning to exploit Indian technical expertise.

As many as 150 R&D centres have been established in India. Texas Instruments Inc. led the way in 1985, followed by Intel, Motorola, IBM and Cisco. Recently, Advanced Micro Devices indicated it will design and develop a new processor from its centre here.

In India, R&D outsourcing existed even before 'outsourcing' became a fad. Outsourcing models for R&D vary, from captive to third party to contract assignments and the pioneers are from the information technology industry. The success of Indian R&D centres is attributed to factors such as good management, an emphasis on quality, strong ties to universities and clear roadmaps. The growing number of R&D centres also built on the successes of pioneering companies.

The Agenda: Following was the agenda for this session. The items in this session were debated and deliberated in details.

Research & Development definitions :

"Research" - when you don't know what you are making "Development” when you know what you want to make but don't know

how to do itThe session also tried to come out whit the characteristics of R&D. They have listed some of them as below :

Research is inward looking activity Abstract thinking concrete working Demands huge investments

5

Long gestation periods Investment necessary but not sufficient Human intensive activity 20% inspiration and 80% perspiration Core Research v/s Applications Core research in IT is in Algorithms Applied research in IT requires domain specific knowledge Real world problems do not come neatly compartmentalized Real world problems are seldom completely solved, they often get

transformed

Companies across a broad range of industries are showing increased interest in business process outsourcing (BPO) as a strategic approach to managing their business processes. At the same time, many vendors have been expanding into BPO, tying their companies' future growth to the expansion of their BPO services. Continued evolution in BPO has meant fundamentally rethinking how to assess and identify market opportunities. IDC's BPO Services: Market Opportunities by Key Business Processes with Vertical Views service not only offers valuable insight into the dynamics, size, and scope of BPO market opportunities through encompassing all the research within the core BPO Services: Market Opportunities by Key Business Processes program, but it also provides additional analysis of end users' budgets, spending trends, and priorities within 17 industries and four different company size segments. Subscribers to this service receive direct access to IDC's top industry experts, who can supply competitive analysis and positioning advice, identify strategic partnering opportunities, assist with speaking to the investment community, provide press quotes, and more. The following is a comprehensive overview of the industry-specific research elements addressed by the vertical views portion of this service.

Changing Face of R&D

Problems are complex & interdisciplinary It’s no longer lone activity, its a teamwork Not one person knows all Today's Research is networked Academic research - publication or patent Industry research - patent or product Academia & Industry - better synergy

Outsourcing

Use of external agents to perform one or more organizational activities Concept that long existed in other industry IT outsourcing can be traced back to 1963 Boom in IT outsourcing started in early 1980 IT was considered as non-core activity and could be left to the experts

Indian vendors have only been able to tap a market share of 2% of the global IT Services market currently and need to tap new service lines in order to capture a market share of 4.6% of the worldwide IT services market by 2008. In the ITES-BPO segment too, India has a market share of 2% currently and will need to

6

target new service lines such as Engineering/R&D, logistics and sales to capture a share of 4.8% by 2008.

Outsourcing Transformation

Started with Manufacturing Then low level programming Then Electronic Design Then Call centre, Customer support Then R & D

Outsource Why & What?

Why outsource?o Manpower cost & availability (transaction cost)o Accountability & delivery (quality of service)o Need to focus on core competencies

What is outsourced?o Non core activityo Mundane & routine activityo Activities requiring expert knowledge

Factors Favouring Outsourcing

Low salaries Skilled workforce Good University system Good communication infrastructure Stable political structure Efficient business conditions No insurmountable cultural barrier Culture of quality & qualification Work ethics Language Skills Time Zones differences

Why Not?

Hidden cost associated with outsourcing Loss of Control & dependency on vendor Loss of technical expertise Security issues Poor intellectual property protection Loss of flexibility Loss of jobs

R&D Outsourcing

7

Despite increasing evidence that US companies are not achieving the types of cost savings they anticipated when entering into outsourcing contracts, in the field of Research and Development the savings still heavily outweigh the costs.  While in some fields the wage differentials have shrunk to the point that including administrative costs in offshoring makes it hardly worthwhile, R & D continues to offer huge multiples for western firms.  The profitability of such contracts is evidenced by the more than 500% growth of Indian pharmaceutical firms in recent years, a rate driven primarily by western outsourcing.

"While the average R&D cost in the US is $400,000, it is $250,000 in Europe and only $50,000 in India," Motti.

R & D Outsourcing Offers Huge Cost Savings. India is the best option to go for any type of R & D work. There are many reasons why organizations choose to outsource functions and services. The following is a list of common reasons why outsourcing is undertaken:

* Lower costs * Specific supplier benefits. For example, better security, continuity, etc* Higher quality service due to focus of the supplier * Less dependency upon internal resources * Control of budget* Faster setup of the function or service * Lower ongoing investment required in internal infrastructure* Lack of internal expertise * Increase flexibility to meet changing business conditions* Improve Risk Management. * Acquire Innovative Ideas.* Turn fixed costs into variable cost.

Sharad Saxena adds to this.

Challenges ahead

A recent study conducted by India's Associated Chambers of Commerce and Industry indicates that Indian outsourcers are losing market share to countries such as China, the Philippines, Malaysia, Mexico and Canada.  Gartner echoed this conclusion as they predicted Indian market share would fall from 80 percent to 55 percent by 2007.  This change indicates that despite an initial thrust towards english speaking India, western corporations are re-examining the benefits of outsourcing and concluding that a number of near-shore providers, Canada and Mexico, or cheaper far-shore, China, are providing more beneficial services.

Wipro Ltd., India's third largest computer software exporter, announced that its profits have climbed 58 percent to $363 million for 2004.  The growth has been primarily due to surging demand for software and back-office services.  Despite predictions of a long-term decline in demand for outsourcing services from India, top firms are continuing to flourish.  Predictions abound, however, that as wages continue to increase and the Rupee holds steady the cost differential and thus

8

incentive for outsourcing to India will decline, making the future of these firms dependent upon their ability to diversify services provided.

The Opportunity

Mr. Arun Kumar, Chairman, NASSCOM says, "India's presence in the global IT Services market is today more focused to custom application development and application outsourcing, which forms only 10 percent of the global IT services market. A significant potential also exists in service lines such as Network infrastructure management; IS outsourcing; IT Training and Education; Hardware support and Installation; and Network consulting and integration where Indian vendors have negligible presence currently. With Off shoring becoming more mainstream, Indian IT companies are expected to penetrate new service lines such as Systems integration (accounting for 22% of global IT services market); Packaged Software Support and Installation (13%) and IT Outsourcing (18%)".

Spending

Mr. Kiran Karnik says , "Significant opportunity exists for Indian ITES vendors in new areas in the ITES-BPO segment such of Sales, Legal, Engineering/R&D and Logistics. Worldwide ITES-BPO spending for 2006 is projected to be US$ 165 billion for Sales, US$ 163 billion for Legal, US$ 123 billion for Engineering/R&D and US$ 308 billion for Logistics."

Current and Potential share of India's IT Services exports worldwide by Service Lines

Current and estimated share of IT Service lines in India's total exports

Current and estimated share of IT Service lines in India's total exports

9

Current and Potential for ITES-BPO Exports by Service Lines

Source: New service lines will boost growth in ITES-BPO February 14, 2003.

