Protectionist Backlash Against Outsourcing

The Associated Chambers of Commerce and Industry of India ^ | July 2003 | ASSOCHAM

[RockyMtnMan]

ASSOCHAM Bulletin July 2003 (The Associated Chambers of Commerce and Industry of India)

PROTECTIONIST BACKLASH AGAINST OUTSOURCING IN THE U.S AND EUROPE

What should be India’s Response?

ASSOCHAM REPRESENTATION TO THE MINISTRY OF COMMUNICATIONS AND INFORMATION TECHNOLOGY

The proponents of complete liberalization of trade and full market access have often sited economic efficiency to substantiate their viewpoint. Multilateral trade bodies like WTO are also based on these non-discriminatory principles. Ironically, the recent criticism of outsourcing, a concept based on efficiency criterion, comes from the patrons of trade liberalization i.e. U.S and U.K.

Form of the outsourcing backlash

• Legislation aimed at keeping jobs in the U.S. is pending in at least five states i.e. New Jersey, Connecticut, Maryland, Missouri and Washington State. The bills employ a variety of methods, including blocking companies from using foreign workers on state contracts and requiring foreign call-centre employees to identify where they are located.
• A proposed L-1 visa bill in the U.S. seeks to prohibit software companies from sending professionals to carryout onsite work at client sites. Though the bill has not become legislation, it has already led to increased scrutiny like personal appearance for all L-1 applicants and restriction on qualifications.
• Certain U.S. states are considering restrictions on outsourcing software services (specially of network facing nature) in telecommunications and defense industries to foreign companies.
• U.K has added Software services to the Shortage Occupation List which specifies that the employer must make good faith efforts to employ individuals from the U.K, before employing foreign professionals.
• U.K. has also started audit of work permits to restrict the use of Intra Company Transfer Work permit by Indian companies.

Implication: Anti-Outsourcing Bills:

In the short term, Indian ITES industry will experience a minimal to moderate impact even if these bills become laws in various U.S. states. It has however been observed that 95% of such bills don’t become laws and this process could take two years. Long-term impact directly depends on the emergent economic scenario.

L-1 Visa Bill:

As Indian BPO vendors move up the value chain and target new service lines like systems integration, package integration, package implementation, IT outsourcing and IT consulting, they need to operate on a Offshore/Onsite model. This requires IT professionals to be deputed at the client location for executing the project. The proposed L-1 visa bill will restrict the use of L-1 visa by Indian companies which is expected to severely affect the Indian IT industry in the long term.

Reaction of the Indian ITES Industry

In order to gauge the opinion of the ITES industry on this subject, the Communications Convergence Committee of ASSOCHAM followed a two-pronged approach. This was:

A) Conducting a nation-wide ‘BPO Industry Confidence Survey’ in the months May-June, 2003 (the period when foreign & Indian media highlighted this issue)

B) Getting inputs from distinguished contact-persons in the industry (ASSOCHAM BPO Steering Committee)

Analysis of survey responses:

A part of the survey was designed to get specific inputs from the responding companies on what is their perception of the impact of anti-outsourcing bills on the Indian BPO industry based on the time-frame. The responses are depicted graphically below:

If Anti-Outsourcing Bills become Laws: Impact Analysis

In the short-term, majority (approx. 60%) of the respondents feel that the current anti-BPO tirade by some U.S. senators would have only a moderate impact on the growth prospects of this industry. However, there was near unanimity that some impact would definitely be felt even in the short run.

In the long term, fear overpowers optimism. Nearly 34% of the responses show a very serious impact of these moves in U.S. and U.K. on the Indian BPO industry’s revenues and profitability.

Another one-fourth of the respondents opine a moderate-serious impact in the long run.

Inputs from Wipro Spectramind, Bharti TeleTech, IDC, KPMG, A.T.Kearney, PWC, Sify & HCL Tech.

Graph see hyperlink

ASSOCHAM had forwarded a 4-point strategy to ITES industry in the survey on what could be India’s response to the proposed anti-BPO legislations in the U.S. and U.K. An analysis of the survey responses shows:

• Strong PR exercise, a must: An overwhelming 84% of the respondents favour a very strong PR exercise in U.S and Europe on the benefits from outsourcing. This exercise should involve Government of India and all major industry bodies and stakeholders. While some industry bodies have begun to lobby individually, a joint government-industry front will strengthen our case.

