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Comparative Employment Studies

Impact of BPO sector on Employment market in India and China

By

Umesh Ponnan

09052915

London Metropolitan University, London

2011

Impact of BPO sector on Employment market in India and China

Preface

With growth in technology and business advancements, there has been a significant change in the employment market across globe. One of the most influencing vertical of trade which has consistently contributed to the growth of developing countries and the business organisations is Business Process Outsourcing (BPO), which in turn is the result of the free-trade policies and strategies. The key focus of this paper is to bring out the impact created by BPO in employment sector of two of the world’s fastest growing economies, China and India. This research paper will try to compare, based on the found statistical information, the kind of BPO jobs being outsourced to these two Asian giants, the existence of competition created by BPO, and analyse the qualitative and quantitative aspects of business processes outsourced to these two countries.

Business Process Outsourcing

As per TPI, a leading global sourcing advisory firm, Business Process Outsourcing is one of the major growth areas when it comes outsourcing industry. In order to define Business Process Outsourcing, we can say that it is "the delegation of one or more IT-intensive business processes to an external provider that, in turn, owns, administrates and manages the selected processes based on defined and measurable performance metrics" (Gartner). In general, an organisation goes for outsourcing one or more of its business processes as cost saving measure and usually these processes are those which are needs of organisation but if outsourced then give a better focus for the organisation on their core competencies. Business process outsourcing has been accepted as a key strategy for business by many multi-national organisations. Usual business processes outsourced are the specific tasks such as IT or Payroll but as the outsourcing sphere is growing, organisations have started outsourcing customer-facing processes as well. This divides business process outsourcing in two main categories: back-office outsourcing and front-office outsourcing (Sahajpal et al, 2006). Back office outsourcing involves internal processes of the organisation such as payroll, billing and purchasing where as front office outsourcing includes external processes marketing or technical support. With the boom in the business process outsourcing, we can see the increase in the number of service categories. Few of the broad categories of business process outsourcing are Finance and Accounting, Investment and Asset Management, Human Resources, Procurement, Logistics, Real Estate Management, SCM, R & D, Sales and Marketing, Customer Interaction and Support (Halvey and Melby, 2007). Apart from these majorly visible categories there can / are few other categories as well which are in minority.

In current business trends where global competition, pressure on investment and cost, increased focus on core functions of business, manpower management and likewise factors are driving the organisations towards finding the ways through with optimum returns can be achieved and deliverables are expected to be cost effective. These determinants influence the organisation’s decision making process in order to go for business process outsourcing. Certainly such decision involves some deep thinking and reasoning. Gewald and Dibbern (2005) in their empirical research relating to business process outsourcing in German Banking industry, have used Cunningham’s (1967) perceived framework in order to explain the influence of perceived risks on decisions. In line

with Theory of Reasoned Actions and Theory of Planned Behaviour by Ajzen (1985) (which deals with the link between attitudes and behaviour and is useful in relation to behavioural intentions and behaviours in various fields) and using theory of perceived-risk by Bauer (1960) (which shows light on judgement people make about the amount of risk involved in decision making) , they have shown that management in organisations gives more importance to the benefits of business process outsourcing than the associated risks. Their study also showed that cost is no more a primary factor influencing the decisions; rather the strategic factors like ability to have more focus on core competencies and possible process improvements are given more importance. Apart from the cost effectiveness and cheap labour, organisations are tapping other benefits as well out of outsourcing. With business process outsourcing, organisations are able to free up their excess internal resources and get reach to global pool of highly skilled personnel in offshore countries. Organisations are striving to get improved market positioning with their strategic moves in outsourcing business process and aiming to compete globally by having better operational performance by having access to low-cost specialist skills. Business process outsourcing helps organisations to keep their costs low and offer them greater control through process improvements and new operational practices. Having said this we should also know the kind of business process outsourcing structures can be adopted by an organisation. Business processes that are outsourced outside a company’s home country are known as offshore outsourcing and the ones which are outsourced to nearby countries are called nearshore outsourcing. As the focus of this paper is relating to offshore outsourcing, further more we will just focus on it and not on nearshore outsourcing. Having said that, the top offshore outsourcing locations, as per a new yearend report from research firm Gartner, are Bangladesh, China, India, Indonesia, Malaysia, The Philippines, Sri Lanka, Thailand and Vietnam with India topping the list as the number one destination for business process outsourcing (source: Newsbytes.ph). Out of these two top offshore outsourcing locations, we will focus on China and India for the purpose of our study. Business Process Outsourcing in India The offshore outsourcing started in India three decades back when multinationals started to outsource services to India in the mid 1980s, which had a fast-track movement in 1990s. Although outsourcing of manufactured goods, import and export of products existed many years back but outsourcing of services was not in movement prior to 1980s. This was enabled by the impressive development in internet and telecommunications which offered quick entry for outsourcing of services to India. In 1980s, British Airways and other global airlines made their base in New Delhi in order to execute their back-office operations. Joining the league, many international banks like American Express also started conducting their regional back office operations in India. In 1985, the first multinational technical design centre was set up in Bangalore (Bengaluru) by Texas Instruments (Source: Sourcing Line website). The first large scale offshore outsourcing in India started after the visit of GE’s Jack Welch to India in 1989. Although GE already had presence in India, they further went to establish captive business process outsourcing centres which primarily dealt with their non-Indian operations. Late 1990s were the years for boom in Information Technology and Telecommunication sector, the Y2K problem and rapid development in internet gave way to IT and Telecommunication services to be outsourced to India (Sourcing Line, 2008). Primarily, business process outsourcing in India became popular in engineering and information technology sector. Business process outsourcing in India widely covers areas such as manufacturing, automobile services, call centre services, data entry, transcription, financial services, banking services, engineering services, infrastructure, healthcare services, IT and Telecom, HR services, and web services. Under the capitalist world system, India has transformed from semi-periphery to core category where it acquired many advanced economic activities and improved its trade with developed nations (World Systems Theory, Lecture notes). Following this, the Indian business process outsourcing