The Dilemma

UNDERSTANDABLY, many Indians took umbrage at the wave of protectionist rhetoric that engulfed the American election campaign. Not only do they point to the endless lectures they have received from Americans in years past on the benefits of globalization and open markets. They also resent an insinuation underlying the debate over “outsourcing”: that all countries such as India have to offer is cheap labour and a telecommunications link. Just look, they say, at the extent of the high-end research and development (R&D) work being undertaken in India.

Or, rather, they say so in private. In public, conscious of western fears of the migration of ever more technically demanding and high-paid jobs, many Indians have recently concluded that the best strategy is not to draw attention to themselves. The ultimate American nightmare is not just about white-collar employment, but the loss of the country's great international advantage: the ability to innovate. So a veil of discretion is masking some of India's R&D achievements. Industry lobbyists are playing down this aspect of India's success. Some multinationals, such as IBM, are loath to discuss it at all. Others, such as Texas Instruments, boast that they “have increased design resources around the world”, but make sure to add that “this has been accomplished without transferring significant numbers of jobs to India”. Indian IT firms are stressing that, great as their contributions are, the real cutting-edge, innovative work is done in their clients' laboratories in America.

10

Some veterans of the Indian technology industry are truly sceptical about the potential of Indian R&D. Lakshmi Narayanan, chief executive of Cognizant, a New Jersey-based IT-services firm with big operations in India, argues that the country does not yet have the capability to develop its own intellectual property. So far, he says, R&D's contribution to overall growth is “minuscule”, and where multinationals, such as Cisco Systems and Nortel, have contracted work out to Indian services firms it has been in upgrading old products, not developing new lines. Satyam Cherukuri of Sarnoff, an American R&D firm, argues that, of the three requirements for developing an innovation-driven industry, India has two: the technical skills and access to capital. What is missing is an indigenous business model.

How did we get here

What is being outsourced?

Infrastructure Application Development Engineering/Design Services Application Support and Maintenance R&D Work

The trend began in the mid-1980s

Research Bases already in Indiao Texas instruments.o GE.o Cisco.o Microsoft.o Motorola.o Sun.

What’s in the air?

“Firms are now beginning to exploit the intellectual calibre that is available in India”.

“US companies want to come to India because of the quality of the work. In India the time to market is low and you have the flexibility to scale up the high quality resources as per your requirements”.

"We've transformed our R&D operations to ensure our focus is bringing solutions - 10 years ago, focus was 5 to 8years. Now, it is is 1-5 years. That's changed the way we construct R&D teams."

“Can create teams without worrying that I'll have to make hiring and firing decisions down the road- staff up to meet the peaks and valleys of the demand.”

“Last evening's problems actually get converted to this morning's solutions”.

11

IT Outsourcing in general

Benefits Costs Risks

Low Cost Vendor selection costs Loss of knowledge

Less time to market Transition costs Security breach

Less recruiting Severance and Retention Bonuses

Potential poorer quality

Refocus/Quality/Flexibility Contract Management costs Language and cultural barriers

Recommendation – Keys to Success

Clear vision, knowledge and focus. Well defined process management. Continuous assessment. Risk management. Resource flexibility. Financial/cost benefits. Strong protection of trade secrets. Quality of service. Size and stability. Brand and image.

Competition

China, Vietnam, Philippines, Russia and other East European countries who are equally cost effective and are increasingly improving their English language skills

Outsourcing is no longer a trend, but a serious option

India has become a preferred destination for R & D outsourcing in Biotechnology Pharmacy IT – software/hardware Telecom

It’s not just software!

Aston martin has contracted prototyping its latest luxury sports car to an Indian designer.

Wal-mart sources $1 billion worth of goods, half of its apparel, from India. Two-thirds of GE plastics' 300-member research team is in India. 9 out of every 10 diamonds sold in the world are either cut or polished in

India. TVS motor company has been awarded the coveted Deming prize for total

quality management.

It will only grow bigger

12

"There is no competition between India and Israel in IT," said Olmert, who is also the minister for industry, trade, labour and communications, during a visit to Bangalore. "India is so much bigger and has so many talented engineers who are much less expensive than our engineers in Israel. We have to use our relative advantages, and do R&D for the world market."

Olmert added that companies from both countries would meet to discuss collaboration. "We don't have a shortage of engineers in Israel relative to our size," he said. "Their quality is very high, but their cost is also high. We need to find a balance between using the innovation of Israeli engineers and the proven skills in software development and implementation of Indian engineers."

Software suppliers around the world operate development and services subsidiaries in India, or outsource to Indian companies. But Olmert said that Israel's interest in India's software and services capabilities went beyond outsourcing and included collaborating on R&D and product development.

The visit of Olmert's Israeli delegation to India follows a visit by Russian president Vladimir Putin and a trade delegation of Russian IT companies. Besides inviting Indian software and services companies to set up operations in Russia, the Russians also met with executives of Indian outsourcing companies to explore collaboration between Indian and Russian IT companies.

Outsourcing of R&D activities is the next wave, and one which will establish India as “The Outsourcing Destination”, which gives real business benefits than just cheap labour costs.

13

Chapter 2 : Software Development

`Outsourcing has got a really bad rap. What people don't realize is that it's been going on forever 'Kevin Yan, co-founder and CEO of Arackal/SwiftThink

IntroductionThe BPO boom seems to be attracting companies in large numbers. After the likes of captive players like GE, and pure-play companies like Daksh, the latest entrants in the BPO ring are the who’s who of the Indian IT industry like Infosys, Wipro, Satyam, TCS, Digital Globalsoft, HCL Technologies and Mphasis BFL etc.They have all got into the game, either through subsidiaries or separate units within the same company.This paper will look at the strategies Indian software players are adopting to tap a market that is estimated to grow to $21 billion by 2008. After a disastrous year, when Indian software companies were testing different survival strategies, they discovered a messiah in Business Process Outsourcing (BPO). Will the BPO plan work for Indian companies?

For Indian software companies, entry into the BPO business is clearly a way to not only increase the topline, but also to address a larger part of the market space. Looking at the way pure-play BPO companies have been grabbing business, Indian software services companies too have been increasingly searching for a way to get into the BPO business. While the differences between software development and BPO far outweigh similarities, Indian players clearly don’t want to miss out on an opportunity which even non-IT companies are seizing.