• Senior-level diplomatic talks, imperative: ASSOCHAM lauds the efforts of the government for taking-up the industry’s case and making India’s viewpoint clear to U.S. senators. This step is backed by nearly 80% of the respondents to the survey. However, India needs to persist in its lobbying efforts so that these bills are defeated as and when they are introduced in the various U.S states.

• The WTO-restrictive practices umbrella: The survey revealed only a moderate favour (42%) on India making its case at the WTO. India’s case at WTO could have been that the proposed bills amount to an unfair trade practice and hamper level-playing field for BPO and IT service providers.

• Forming country-level-alliance with China and other BPO beneficiaries: This option was considered a solution by only 30% of the respondents.

ASSOCHAM initiated a discussion within its BPO Steering Committee on what could be India’s multi-faceted strategy on this subject. Accordingly, an 8-point strategy model is presented below:

The 8-Point Strategy Model

• Strategy #1: Government appointed PR agency: There should be a communication through American media (advertisements, talk show participations, participation in media features, stories etc.) of the value the Indian BPO Industry is adding to the American society, polity and economy. To achieve this, a multi-modal mass information campaign on outsourcing can be carried out in the U.S and European countries.

• Strategy # 2: There is a need to put together a cogent case outlining how the 5 American States and U.K considering the bill against offshoring to India stand to lose in a net lose-lose proposition. The business case needs to be put together along the following lines:
  • How much will the states lose in additional costs per call that are taken in the U.S/ U.K versus taken in an offshore destination like India.
  • What is the opportunity cost of the ‘spend base’ i.e. where else could the U.S. states put the monies that they will end up spending extra – can the money be deployed in creating alternate employment opportunities (up-skill/re-skill displaced employees) or other social/developmental programs.

• Strategy # 3: India should try to develop a bigger picture of cooperation with U.S trade, commerce and geo-strategic links.

• Strategy #4: Focus on interest groups (India Caucus etc.) within the legislature to form an opinion against any protective/restrictive legislation.

• Strategy #5: Forward a well-prepared economic argument for outsourcing: The contours of this economic logic could be based on the following points:
  • Nearly 3/4 th of the American and European households invest in shares of companies and venture funds. If outsourcing improves the rate of return of these companies/funds, the ultimate beneficiaries would be the shareholders.
  • Research suggests that offshoring to India helps most companies increase their EBITDA by 10-50%.
  • Offshoring of activities to a cost-effective, more-productive location like India contributes to the overall-development of U.S and European countries. This reasoning is based on a chain-process according to which outsourcing will lead to greater workforce productivity thereby a higher economic growth.

• Strategy #6: Visa related suggestions: The Indian Government can take-up the following visa issues with the U.S. administration:
  • Special visa for IT professionals
  • Separate visas for short-term work upto 180 days
  • One year restriction on L-1 visa stamping on reciprocity basis should be dropped
  • Considering the restriction on L-1 visa, cap on H1-B should be enhanced. India should also seek to remove the attestation requirement that is present today.

• Strategy #7: Learn from the Japanese experience: Japan went through a similar experience with respect to their automobile and electronics industry in the eighties. The Indian Government in association with industry bodies can spend sometime with the people who managed these rough patches for Japan Inc.

• Strategy #8: Make a case under various WTO agreements that these bills will act as trade barriers and not allow a fair movement of services. However, the opinion of BPO Steering Committee members and survey responses indicate this option should be used only as a secondary measure.

  The Indian IT and ITES industry is currently going through a challenging phase. Sluggish economic conditions, specifically in the U.S. and Europe – which are the world’s largest market for Indian BPO services – still prevails. With the continuing squeeze on technology spend of major global corporations; future revenues of the ITES industry may come under pressure. Additionally, competition from countries like Ireland, Philippines, China etc. is increasing. Despite all these constraints, Indian ITES industry has clocked a significant growth of 59% during the last financial year.

  The ASSOCHAM BPO Steering Committee requests the government to further strengthen this industry by helping to solve various regulatory, legal, taxation and infrastructure related issues. The ITES/BPO industry has great potential to transform India into a global power by reducing unemployment thereby raising the overall standard of living of the masses. Undoubtedly, a joint industry-government partnership is essential to attain this.

[RockyMtnMan]

It appears the government of India is conspiring with American corporations to lobby our legislatures. This looks to be the action plan for taking away our jobs to enhance the Indian economy.

"The ITES/BPO industry has great potential to transform India into a global power by reducing unemployment thereby raising the overall standard of living of the masses. Undoubtedly, a joint industry-government partnership is essential to attain this."