industry is dominated by IT and ITeS (IT enabled Services). Over the past decade, India has seen a tremendous growth in IT and BPO industries. Topping the list of offshore destinations, India is now accounts for 65 percent of the global IT offshore industry and 46 percent of global business process outsourcing industry (NASSCOM-McKinsey, 2005). As per NASSCOM & McKinsey’s report, the global offshoring exceeds US $300 billion and Indian IT and BPO industries will grow at an annual rate of 25 percent, which will contribute US $ 60 billion to export revenues.

[Source: Sourcing Line, 2008]

NASSCOM’s 2009 report shows that Indian IT-BPO grew by 12 percent and reached US $ 71.7 billion. Software and services exports including exports of IT, Engineering, R & D and BPO, reached US $ 47billion in FY 2009 showing 16 percent growth rate. In last few years India has seen diversified market exposure to offshore outsourcing which includes several mature and emerging markets. As per the report, Banking, Financial Services and Insurance (BFSI) held the major share in Indian IT-BPO and is also the largest vertical market for the industry followed by Hi-Tech / Telecom (NASSCOM 2009). Following this development in Indian business process outsourcing sector, it is very evident that the three decade old industry has shown great value addition to the India’s economy and society. Business process outsourcing has not only driven the development of various regions in India but also has vastly contributed towards empowering the huge talent pool by creating innovative platforms.

Indian IT-BPO industry has gone under a quick uprising meeting the global standards and needs. The industry is now one of the main pillars of Indian economy and has put India as an IT hub at a global level. NASSCOM’s study shows that the industry is heading towards IT Strategy, Consulting, and high-end services like analytics and engineering design services (NASSCOM, 2010). Thinking about the kind of tasks being outsourced to India, we can now see that Indian business process outsourcing is now taking in more quality works than quantity related. The type of works such as back-end processing works, data entry, software development, customer support and maintenance works, are

now being reduced in numbers. As the focus of the industry is now shifting towards more on quality related tasks, Indian business process outsourcing sector is providing its service in end to end product development, business transformation and re-engineering. As per NASSCOM, the value proposition of Indian business process outsourcing is now on domain expertise which supports end to end services along with research and development, whereas in 80’s and 90’s it used to be providing low-cost services and high labour pool.

As Indian IT-BPO industry is holding major share when compared to other outsourcing services in India and going by the reports produced by NASSCOM, Indian IT-BPO industry is having its presence in 52 nations, 200 cities and 400 delivery centres. There are 10 companies which are listed on overseas stock exchanges and the whole Indian IT-BPO industry serves over 400 Fortune 500 customers (NASSCOM, 2010). Study done by NASSCOM also shows that Indian outsourcing industry has employed around 3 percent foreign nationals which helped creating savings of US $ 25-30 billion in source economies in FY 2009 (NASSCOM, 2010). Following this if we think what impact Indian business process outsourcing is has shown on employment sector in India, it is far higher when compared to other sectors. Alongside of having over 750 captive outsourcing centres including world’s six largest software companies, it employs 20 percent of the workforce in the country (NASSCOM 2010). The Indian IT-BPO industry has created direct jobs for over 2.2 million people and it has also contributed to providing indirect jobs to 8 million people (NASSCOM 2010).