NASSCOM estimates that about $7-8bn worth of work may not have come to India because of security concerns. Clients are convinced about delivery of IT and BPO services from India but security concerns loom large in any discussion around offshoring IT services and BPO work to India. Sunil Mehta, vice president, Nasscom says : “Security issues are being used as an excuse to not to offshore work to India.” . A recent study by Frost & Sullivan (India) has brought out the following facts about the recent trend in more outsourcing opportunities . Hit by the global economic slowdown and tech meltdown, software firms are looking at constant revenue streams and steady net margins. In such a scenario, BPO represents the best opportunity. By foraying into the BPO segment, software services companies are looking at improving cost efficiencies by moving operations offshore for their existing as well as potential clients. Also, in the services industry where customer relationships play a vital role, having a presence in the BPO space would place software firms in a vantage position against competition. In addition, by controlling the maximum levels in the value chain, software

14

companies can not only commit high-quality levels to their clients but also look at long-term strategic outsourcing alliances with them.But one challenge which Indian companies have to realise is that software services and BPO are dissimilar, and require different skill-sets, though there may be some skill-sets which could be transferred to the BPO subsidiary. BPO is a strategic move with long-term commitments and long-term implications. Selling and delivering business processes require different skill-sets compared to traditional IT services outsourcing. Even the decision makers that need to be targeted are different, at the CEO/COO level, and the issues they need to be convinced about for BPO services are very different from what a CIO needs to be convinced about for IT services. However, as Indian IT services vendors have built a credible India brand, it would be easier for such companies to convince potential clients to sign on the dotted line than it would have been without this recognition.

Strategies of Indian players

Infosys has set up a separate subsidiary named Progeon for its entry into the BPO space. Says an Infosys spokesperson, “Our BPO foray is part of our initiative to increase the length and breadth of our services and extend relationships with our clients. But we set up the BPO company as a separate entity as the skill-sets, resources and execution model are different from that of our core business.” Infosys has also decided to go in for a build-option rather than a buy-option, by forming a separate subsidiary. As Infosys has a strong client-base, the company thought it prudent to tap its existing clientele, which would enable it to grow organically.On the other hand, the strategy of Wipro has been to buy and then build. For instance, Wipro made a smart move by picking up a stake in Spectramind, thus giving it a competitive edge against other Indian players. Says Balakrishna R, practice head for BPO at Wipro, “The key for us was to get a quick start with an established player and experienced management team. It would have been time-consuming to build this from scratch. Additionally, the investment in Spectramind is a fair investment from a financial standpoint. The call centre business has good growth potential, and this investment allows us to participate in this business opportunity as we go to market initially with this offering. With this strategic investment, Wipro has strengthened its BPO offerings with the inclusion of backroom processing services and customer contact services in its portfolio of services.”While the build-or-buy decision varies from one software company to the other, both the options hold interesting pointers for the rest of the industry to follow. For instance, going in for a build option allows a company to scale up as per market needs. Additionally, this option offers a company like Infosys the opportunity to gradually scale up operations to align completely with existing software service practices. Moreover, a build option gives a company complete management control and better quality control. But while this option helps a company to fine-tune its BPO practices over a period of time, in terms of go-to-market strategy it could prove to be a long wait.

So which strategy should Indian companies adopt? While both models offer benefits, most analysts , as per research in the Industry, favoured the buy option. The main reasons cited were – “As the already established BPO player has

15

established Industry practices and trained manpower and also a well established customer base, there is a faster return on capital invested. Moreover, the Wipros and Infosys of the world have the brand recognition, the smaller BPO firms have the core competencies in the business”.

Infosys is looking at working together with Progeon to provide the client a complete range of services that not only takes care of its technology requirements but also process outsourcing needs. Progeon is banking heavily on the Infosys brand name and its methodologies to gain a competitive advantage. The frameworks developed for business process management which will be used by Progeon will be based on the Infosys Influx methodology, which enables client processes to be transitioned and executed smoothly. Initially, Progeon will focus on the lucrative banking, financial services and insurance (BFSI) sector. Within this sector, the focus will be on transaction processing and accounting services. The company will offer these services in multiple forms—as business process re-engineering, shared services platform, and business intelligence services—in addition to the obvious cost advantage of executing the work in India.Wipro too is counting on its immense experience in the software services space to help create the same kind of brand in the BPO space. Additionally, Wipro’s strengths in terms of quality by its SEI-CMM, SEI-PCMM, SEI-CMMi and Six Sigma processes will be complemented by Spectramind as it is the first Indian company to achieve COPC certification using the Six Sigma platform.

According a senior Spokesperson from Wipro , “BPO is a key strategic initiative for Wipro and will be a growth driver. We see synergy in terms of a common client-base and an expansion of our service offerings. The key message is that in this space value is delivered in three waves. The first wave is delivered by moving operations offshore. Wipro already has a strong presence here and has an established and proven process for transitioning and sustaining operations. The second wave of value comes from process optimisation. This comes in two ways—by redesigning the process; and by changing the IT solution that supports the process. These processes are transaction-driven; processes such as Six Sigma can be very effectively used to take out cost on a continuous basis, which constitutes the third wave.This along with Wipro’s financial stability and strong account relationships helps us in being a serious player in this space.”

16

Mr. Batni, Director Infosys , explained a few challenges and perspectives about the Education

The software industry will chase talent. India’s huge base of strong technical talent: key competitive advantage. Education fundamental for the growth of the software industry. India has one of the largest higher education systems in the world.

Quality of education varies significantly across universities. Lack of research focus in universities. Number of patents per million residents in India is 1, as compared to 779

in South Korea and 289 in the US. Number of scientists/engineers employed in R&D per 100,000 people is

149, compared to 3,805 in the US. Total employment in the Indian IT industry increased from around 30,000

in 1991 to nearly a million today. Infosys has grown from 300 employees in 1992 to over 35,000

employees. IT sector will employ close to 2.2 million people by 2008, of which the

ITES-BPO segment will employ 1.1 million people. Major challenge finding quality, educated professionals in smaller (tier 2)

cities.

BUSINESS PROCESS OUTSOURCING

17

BPO or Business Process Outsourcing is not simply another term for outsourcing. It involves creating strategic value through outsourcing by creatively examining the process and changing the way it is actually performed and is therefore more than just changing hands. Here, the supplier not only takes on the responsibility to take over the function or business process, but also to reengineer the way it is done. That includes either applying new technology or applying the existing technology in a new way. As a result, something about the way the process is currently being done gets fundamentally changed even though considerations of how the new process affects the buyer's company and interacts with other departments and functions in it. BPO often increases a company's shareholder value.

A BSP or a Business Service Provider, is an outsourcing service provider that offers scalable BPO services through the InternetWhy are the jobs coming to India? This is one question dogging everyone from politicians, businessmen, students, scientist and IT professionals to the common man.The phenomenon seems to have been triggered off by the emergence of the Indian economy on the global scene and its ability to attract jobs.

Situations Responsible for Job Outsourcing to India

Globalization

A new era of globalization began in the 1980s and brought along a significant decline in costs of transportation, communication, and production, and considerably improved inter country competitiveness; and broke down trade and cultural barriers among countries.Communication(Internet/travel) But for the ease in communication, offshore outsourcing could be unthinkable. The shift from atoms to bytes and bits has made this possible. Distance has become immaterial to many of today's business processes.

Government policies and backing.India has written its success story not in spite of the chaotic, robust democracy, but because of it. Decades of Socialist Democracy and affirmative action have allowed the participation of the poorest, for whom education is the only way out. This mindset has led to increased schooling. On another plane, Socialism and import-substitution, produced generations of entrepreneurs who had to develop indigenous products, from blades to satellites, with their own resources. That self-reliance is helping India now: In the past two years, six companies have won prestigious Deming quality awards ,and excellence has triggered a surge in export orders.