I had to reformat the document from PDF so there might be some quirks, but it is word for word. The link is a PDF so make sure you have acrobat.

[L`enn]

Csnnot blame India for doing so. It is in their interests. The onus is on the traitorous US corporations for their role in this farce. BTW how come since all these brilliant MBA CEO's started shipping jobs overseas has the economy went in the sinkhole? Any correlation? Like to see what these "brilliant" strategist can spin to 'splain that away.

[big bad easter bunny]

We wouldn't want to help over a billion people find thier way into the high tech world. Why they might become consumers instead of well educated people with no way out. Lets bring back the cotton gin, think of all the new jobs we could create in the south.

[RockyMtnMan]

I don't like the idea of a foriegn power conspiring with American companies to control legislation that is not in the best interest of the American people. Our government must act on our behalf an not the people of India.

[RockyMtnMan]

Do you really think they'll be the same kind of consumers we are?

There have been numerous articles that point out how ridiculous it would be to have over 3 billion people (don't forget China) increase their wages enough to buy our goods. Even if we did manage to "level the market" through labor exportation it would take 20 or more years.

[sinkspur]

From the editor of INFORMATION WEEK:

Business Technology: Let's Remake Future, Not Relive The Past April 7, 2003

By Bob Evans

I grew up in a small industrial city in western Pennsylvania some 40 years ago. Many thousands of men and some women worked in the plants and factories there that churned out rolled steel, pipe, tubing, transformers, specialty copper, and more. At the end of the high-school year, my older brothers could walk down to the mills and get high-paying jobs for the summer. The local radio station had a program around 3:30 every afternoon called "The Factory Whistle" that more than 10,000 workers listened to on their drives home. Grocery stores restocked their shelves on Friday mornings because paychecks arrived home Friday afternoons. The pervasiveness of those jobs and their interrelationships with the lives of everyone in the surrounding community--the interwoven fabric created by those steady, essential, vital jobs--was something we took as normal, natural, and unchanging.

And then those jobs began to disappear--slowly at first, and then with a suddenness that in hindsight is hard to imagine. From just that one small city, 15,000 jobs disappeared. Forever. In some cases, the work moved to specialty mills or to lower-cost foreign producers; in others, the demand for the types of steel and other products that those plants were superb at making suddenly changed, and the mills were hopelessly unable to adapt and evolve as quickly as the markets they served. We had perfected our past but were woefully unprepared to create our future.

In that context, what I'm about to say could well anger and perhaps even alienate some people very near and dear to InformationWeek, but it needs to be said because it is the truth. For a variety of reasons, many parts of the IT industry--and along with them, tens of thousands of jobs--as we have known them are disappearing, and they will not return. Lots of work in applications development, programming, call centers, integration, operations, and other jobs requiring skilled technologists are leaving or have left this country, and they're never coming back. What, then, is to be done?

Well, we can seek regulatory relief or legislative intervention or tariff strategies or lawsuits, but they're all a waste of time. Because buyers will seek the highest quality at the lowest price, and some producers in other countries have clearly demonstrated that for some projects, they can match the quality of our software and services while also beating us--badly--on price. Not surprisingly, the global market is rewarding those other countries for that.

So no, this challenge isn't about legislation or taxation or regulation--it's about innovation and forward thinking and the courage to change. Not just knee-jerk change in reaction to what someone else is doing and that is patterned after the past but, rather, forward-looking change that helps to create the future in which companies are truly connected in real time with their customers through the power of new types of software that today are merely prototypes, in which business-technology workers become businesspeople with indispensable technical prowess, in which IT professionals judge themselves not by technical certifications but rather by how relevant and valuable they make themselves--constantly--for their employers and customers, in which business technologists make possible today what couldn't be done yesterday, and in which CEOs and CIOs aggressively lead the transformation of their phenomenal business-technology organizations from keepers of the old central flame to lighters of new fires of revenue opportunity, market insight, industry knowledge, customer value, and optimized business processes.

We cannot recapture the past, but we can surely make the future. And the time to start is now.

[sinkspur]

There's not going to be any "legislation." All the government can do is refuse to issue government contracts to businesses who offshore; it CANNOT forbid private companies from using resources outside the US.

If they try, Indian companies can offer to set up a subsidiary to the company, using Indian employees.

Legislation can't stop this trend.

[RockyMtnMan]

Pure crap from a trade rag who's readership is CxO's.