Table 1: Knowledge Professionals employed in the Indian IT-BPO sector

By 2010 it is expected that employment (both direct and indirect) created by Indian IT-BPO industry will go up to 10 million and 20 million respectively (NASSCOM, 2010). Looking at the employment opportunities provided at the level of cities (tier1, tier 2 and tier3), interesting the facts shows that 58 percent of workforce in Indian business process outsourcing industry is from tier 2/3 cities with 56 percent being the key bread earners (NASSCOM, 2010). The NASSCOM study shows that by 2020, industry will provide direct employment to 4 million people from tier 2/3 cities.

Indian IT-BPO industry is doing its best in providing employment to female workers. 31 percent of Indian IT-BPO industry’s workforce in FY 2009 was represented by women, responsible for 45 percent of new intake (NASSCOM, 2010). The study also shows that by 2020, there will be five million women employees expected to join the industry’s workforce.

In short, business process outsourcing is taking greater turns in Indian economy contributing at a better level. The industry has shown 1.2 percent of national GDP in FY 1998 which is now estimated to be 5.8 percent showing net value addition of 3.5-4.1 percent (NASSCOM, 2009). Indian business process outsourcing industry has been taking tasks which offered low – cost services and greater scalability to customers involving tasks such data entry and call centres. And now moving its focus on high-end services such as end to end product development, R & D and business consulting. This move of Indian offshore outsourcing industry shows that now more and more quality jobs are being sourced than quantity based. Result of this move shows industry’s growth and also this has provided

employment opportunities to a vast pool of workforce including those in tier 2 and tier 3 cities such as Indore, Ahmedabad and Cochin.

Business Process Outsourcing in China Under the World Systems Theory, China is seen as semi-periphery which for long time is known to all of us as a world’s manufacturing factory. When China opened up its trade for world in 1980s, it soon captured the global market in manufacturing of good and electronics. China can be classified under Fordism which refers to having centralised politics, large employers, mass production and mass consumption (lecture notes). China is the sixth-largest economy in world with GDP of US $ 1.4 trillion and it has been maintaining the average growth rate of 9 percent for past 25 years (ATKearney, 2007). China is more known for producing its electronic gadgets and retail goods but now China has started focusing on providing offshore outsourcing services at a greater level. This is due to government’s huge investment in areas supporting business process outsourcing industry such as infrastructure and qualification. A study conducted by ATKearney shows that China’s outsourcing industry is limited to providing its services to Asia-Pacific market. The study says that it is widely due to geographical closeness and its language and cultural similarities with nations in Asia-Pacific region (ATKearney, 2007). Although, China is receiving lot of outsourced job from nations like Japan and Korea but still its BPO industry is very small or its share in global outsourcing market is very less. As per McKinsey, China’s outsourcing and offshoring industry holds for less than 10 percent of the global market (McKinsey, 2009). With growing focus in developing IT offshoring and outsourcing, China is speeding up in providing outsourcing service in various verticals. A recent study done by KPMG shows that there is a very high presence of Accounting and IT Services being outsourced to China (KPMG, 2010).

Services entrusted to outsourcing provider in China. [Source: KPMG, 2010]

Alongside there are other verticals as well which have their clear presence in China’s outsourcing industry. The survey was conducted for KPMG China involving 286 CFOs, finance directors, financial controllers, CEOs, and other executives. The survey tested the preference of executives with regard to obtaining shared services and outsourcing partners in Asia (KPMG, 2010). The survey also shows light on China’s position in the Asia-Pacific market and the reasons for it to be more liked in

comparison to other existing locations in Asia. Below is the chart from KPMG which shows China’s position along with others in Asian outsourcing market.

Outsourcing service providers. [Source: KPMG, 2010]

It is shown that China is the most preferred outsourcing location for Asian companies although India still holds the top position in global market. The Key factors which influence China’s top position in Asian market are low labour costs, regional cultural similarities, language, good infrastructure, governments new policies offering tax and incentive benefits, and of course, China is a big market for the world. KPMG’s survey proved that China’s low labour cost attracts many companies and shows that in Asia cost is still considered as a major factor in decision making which stands contrary to Gewald and Dibbern’s findings where focus on core competencies and process improvements were stressed on (Gewald and Dibbern, 2005). KPMG also commented in this regard and says that although low cost is a trump card for China at the moment but it will not help much in the long run and China will become less cost competitive in few years (KPMG, 2010).

The companies who are not in the outsourcing market or have not yet planned to go for outsourcing but have shown interest are likely to choose China followed by Malaysia and Hong-Kong (KPMG 2010). Again the factors shown below are the leading influential reasons for this in Asia outsourcing market.