Demography What was a few years ago cause for worry, has turned to India's advantage. The growth of India's population is a big factor in the whole scenario. If it were not for the teeming millions in the country and the government's inability to provide employment to them, the workforce would not have offered cheaper services and appear satisfied to boot. The workforce is too happy to land a job in the first place to bother too much about the salary. Moreover the salary structure has always

18

been low in India so whatever the workforce earns from outsourced jobs is much more than he would go anywhere else.Economic The economic factor has been greatly highlighted in this issue. Even though it is indeed a major factor in the process, analysts have been overlooking the other very important factors. It is true that if it were not due to economic reasons outsourcing would have never happened. It works both ways for the people who outsource as well as for those that take up the jobs. Cutting costs has been the major concern of companies who are faced not only with recession but also with growing competition. Coupled with that is the growing stature of a fussy and smart consumer who wants the best for the least. Development of easy transportability and service delivery has given the consumer a global market and he is willing to make the best of it. This has made it imperative for companies to deliver to the demands of the consumer. Developed nations have had a good per capita income. Their workforce is used to the high wages and is therefore unwilling to comply with lower wages.

Location Being located on the other side of the world gives the advantage of time difference to India and some companies find it a definite advantage. In fact many companies are giving users in Europe and the USA the choice to choose the place of service in processing their bills and insurance documents, but always warn them of the time advantage they get if they get their jobs processed in India. Consumers are told that if they choose to process in India they may get the required job done in a day or if they choose a local service they get the same thing done in two days. The growing resentment towards Asians has also made call centers provide an option.

Business Sectors Involved in Job Outsourcing

Information Technology/IT solutions This sector has come out of it's Dot Com hangover and have landed solid and confident steps into providing quality IT solutions. No more the small players trying to make a fast buck, it's the old way of working towards trust of customers and brand building. IT solutions include developing software solutions for almost all areas of business and for all sectors, ranging from automotives and aviation to transport and medical services to the media and retailing. IT consulting is the other big thing in the IT sector. From low-end solutions like data entry to Enterprise Application Integration almost every level of knowledge work is done.

Call Centers Call centers are the flavor of the season. Every company worth it's salt is investing in it. A huge part of human resources is being directed towards this field. It is a rapidly growing field and a relatively easy field to enter. The English educated generation of youngsters do not mind the night shifts as they are taken in without being asked to show experience and are being paid a heavy packet - amounts that only could be earned with hard years of slogging in any other field. Thousands of Indians handle customer service, process insurance claims, loans, bookings, and credit card bills.

19

Finance & Accounting Outsourcing FAO (Finance & Accounting Outsourcing) is a fast growing sector. Accounts payable, followed by accounts receivable, were the F&A functions most companies chose to outsource. Much of the outsourced work is full-service in scope. Transactional relationships include accounts payable and receivable, tax, payroll, internal audit, and fixed assets; whereas full-service outsourcing includes the transactional part along with budget and forecast; treasury and risk management; management reporting and analysis; and strategy.

Future Projections and Concerns

In the annual industry leadership forum called NASSCOM'04, leaders unanimously agreed that the Indian market has reached the next level of maturity and is set to grow. By 2008, forecasts McKinsey, IT services and back-office work in India will swell fivefold, to a $57 billion annual export industry employing 4 million people and accounting for 7% of India's gross domestic product. That growth is inspiring more of the best and brightest to stay home rather than migrate. More than half of the Fortune 500 companies are already outsourcing work to India. Research firm Gartner on the other hand claims 1 in 10 US technology jobs will go overseas by the end of 2004. According to Forrester Research, in the next 15 years, more than 3 million US white-collar jobs, representing $136 billion in wages, will depart to places like India, with the IT industry leading the migration. Additionally the telecom bubble has burst and growth has been sluggish. Telecom majors like Lucent and Nortel are cutting costs and trying to recover heavy investments. They are therefore looking at Indian software companies to provide offshore solutions to manage their network operations, support systems, billing software, OS integration and business process re-engineering.

India sees this potential and is working towards meeting future demand for knowledge workers at home and abroad. India produces 3.1 million college graduates a year, which is expected to double by 2010. The number of engineering colleges is slated to grow 50%, to nearly 1,600, in four years. There's a growing movement to boost faculty salaries and reach more students nationwide. India's rich Diaspora population too is chipping in. Prominent Indian Americans helped found the new Indian School of Business, a tie-up with Wharton School and Northwestern University's Kellogg Graduate School of Management that lured most of its faculty from the U.S. Meanwhile, the six IIT campuses are tapping alumni for donations and research links with Stanford, Purdue, and other top science universities. "Our mission is to become one of the leading science institutions in the world," says director Ashok Mishra of IIT-Bombay, which has raised $16 million from alumni in the past five years. Since 2001, Delhi has been furiously building a network of highways. Modern airports are next. Deregulation of the power sector should lead to new capacity. Free education for girls to age 14 is a national priority. "One by one, the government is solving the bottlenecks," says Deepak Parekh, a financier who heads the quasi-governmental Infrastructure Development Finance Companies. White collar jobs ranging from call centers to software engineers to medical technicians are being "outsourced" to India resulting in comments from the White

20

House and the presidential candidates in the USA. This "outsourcing" is blurring the lines in the globalization debate as well. When globalization mainly meant that blue-collar jobs were going overseas, it was ok with many American professionals who supported Globalization. Opponents of globalization, on the other hand argued that only the bad, dangerous jobs were being sent overseas...setting up a kind of sweatshop slavery. The scenario seems to be drastically changing as really good jobs in glass office towers with air-conditioning are now going overseas. Anyone opposing this is seen as a hindrance to the development of a legitimate middle class, even if that means more people of the country of origin are forced into the bad jobs.

If India can turn into a fast-growth economy, it will be the first developing nation that used its brainpower, not natural resources or the raw muscle of factory labor, as the catalyst. India desperately needs China-style growth. For all its R&D labs, India remains visibly Third World. IT service exports employ less than 1% of the workforce. Per-capita income is just $460, and 300 million Indians subsist on $1 a day or less. It has taken Infosys' Narayana Murthy to remind rapturous India that with less than 2 per cent share of the global IT market, India is still a toddler, not a superpower; that potential should not be mistaken for performance. Too late! India is set to reap the harvest of its bragging.

At the end BPO is managed not as cost centres but value as a value centre.

The Indian Inc has taken a giant leap after its inception in 1947. Known only for spices, cotton and cheap Labour it has completely transformed its image into one of the fastest growing nations of the world. Being the fourth largest economy in terms of purchasing power parity, it is now the tenth most industrialized economy. India's advent in global scene was more strongly felt after globalization and de-regularization. Since mid 1991 India has been embarked on economic reforms, which aim to liberalize and globalize the economy. Globalization is the inevitable outcome of the knowledge revolution.

However as compared to world's largest economy the US, India is still far behind the scene. Despite the innate limitations and constraints on infrastructure, unemployment, large scale poverty, competition from other growing economies, corruption etc. the brand India has been able to develop a niche for itself. India has already made a mark especially in ITES and B. P. O. sectors. Apart from these India has a vast pool of highly learned and skilled professionals. The Indian entrepreneurs are leading the globally competitive markets. India is now being perceived as a low cost destination for manufacturing and outsourcing. With the availability of highly skilled will cost human capital most of the multinational companies are shifting focus to India.