I know the high-tech field better than a vast majority of people in the industry. Offshoring software development will cut the legs out from under the entire industry. Enrollment in the sciences will drop to near zero because no-one can get a job after college in the field.

Software engineering requires years of experience in the field to attain these high skill levels. How do we build skills without the opportunity to do so?

[superloser]

Legislation can stop this trend by adding a tax on foreign labor.

Here is a proposed equation seen elsewhere on FR:

Tax = (% Foreign Input - % Foreign Sales)

So, if a product is 100% produced outside the US, it gets a 100% tax if it is only sold inside the US.

Don't underestimate the ability of Government to tax. They can get very creative even without OUR help.

Just so you know, yes, it passes Constitutional muster as being both an excise tax and a tariff.

[Dissident1]

We wouldn't want to help over a billion people find thier way into the high tech world. Why they might become consumers instead of well educated people with no way out.

To consume what? Products from China? The only thing the US makes today that the world wants to consume are Marlboro's, Jack Daniels and porn.

[lelio]

BTW how come since all these brilliant MBA CEO's started shipping jobs overseas has the economy went in the sinkhole?

Why the "brilliant" dig at MBAs? They are brilliant ... for their own short term gain. That's why we need governmental leadership on this offshoring trend. Businesses are always going to look out for their bottom line, they can't be counted on to worry about the health of the economy.
I think Bush needs to learn that part of leadership, he can't just sit back and watch the market. I don't want him to control the market, to pick the winners and losers, but rather for him to set some ground rules down. And one of those should be that in order for America to growth there has to be some incentive to keep jobs here.
Bush has "that vision thing" (to use his dad's phrase) downpat on our war on terrorism. Now just look at the economy and realize that we're heading for disaster.

[sweetjane]

Here is another strategy for them:

They should use their resources to bring India from third- world to industrialized country as fast as they can. That way India can generate its own demand for these services.

I know a small company (owned by a family member) that uses Indian programmers. They have since 1998. In one of my many debates with this family member, I tried to explain that it was just another form of imperialism. He's a big-time lefty and I thought he'd get the imperialism thing. But he didn't get it at all.

[eccl1212]

government CAN regulate, legislate and tax imports and exports...
and labor could be reasonably defined as both...

the question is not whether, but IF this should be done... and to what extent.

We exported a lot of our manufacturing jobs.
We touted the "high income high-tech" sectors as replacements for the lost jobs. Now we have done the same with the technology sectors.

Globalism principles at work and I have NO clue as to how it will play out, other than degradation of our standard of living and a full tilt run towards service and retail sector jobs, hamburgers, tacos and window washing. Don't get me wrong... those can be good jobs... but hardly useful for supporting a family...

no solutions... just questions of course.

[lelio]

He's a big-time lefty and I thought he'd get the imperialism thing. But he didn't get it at all.

Oh he got it. Its just when you're in the driver's seat you begin to like the ride.

[RockyMtnMan]

Technology is the first wave, soon to be following by all other high value positions. The catch fraise is BPO, Business Process Outsourcing, which means an entire business process not just the automated pieces.

This is the beginning of the end for the "working class" unless government intervenes.

[SoDak]

It's hard to blame corporations either, really. The company is like a handful of water. It will probe everywhere to find the leak, and exploit it when it finds it. This is what a good management team does. It finds the best bottom line for it's stockholders. If government policy changes to seal the leak, it won't be used, and equilibrium between competing companies is restored, and increased costs are passed along. I guess the question is, are we willing to pay more for computer services in order to keep the jobs American?

[sinkspur]

government CAN regulate, legislate and tax imports and exports... and labor could be reasonably defined as both...

How do you propose the government impose taxes on outsourced work? Lines of code?

This can be done via the net, almost completely furtively.

IBM's Indian workers are not taxed; they work for an Indian subisidary. Any outsourcer with a presence there could set up a similar subsidiary for any company.

[big bad easter bunny]

I have a lot of friends in India, the answer is of course they would be. They have the same draems and ambitions we do, they are human just like you!

[sinkspur]

So, if a product is 100% produced outside the US, it gets a 100% tax if it is only sold inside the US.

This development work is not "sold"; it becomes part of the infrastructure of a company.

You need to know what you're talking about, first.

[RockyMtnMan]

Governments role in the economy is to ensure a level playing field for all competitors. Laborers compete for work, therefore the playing field must be leveled to foster competition. Until they bridge the gap in wages there is no competition, therefore India holds the monopoly on labor.