Reasons for selecting outsourcing provider. [Source: KPMG, 2010]

Another report by McKinsey shows that Chinese companies are now more focused in upgrading their capabilities and thus increasing their billing rates (McKinsey, 2009)

Although China is improving its capabilities and skills, still research shows that it lags the competitive edge and is far behind in competition with matured locations such as India and Philippines. McKinsey shows that there are three reasons for China to lag behind in competition, one, China’s IT services industry is highly fragmented and China doesn’t have a single domestic player which has got significant scale and market presence, two, China is still looked as a manufacturing factory rather than as a outsourcing destination due its behaviour of not showing clearly what it can offer to global companies, third, there is a hold-back in Chinese companies in order to outsource their IT services and business function as they want to have full control on their functions (McKinsey, 2009). Although these factors remain influential in still keeping China behind in the competition, there are certain other factors which show that China is improving at a greater speed.

The growing IT talent in China is far speedy than in any other country. The reverse brain-drain and fast growing IT talent pool in China is making all the difference in outsourcing market. The Chinese outsourcing market can get benefited by the 2 million software developers with CAGR (Compound Annual Growth Rate) of 22 percent over the last five years, which in turn is a considerable growth rate overall (The Outsourcing Institute). Also there is huge pool of pass out gradates in China who can be taken in outsourcing market. There are currently 5.86 million engineering graduates with CAGR of 13 percent. These numbers are going to be far higher in the current year as it is reported in leading Canadian national newspaper, National Post, that China will become the largest English-speaking nation in the world with more than 300 million people. In Chengdu, which is one of the most popular locations for outsourcing, the Chengdu Software Association has provided information that there are 65,000 working in Chengdu’s software industry (China BPO, 2010). Chengdu has got 42 colleges and universities and is the education centre in West China. There are an estimated 200 graduates and 1.6 million professional to be contributed by Chengdu (China Sourcing, 2010).

With these advancements and aggressive government support for the development of outsourcing industry in China, it is expected that China will grab major share of global outsourcing industry in near future. There has been a huge investment on infrastructure; sources shows that China’s National Development and Reform Commission (NDRC) announced that government has invested RMB 367.6 billion in developing infrastructure of China (China BPO, 2010). A Study conducted by Canada based XMG Global shows that at the end of year 2010, China share value of US $ 35.76 billion holding 28.7 percent of global outsourcing industry (China Daily, 2010). The report also shows that China is gradually making its bigger presence with huge 30 percent growth rate (China Daily, 2010).

In Competition: China Vs India

The outsourcing market is seeing two big nations dominating the space are China and India. Both the countries have expanded their outsourcing services to various vertical significantly. Although China has expanded its services recently to IT and ITeS, still it has long way to catch with India’s leading top position. India has shown tremendous growth in its IT-BPO industry in the last decade and currently holds the major share. However, different advisory institution show different figure of India’s share in global outsourcing market, NASSCOM, which is India’s National Association of Software and Services Companies, says that India has got 46 percent share of global outsourcing market. Indian outsourcing market covers various verticals including Financial Services, IT, Business Consulting, Manufacturing, Retail, Healthcare etc.

India’s IT-BPO exports by industry. [Source: AT Kearney, 2009]

On the other hand China has shown growth in its shared services and outsourcing predominantly in Asia-Pacific region in the areas of Accounting, IT services, Cash Management, HR outsourcing, SCM, R& D, Sales and Marketing etc (KPMG, 2010). China is now expanding its share in global outsourcing market as well and as per the report shown by XMG, china is currently holding 28.7 percent of global market share and is currently growing with 30 percent growth rate (China Daily, 2010). And many of the companies who still has not adopted outsourcing as a business strategy but who will likely to have it in near future (in Asia – Pacific region) are most likely to look for China as their destination (KPMG, 2010).

Preferred outsourcing location by non-sourcing companies. [Source: KPMG, 2010]

Another leading advisory firm, Gartner, still believes that India is the leading outsourcing destination for the world with its various outstanding factors and capabilities. The recent study conducted by Gartner for globally sourced activities in 2010-2011 considered 30 countries and rated them according to 10 criteria; the result shown that India still is topping the list (Newsbytes, Philippines, 2010). However, China did make it ahead of India in Gartner’s Asia – Pacific’s outsourcing destinations (Newsbytes, Philippines, 2010).