The new picture of brand India: Unique, creative, highly talented, qualified, skilled and cheap man-power, center of innovation in the world after Silicon Valley, IT hub, techno-savvy citizens, aggressive companies, world class institutions (IIT’s, IIM's, IISc etc), greater buying power, greater export market share, surplus foreign exchange, state of the art R&D facilities, good infrastructure.

21

The Indian software and services exports have grown over the past 11 years at a scorching pace of almost 50 per cent every year, from $128 million in 1990-91 to $6.2 billion in 2000-01, which is quite an enviable and unmatched record. India's software export revenues increased by 30 percent during 2002-03, with IT services exports projected to grow by 22 percent. The ITES/BPO market has witnessed high growth in the past two years, emerging as a significant revenue generating area for India's software and services companies. ITES/BPO activity accounted for around Rs. 11,700 crore of software export revenues during 2002-03, up from Rs. 7,100 crore in 2001-02.

General Electric first identified India’s potential in the mid-1990s when it shifted a large number of back office jobs to the sub-continent. According to consultant firm McKinsey, over 200 of the Fortune list of 1000 companies have been outsourcing in India. And what has today become a mushrooming $1.5 billion dollar for India is predicted to grow at a whopping pace to $21 billion by 2008, according to British consultants Cushman and Wakefield.

The rationale behind outsourcing was never more clearly stated than by Hewlett-Packard’s services head Ann Livermore when she said (quoted by CNET’s News.com): “We think customers are going to put a lot of pricing pressure on the consulting and integration market. We are going to aggressively move everything we can offshore.”Similar logic has been prompting global giants like GE, American Express, Standard Chartered, HSBC, Delta Air Lines, America Online, and some 300 others from the Fortune 500 list, to do business with Indian IT services companies, and that’s extending to BPO as well. Why, the Indian offshore development model is so attractive that even the big boys of consulting, including IBM, EDS, Accenture, KPMG, etc, are expanding their facilities in India, just to remain cost-competitive with the likes of TCS, Wipro and Infosys. When you have a company like GE stating that it saved $500 million last year because of its ITES set-up in India, that’s very compelling reasoning indeed for myriad others to follow suit.

Nasscom has been trumpeting that the American banking and finance sector alone has saved $8 billion in the last four years due to outsourcing, and that Indian companies and their affiliates contributed $215 million as taxes in the US last year.

Even the US Chamber of Commerce believes BPO is good for the US economy and makes good business sense even as it blames lack of information and politics for the backlash. The Chamber of Commerce of the US is leading the fight to preserve for the American companies the freedom and flexibility to source and trade around the world.

Yet another study by the Forbes magazine last year, said, India remained the prime destination of outsourcing for the American companies as the country turns out 75,000 English-speaking IT professionals every year and has a low wage structure. The study compared India with six other destinations – China, Russia, the Philippines, Canada, Mexico and Ireland. While analyzing profiles of the seven countries, the study praised India for its IT-friendly policies and commitment to ensure best possible facilities for its development.

22

More companies are turning to India to do everything from software development to back office work, Wall Street Journal report said: “Revenues for call-center businesses grew by 46 per cent to nearly $4 billion during the financial year 2003-2004.”

Companies that have opened development operations in India, or are thinking about doing so, include IBM, Hewlett-Packard, AT&T, Northern Telecom, Siemens, British Telecom, Digital Equipment, Lucent and Computer Associates. Non-technology giants like Citicorp have found that they can gain a competitive edge in world markets by using proprietary, and setup there back office also in India, to get both the price edge and the technical support of the developer, couple with the vast pool of talent.

Today whosoever thinks of outsourcing India comes to their mind. Currently, India occupies the premier position in offshore work because of technology; massive infrastructure building (primarily because of software development hub) that is creating a fundamental transformation. Perhaps somewhat uniquely, India as a country has developed a powerful brand for itself particularly software development and ITES/BPO. The domestic service providers have well thought out business plans and are deep into there executes phases. At the same time, the public and private sectors have joined hands to brand their offshore capabilities--a message they have communicated clearly and globally.

23

Chapter 3 : Business Process Outsourcing

`They are pioneering the movement of outsourcing to small and medium business. If it succeeds it could be quite profitable and significant'Joseph D'Cruz, professor, Joseph L. Rotman School of Management at the University of Toronto

Introduction

Business Process Outsourcing (BPO) is the way the business is and will be carried out in the coming times.

With the evolution of the Information Technology and latest Communication Technologies being implemented, the world has become a small village. Information is being transferred from one point of the globe to any other at low cost and good quality. Moreover, a significant change in management philosophy has taken place since the 1990s. Organizations have switched emphasis to concentrate on their core activities in order to increase market penetration and become more competitive. It is now widely recognized that to compete effectively, it is essential for business to concentrate on what they do best and where they can add value.

Areas It Covers

With the rapid expansion of the BPO industry and the extent of its reach, it is becoming increasingly difficult to define what a BPO exactly means. It encompasses a wide variety of activities such as human resource, accounting, financial research, marketing, sales, legal work, logistics, management information systems (MIS) and so on. Software services are also regarded as a part of the BPO market by many firms.

Why do the Companies Outsource?

For any company to outsource its business process to any third party, it is an important decision which would reap significant dividends on the long run. So, what are the motives of any organization to outsource its business processes? The table below is indicative of this.

Reason to Outsource Percentage

Improve company focus 55%Reduce and control operating costs 54%

24

Free resources for other purposes 38%Gain access to world class capabilities 36%Resources not available internally 25%Accelerate reengineering benefits 20%Reduce time to market 18%Share risks 12%Take advantage of offshore capabilities 12%Function difficult to manage or out of control

10%

Source: Outsourcing Institute

What Is Being Outsourced?

Now, along with the reasons to why the companies outsource their business processes, we have to look at what is being outsourced. This would give us a better understanding of what is the general trend of the outsourcing industry world wide. The table below gives us the pertinent information.

What is Being Outsourced Percentages

Information Technology 55%Administration 47%Distribution & Logistics 22%Finance 20%Human Resources 19%Manufacturing 18%Contact Centers/Call Centers 15%Sales/Marketing 13%Real Estate/Facilities Management 11%Transportation 9% Source: Outsourcing Institute

The Scene Today

Today, most of the developed countries are into offshore outsourcing. The main players in this arena are USA, Europe (UK being the dominant player), Japan, etc. USA has the largest chunk of about 70% of the total outsourcing.

Segment wise break-up of the new Jobs in 2005

IT & IT Services - An estimated 70,000 new Jobs expected in 2005. Plus there will be additional hiring to replace industry attrition that is around 25%

BPO and Outsourcing services - Around 1,25,000 new Jobs expected in 2005.

Retailing and Lifestyle - It will create close to 25,000 Jobs directly and more than twice the number indirectly.

Biotechnology - It is expected to create around 5,000 - 7,000 highly skilled jobs.

25

So we see from the above figures that outsourcing will result in huge amounts of job generation and create unlimited employment opportunities.