As there is a general notion that increase of India’s Rupee and increasing labour cost gives advantage to China, which is considered to be cheaper than India, Gartner’s study based on over 240 business case analyses in last 2 years, shows that cost cannot be the factor to show an absolute ranking of global outsourcing locations (Gartner, 2010). Gartner says there is not clear information or availability if data in order to judge China’s cost advantage as there are not many business deals and case analyses available. However, it has concluded that China’s cost structure for standard cost (considered to be the largest component which includes labour, real estate, telecommunications etc) is indeed competitive in comparison to India (Gartner, 2010). Thus, for those who see cost as the major factor, China will certainly attract them most.

China has improved its political and economic policies as well which certainly is shown by its steady growth rate. In comparison to India, China has got a better infrastructure and low-cost labour. And with increasing cost in India, the cost competitiveness has become an advantage for China. However, India still has got an edge in terms of having better and skilled resource which is rich in education and technological skills. India also leads through by having a better legal system for FDI and having a good old presence in the global market for more than 3 decades.

Conclusion

In above sections of this paper the market share, capabilities, contribution to employment sector and the changing face of both the nations by opening up to global outsourcing market is shown. Focusing on the kind of services offered by the two countries in global outsourcing market, it is clear that both has got their strong hold in major verticals – Engineering and Technology for India and Manufacturing and Technology for China. India has been into offshore outsourcing market since 1980s and has started from providing low end services such as data entry, call centres, online search, back-office billings etc to high end services of today such as end to end product development, Banking and Financial services, business consulting, re-engineering, research and development etc. The growth shown by the Indian outsourcing industry is primarily based on the vast population which is highly qualified and English speaking. The language compatibility and low cost paved the way for India in leading the global outsourcing market. The tier 1 cities on India had seen the boom in technology and telecommunications which led many companies to start adopting the outsourcing service model in order to serve the companies in US and Europe. Top technology and management institutions such as Indian Institute of technology and Indian Institute of Management, which has produced many business leaders since 1950s, have continuously strived to raise and meet the global standards.

China on the other hand has been seen as world’s manufacturing factory since 1980s. It has been providing cheap goods to many of the multinationals of US which opened its way to be the leader in the manufacturing sector. China is also known for producing cheap electronic goods. In 1990s, the need to IT services was recognised by China and the industry’s focus started shifting towards IT development. Although the IT industry started to emerge, China being classified as having low

knowledge base and having high mass production state (Fordism), faced issues with internet technology. This impact has made China to be still very new to systems thinking, component based design, object oriented programming, and various other IT practices (Sourcing Mag). In recent times, China has emerged as big market for outsourcing industry and majorly contributing to this success is the political and economical reforms during the recent global economic crises (Newsbytes, Philippines, 2010). China’s growth in the offshore outsourcing market is still primarily driven by the domestic demand and by companies in Asia-Pacific region (KPMG, 2010). China is now investing hugely on its infrastructure and educational system in order to meet the global standards and overcome the language barrier. This will help the wide pool of graduates and professional to be acquired by the global outsourcing market.

Both the countries being the Developmental State and falling under the Take-Off stage of growth as suggested by Rostow (1960) (Lecture Notes), has got the focus on economic and corporate growth. At the moment, as per the information released by Ministry of Commerce of China, offshore outsourcing companies in China has exceeded 10,000 in numbers and thus providing employment to over 2 million people in the country (China Sourcing, 2010). This has shown the positive impact of the outsourcing industry on China’s employment sector. Also the presence of Indian outsourcing companies such as Wipro in Chengdu has been a positive sign for China. Wipro at the moment has a staff scale of 400 among them, 300 are local employees and adding to this, Wipro has also announced that seeing the growth, it will be creating more jobs with an expected size of 1,000 in Chengdu centre (China Outsourcing, 2010). While China is having improved employment situations, India is still doing better as the outsourcing industry has contributed very widely to the Indian employment sector. In India, the outsourcing industry has contributed to providing direct employment to over 2.2 million people and indirect employment to 8 million people (NASSCOM, 2010). This is further expected to boost to 10 million and 20 million respectively by 2020 (NASSCOM, 2010). Also with the rapid growth of Indian outsourcing industry, many of tier 2 and tier 3 cities have developed in a fast manner. NASSCOM reported that the outsourcing industry will see 20 times fold in the number of workforce coming from these cities in near future. And also there will be some 8 to 10 satellite townships developing around tier 1 cities by 2020 along with 10 to 15 tier 2 cities providing high quality talent pool (NASSCOM, 2010). All these figures show that in both India and China, the contribution to employment sector by outsourcing industry is very healthy and rapid. However, India having a edge on technological and linguistic skills holds the leading position in comparison with China. It will be interesting to see how fast China is bridging the gap in the industry and copes up with the weaknesses in order to become the major share holder in the global outsourcing industry same as India.

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