A Win-Win Game

Yes it is a game. Outsourcing is a game in which there are no losers. It is a win-win situation for both the parties concerned. Let us now see

How Outsourcing benefits the source country?

There is a whole lot of cost savings for the outsourcer. The customer finally gets better products as the source company

concentrates on its core competencies. There is a growth in revenues. The labour force is re deployed in places where it is more required.

But at the same time, there are challenges before the source country as well.

There are massive job losses in the source country due to the shift of jobs to the destination country.

This frequently results in low morale of the workforce. The present workers have to shift location in search of new jobs, which

leads to displaced families. The government has to bear the high cost of rehabilitation. The government also has to deal with the problem of xenophobic

populace.

Over and above the challenges before the source country, there are costs that have to be considered. These cost are well depicted in the Total Management Cost model shown below.

26

On the other hand, there are several benefits as well as challenges in front of the destination country as well. Let us try to identify them.

Economic, Social and Psychological benefits to the destination country

Outsourcing cerates huge employment opportunities in the destination country. This helps the unemployed populace.

The newly created jobs indirectly help the GDP of that country. Higher per capita income Higher standard of living Increased purchasing power Global exposure as a result of interaction with clients from all over the

globe. Boost in literacy and education to meet the qualification requirements of

the clients. Better infrastructure to meet the expectations of the clients. High morale, positive attitude, high risk taking ability, global outlook, etc.

are seen in the destination country workforce.

Challenges before the destination country

The youth of the destination country is less ambitious. This follows from the fact that they tend to get less demanding jobs easily.

The youth, as a reason of getting easy money, start having a spend thrift lifestyle.

Due to the influence of the western culture, in the countries like India, there is an erosion of the family values and beliefs.

The workforce develops a superficial outlook.

The Indian Perspective

27

Now, having seen the benefits and challenges of outsourcing, let us now turn our attention to the role of India as an outsourcers’ paradise.

Software houses from India have effectively provided many of the Fortune 500 corporations with efficient software solutions. These solutions have helped these companies to be more responsive to their customers and more attractive to their shareholders. No wonder, companies like Citibank, Morgan Stanley, AT&T, General Electric, Reebok, General Motors, Fujitsu, Boeing, Coca-Cola, Pepsi, Swissair and British Airways continue to remain ahead of their rivals, thanks to the efforts of many software companies in India.

Offshore Development Centers

One of the unique methods adopted by Indian software companies for providing competitive advantages to their clients is through offshore development centers Offshore Development Centers (ODC) are a Virtual extension of clients’ development environment enabling complete linkage with the parent site in terms of infrastructure and organization structure to deliver multi site solutions seamlessly

Features of Indian ODCs

World Class Infrastructure Well Educated Technical Manpower Resources Availability of State of the Art Technologies Well Maintained Quality Management System Intellectual Property Rights (IPR) Protection system well in place

Other Opportunities for India

There is a huge untapped potential market Huge educated human resource Varied Business Options High employment potential Round the clock shifts available Cheaper capital equipment

Now just as every coin has two sides, there are few concerns too which might thwart India’s progress.

Concerns for India

28

Intense competition from countries like Mexico, China, Taiwan, etc. Hostile opinions in the source countries like USA. Unsustainable relative advantage in terms of language, infrastructure, etc.

China is soon catching up. The rising wages in the BPO industry are a matter of concern as we are

slowly loosing the cost advantage. The working schedules in the BPO industry, especially the Call Centers

have lead to stressful work schedules. This has resulted in several stress related anomalies in the workforce.

The job iteration rate has increased substantially over the years.

So, thought the Government of India is supportive and has clear investment priorities with respect to the Outsourcing, we still have a long way to go to overcome the challenges.

Now, after having talked about the Indian context on the outsourcing front, let us talk about one of the most developed states of India, i.e. Goa.

Outsourcing – Goa at a Glance

The Goa government has announced the long overdue IT policy, which besides giving several sops to the IT industry also focuses on streamlining the administration for e-governance.

Several highlights of the policy are:

Proposals of investment exceeding Rs. 50 crores and industrial houses amongst top 20 companies, as per NASSCOM annual listing, will be provided land at institutional rates

local employment by IT/ITES companies to be rewarded to the extent of 30 percent of salary

Stamp Duty reimbursement to IT/ITES units operating in IT designated areas

Preferential Power Tariff for IT/ITES to be announced to the industry that requires service levels of 99.99 percent uptime

Over and above the above policies, Goa has several other advantages.

Large English speaking workforce Good infrastructure - One of the best in the country

Special Industrial Estates

Strong government support and initiatives

Global outlook due to thriving tourism industry

29

Excellent climate

Ranked in the top three states in India on socio economic indicators

Challenges for Goa

Location – away from the maddening crowd Perception that Goa is just for tourism

Low go-getter attitude of the populace

Less recognition in ITES and other fields as compared to other metros

So we see that Goa has to break free of the traditional shackles that it is only a tourism state and jump in the ITES arena with its new liberal IT policies. Though it will take some time for the international bodies to recognize the strengths of Goa on the outsourcing front, Goa has a sure potential to be amongst the top states on the IT front in India.

Future Perspective:

The BPO Industry is on a high today. India has carved a niche on the global front and is well ahead in the race till now. So the future appears bright.

Revenues: If we look at the projected figures for the revenues per year for estimating the Indian Market size for BPO, we get the following:

Revenue \ Year

2002 2003 2004 2005 2006 2007

Offshore BPO Revenue

1,322 1,825 3,017 6,439 12,563 24,230

Indian BPO Revenue

912 1,205 1,961 3,928 7,412 13,811

Total BPO Market

110,167 121,687 131,171 143,090 157,033 173,070

Figures in $ million Source: Gartner Dataquest (May 2003)

The revenue per year growth is substantial as seen from the above table.

Competition: But at the same time, we have to be wary of the competition from other countries like Philippines, China, Mexico, etc. who are catching up with India. Governments in such countries are taking significant steps to improve their attractiveness for the information technology enabled services industry. Other countries like Malaysia, the Carribbean, South Africa and Hong Kong have also seen some information technology enabled services activity.

Organized Sector: Moreover, within India there are very few listed companies in the organized sector. Otherwise, most of the players are in the unorganized

30

sector. There are some companies who are captive units of the MNC's. But, there are very few companies providing third party services. So on the BPO front, a lot of work has to be done on the front of the organized sector.

Language: With the increasing trend of outsourcing from companies in UK and other countries to India, the need for Indian vendors to be able to employ people who can work in languages other than English has increased. So far it seems German and French will be required more than Spanish, Italian, Russian or Greek.

So finally before we conclude, let us have a look at SWOT Analysis for the Indian BPO Industry.

Strengths

Highly skilled, English-speaking workforce. Cheaper workforce than their Western counterparts. According to

Nasscom, The wage difference is as high as 70-80 percent when compared to their Western counterparts.

Lower attrition rates than in the West. Dedicated workforce aiming at making a long-term career in the field. Round-the-clock advantage for Western companies due to the huge time

difference. Lower response time with efficient and effective service.

Weaknesses

Recent months have seen a rise in the level of attrition rates among ITES workers who are quitting their jobs to pursue higher studies. Of late workers have shown a tendency not to pursue ITES as a full-time career.

The cost of telecom and network infrastructure is much higher in India than in the US.

Opportunities

To work closely with associations like Nasscom to portray India as the most favoured ITES destination in the world.

Indian ITES companies should work closely with Western governments and assuage their concerns and issues.

India can be branded as a quality ITES destination rather than a low-cost destination.

Threats

The anti-outsourcing legislation in the US state of New Jersey. Three more states in the United States are planning legislation against outsourcing Connecticut, Missouri and Wisconsin.

Workers in British Telecom have protested against outsourcing of work to Indian BPO companies.

31

Other ITES destinations such as China, Philippines and South Africa could have an edge on the cost factor.

32

Chapter 4 : Social, Economical & Political Impact of BPO – FutureFindings of the session, Analysis, reality, & comments.

Business process outsourcing (BPO) is defined simply as the movement of business processes from inside the organization to external service providers. With the global telecommunications infrastructure now well-established and consistently reliable, BPO initiatives often include shifting work to international providers. Five BPO international hot spots have emerged around the globe, although firms from many other countries are specializing in various business processes and exporting services:

1. India. Engineering and Technical2. China. Manufacturing and Technical3. Mexico. Manufacturing4. United States. Analysis and Creative5. Philippines. Administrative

In an age of globalisation, more and more job sectors are being forced to compete internationally in unprecedented ways. Workers in developing countries – beneficiaries of improved education and training – can frequently offer high-quality services at greatly reduced costs. Consequently, jobs are migrating to these developing countries – to the Philippines, Malaysia, China and especially to India.

On the one hand proponents see the trend as the natural outcome of globalisation – and a positive impact at that – one that brings jobs and economic development to developing countries. On the other hand there are justifiable concerns for the loss of jobs and income in the US and Europe. At the same time, there is some concern that well-paid but low- skilled service sector jobs may be weakening developing countries by luring educated people away from vital job sectors, or may not be helping countries move up the value chain to higher-level products and processes.

To understand the socio-economic factors let us look at the holistic scenario both in the developed countries and in India:

Socio-Economics Factors:In Developed Countries:

In developed countries like the UK and the USA, employment in call centres is not generally considered prestigious (although there are exceptions to this rule), and they suffer from high turnover rates, high training costs, and occasionally, problems in delivering a consistently high quality service. Many of those attracted to call centre work consider it a stepping stone to better, more highly paid positions in the future. As a result, call centres tend to have high attrition rates, “up to 100% per annum for BT Directories,” according to BT Retail Human Resources Manager Alun Evans. Staff turnover varies by sector but is said to be highest in telecoms and information technology sectors and the banking and financial services sector.

“Outsourcing in general is expected by many companies and observers to bring positive benefits to the UK in the form of increased efficiency and

33

productivity. A recent survey by the Centre for Economic and Business Research estimates that increased efficiencies through outsourcing may result in as much as £16 billion to the economy over the next five years.” - Anna Fifield, “Outsourcing: Set to Give Economy £16bn Boost”’, Financial Times, 17 January 2004.

In India:The main causes for the rise of BPO industry in India have been the availability of a large number of trained manpower. This is due to India’s large population and emphasis that education carries in Indian middle class families.

The craze to get their children properly educated is the most important agenda in the minds of any parent. This in conjucion with a fairly capable educational system has created a huge pool of talent that cannot be absorbed by conventional industries.

The surplus in the labor market provides for perfect employees for the BPO sector. Another pool is also present which is not trained but can be easily trained employing minimal costs . Also due to abundance of labor the Outsourcing companies hire people at cheap prices .The per capita income of an Indian is Rs 12,414 while the per capita income of an American is $37,800. This gives a definite cost advantage to Companies that go in for Outsourcing. Also in ITES the presence of a large number of English speaking youth gives a huge advantages for the company that outsources. India, with plenty of university-educated, English-speaking technical experts, has become a powerhouse in the IT sector. Huge chunk of India’s population is younger than 25 years of age and many of these members of the India’s youth like to live a life with full freedom and independence . In their zest they do not mind working for BPO Industry even if the amount of value addition is not perceived to be very high. The needs of the BPO industry and these youth are complimentary and This has immensely contributed to high popularity of BPO jobs in India among youth and also help India achieve the place it has currently in BPO .

Today , some 40% of companies in the Fortune 500 source software services from Indian companies. With the success of the Indian IT revolution, the trend has extended to other business processing services, from remote bill processing to human resources, and recently, call-centres.

The main areas of outsourcing in India are IT Enabled Services (ITES) and Business Process Outsourcing (BPO) with BPOs being the fastest growing segment, at about 50% growth per year. The outsourcing of business processes and call centre operations, as well as some value added analysis like equity research, is viewed as a positive trend in India, one that brings in jobs and opportunities to a country that is home to one-sixth of the world’s population. It is also seen as fair reward for the years of investment India has made in education to deliver high levels of English language fluency and technical and managerial skill.Gradually, higher value-added services have also begun to take hold in India, particularly in the financial services industry, including portfolio analysis, risk management, claims processing, content development and new product design.

34

With the increasing education levels around the world, BPO is no longer confined to routine manufacturing jobs or boiler-room telemarketing centres. Today’s outsourcing involves complex work that requires extensive preparation and training. For example, Indian radiologists now analyze computed tomography (CT) scans and chest X-rays for American patients out of an office park in Bangalore. In the United States, radiologists are among the highest paid medical specialists, often earning more than $300,000 per year to evaluate magnetic resonance imaging (MRI), CT scans, and X-rays. In Bangalore, radiologists work for less than half that. Not far from the radiology lab in Bangalore, Ernst & Young has 200 accountants processing U.S. tax returns. Starting pay for an American accountant ranges from $40,000 to $50,000, whereas in Bangalore accountants are paid less than half that amount.

Indians are known to be more to respect tradition and their elders, follow strict family norms, have a deeply inculcated sense of value for education and exhibit a relatively egoless state (within a family, or team), meeting commitments, believing in duty, and not worrying about the goal or the endgame too much.

Software organizations and customer service agents fortunately and surprisingly seem to emulate the Indian family values, rather than the society at large. The same, unfortunately, cannot be said of the Indian manufacturing sectors or other parts of the economy in general, though things are changing there, especially in the automotive sector

INEQUALITIES IN THE INDIAN SOCIETY.

Another reason for the rise of BPO in developing countries like India was the monetary inequalities amongst various sections of society. So in order to lessen this gap youth from lower middle class started taking up jobs to either support their families or become independent of their families. Also there was a problem of disguised employment which the BPO industry seem to solve at least in the short run. This factor again was instrumental in the popularity

Driving Factors behind the BPO Boom:

Educational Attainment:

The United States still dominates the world in the quality of its higher education, but the rest of the world is catching up quickly. As more and more Ph.D.-qualified faculty return to their home countries with their degrees from Harvard, MIT, Stanford, and other prestigious schools, they are helping to transform higher education worldwide.

At the K–12 level, it has long been noted that the United States lags behind other countries, especially in technical areas such as math and science as measured by standardized test scores. The gap between the United States and many foreign nations has increased over time in technical education, which has now also translated into fewer U.S. students seeking college degrees in technical fields.

35

The following exhibit compares the relative numbers of U.S. and Asian students pursuing science and engineering disciplines at the collegiate level. As illustrated in the exhibit, Asian students are increasing their engineering expertise in a world that increasingly appreciates and utilizes their new abilities.

Broadband Internet:Broadband refers to the growing pipeline capacity of the Internet, allowing

larger chunks of information to flow with fewer congestion issues. Broadband is the term used to refer to Internet connectivity speeds that are in the range of 2 megabits/second (2 million bits/second). With broadband, workers in different countries can share data, while consumers can surf the Web for the latest bargains.

Changing Labour Pattern:Regular and permanent jobs with respectable compensation, including

social security and terminal benefits are beginning to look as thing of the past. Short term and third party jobs in instalments are emerging as a new phenomenon. Flexi staffing, it appears, is a strategic necessity for survival in a globalised market setting. Indian IT firms were the first to take advantage to work around the restrictive labour laws and optimise productivity. Temporary staff helps in flexibility of deploying manpower and concentrating on executive handling for core functions. The non-core job staffs are being outsourced through

36

different agencies. It is estimated that about 100 thousand temporary job were generated in 2003-04 accounting for an industry turnover of Rs. 850 crores.

In India it is just a beginning. Such jobs may not fall into the category of traditionally ‘decent job’ but employers gain as a result of flexibility without any hassle, as well as reduced wage bill. For the workers, however, it offers immediate job opportunity for freshers. Temporary jobs provide opportunity to update ones skill and acquire more market friendly experiences in a fast changing job market scene. Unions hate this phenomenon, but can do hardly much in view of their own falling clout. Even the government is more anxious to promote employment in a labour surplus economy rather than continue to remain a promoter of model employment which is secure and provides better compensations and benefits. Interestingly, industrial disputes which have largely been confined to the organised sector have taken a new turn. More man-days are being lost lately due to lockout rather than strike. This reflects the changed power equation within the job market. Neutral and investment friendly government labour policy is encouraging this trend.

Demographics:With growing trends of an ageing population in Europe, Japan and UK and

to some extent in the USA, the demand for younger workforce from labour surplus countries will increase. India with its more than 52% of the workforce in the younger age group is likely to service the international labour market increasingly. Engineers, Doctors, Nurses and Teachers of Indian origin are in high demand.

Another important factor: returning Indians, either due to the pull of domestic investment opportunities or due to the push of shrinking job opportunities, particularly after dot com bust, are likely to substantially improve the qualitative performances of Indian economic activity wherever they decide to locate and work either as entrepreneurs or as employees.

This linkage is also going to be a major facilitator in investment as well as market access for product as well as services. An added advantage is the possibility of a smoother joint venture, strategic alliances and partnership for global operations.

Conclusion :

According to a McKinsey report, the business process outsourcing industry is set to grow up to $1.2 billion from the current $0.3 billion, in the next two years. However, with the services industry growing at 10-11 per cent with emerging careers in the hotel, airline and banking industries, Indian BPOs are likely to face a manpower shortage, especially at the mid-management level by 2008.

Before coming to the conclusion on India's BPO industry, provided the ideal forum for industry representatives to discuss, debate and acknowledge the teething problems of the Indian BPO industry:

The model used to built the BPO industries was cost effectiveness, initially. In recent times, with wages continuing to rise at 10-15 per cent coupled with shortage of skilled manpower, the model no longer holds good.

37

The hidden cost of sub-standard infrastructure is the one of the most serious threats for BPO companies in India.

Creating a secure environment becomes paramount, as business processes are distributed across the globe through diverse complex and increasingly mobile networks and fast growing industries, and imperatives.

Largely untapped potential ability to apply technology to business processes is the India's true competitive advantage as of today.

The BPO industry is capital intensive and requires huge additional capital infusion to fuel its growth.

Last and most critical is the education system input to this sector. Scarcity of the appropriate skills gained through the education system, which is low on quality and relevance. This is a major limiting factor for the long-term growth of the industry.

In lieu of the current limitations, and deliberations from the conference can be summed up with :

1. New face for Indian BPO.India should no longer be presented as a cost-effective destination alone, but one that is driven by skills and quality. The industry is however, still in its nascent stages of consolidation and needs to Re-brand itself in terms of value addition, competition and innovation.2. New wine in New bottlePublic and private investment in infrastructure with all concerned bodies adopting a customised approach to meeting the needs of the BPO industry.3. Information security Benchmarks.Academia, Public and Private partnerships need to be developed in strengthening the courts understanding of security issues. In addition, a robust and effective mechanism needs to be implemented for information sharing among industry, government and other interested parties. Timely dispensation of justice, including concrete alternative dispute resolution mechanism is also an imperative. Industry and the government must work together to make legally viable standards of due diligence.4. Latest Technology.India's scientific and research establishments should be encouraged to devote greater attention to the new class of technology that is emerging to enable secure and increase efficiency of remotely delivered services. Private investment should be encouraged in development and commercialisation of technology.5. Governmental support.Credit institutions need to develop customised norms for the BPO industry. The availability of risk capital needs to be enhanced in early stage ventures.Third party hosted infrastructure BPO companies should be eligible to favourable tax treatment  afforded to the infrastructure sector.6. Sound and self sustained Education system.Industry in association with management schools should develop BPO specific graduate level programmes for mid-management and modify curriculum and the quality of instruction in entry-level educational institutions.

Technical institutions should develop competency around the specialised technology required for the BPO industry.

38

References:

1. www.ciol.com2. www.wipro.com3. www.bpoindia.com4. www.myiris.com5. http://www.bpoindia.org/6. Express computer Magazine7. Global Offshoring Outsourcing Summit (GOOS) 2005 presented by the Indo-American Chamber of Commerce.8. NASCOM Reports 2002,2003,2004.9. McKinsey Reports 2001,2002,2003.

39

Acknowledgements:

The White Paper is based on the Direction Paper prepared by Dr. Anil Seth, Padre Conceisao College of Engineering and the presentations made by industry leaders at the seminar. We thank Prof. V.S. Sukhthankar, Goa Institute of Management for compiling this document.

We would like to acknowledge all the speakers without whose contribution this conference would not have been successful:

Mr. Srinath Batni, Director & Head APAC, Global Accounts, Infosys

Technologies

Mr. Manoj Kunkalienkar, Executive Director, ICICI Infotech

Mr. Ravi Dighe, Sr. Vice President - Operations, Aptech Limited

Mr. Hemant Sukhthankar, CEO, M4II

Mr. Pradeep Phadke, Sr. Vice President & Centre Head, Global

Telesystems Ltd.

Mr. S.P. Zindal, Executive Director, STPI

Dr. M. V. Pitke, Director, Axes Technologies

Mr. Sanjiv Nadkarni, General Manager – India Operations, NE

Technologies

Mr. Sharad Saxena, Chief IT Manager, Konkan Railway Corporation

Limited

Ms. Jyoti Bacche, Sr. Architect, Aztec Software

Mr. Girish Nair, Vice President – HR, Aztec Software

Dr. V. V. Kamat, Reader, Department of Computer Science, Goa

University

Dr. Anupam Saraph, IT Advisor, Government of Goa

40