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.

[sinkspur]

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

How does government intervene? All of this work can be done via the internet.

[LibertyAndJusticeForAll]

Outsourcing ping!

[RockyMtnMan]

If they are just like us why don't they have a world-class economy? Shouldn't they have built one by now? Why should I have my wages decreased because of their lack entrepreneurship in their own country?

[sinkspur]

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.

Actually, the Phillipines and Malaysia are beginning to undercut India. India's costs are beginning to affect the hourly rates.

There's no way to level this playing field. The big boys, like IBM and Dell, and HP, have a global presence in these companies. Indian or Phillipine code developed within IBM can be used globally, within IBM. The feds don't have the manpower to check every line of code in every program.

[RockyMtnMan]

Do you think reputable companies would risk subverting a tariff to save a few bucks?

I am very confident our government will find a way to make tariff/tax collection work.

[eccl1212]

I will take a stab at it...

what you call outsourced is in reality an IMPORT. PAID for by the importer.. for sake of arguement... IBM USA is importing code from IBM-India... and any money they use from the USA corporation to transfer to their INDIA operation can be taxed as IMPORTED LABOR VALUE... They try to transfer 100 million in 'expenses' to india...its cool... but they have to pay the USA 100 million EXPORTED JOB/Imported work product tax or the money cannot go off shore to pay the indian subsidy employees or the rent on their offices and equipment.

Just a stab at how they would TRY to do it.
Necessity is the mother of invention, but I am not sure we can innovate our way out of EVERY nightmare job scenario.

Give an example of how as a nation WE could innovate our way out of this... perhaps we could subsidize our businesses heavily to keep jobs here, and thereby make our own services prohibitively inexpensive, by the same means the japanese do it with their "consei" manufacturing of autos... steel and other items.

I'm all for open competition, but it seemeth to me that something dirty is undermining the "levelplayingfield" that competition presumes.

What's your idea?

[sinkspur]

Why should I have my wages decreased because of their lack entrepreneurship in their own country?

Because you're not competitive. Get competitive. Offer something that the Indians can't offer.

[RockyMtnMan]

That's what whistle-blowers are for.

[RockyMtnMan]

I'm hyper-competitive so I have little to fear. It's the economy in general that I'm concerned about. This trend has the potential of pushing us into socialism by eviscerating the middle-class.

[sinkspur]

What's your idea?

The positions that will likely stay are project managers, who need to be close to the business people for whom the code is being developed.

Writing code in Java is like cutting someone's lawn. It's easy to do, as long as you know how to crank a lawnmower.

The landscape architect who designs the lawn, however, requires a bit more smarts.

[eccl1212]

The government seems to be willing to take on file sharing via the internet of music... that involves songs worth only a few nickels at best... why they would be unable or unwilling to go after internet commerce that violates the intent of our import/export laws?

(at least they will when they rewrite the export/import laws to fit the global/internet paradigm)

I think that trade wars are a legitimate role for government, as they DO affect all aspects of our national security... I take it you disagree?

[sinkspur]

That's what whistle-blowers are for.

That's funny. It wouldn't work, but it's funny, nonetheless.

[RockyMtnMan]

Writing code in Java is like cutting someone's lawn. It's easy to do, as long as you know how to crank a lawnmower.

Your ignorance is showing. PM jobs are moving closer to the work and the "business people" can do a telecon just as easily as meeting face-to-face.

How much do you know about programming? Are you in a marketing department?

[Dissident1]

Because you're not competitive. Get competitive.

OK, let's talk manufacturing in China. Should the US start eliminating things like EPA, OSHA, and Workman's Comp to get competitive? Some will say yes. Or how about forcing EPA, OSHA and Workman's Comp onto China so we can level the playing field.

[sinkspur]

I think that trade wars are a legitimate role for government, as they DO affect all aspects of our national security... I take it you disagree?

Nobody on this thread has uttered one word about the reason the costs of doing business are so high in America: regulations and taxes.

Instead, you'd rather tax already overtaxed and overregulated businesses because they're trying to remain competitive.

Line coders are gone, forever. You're just going to have to accept that fact. As are, likely, some financial industry jobs that require boring, repititive tasks.

The rule is this: if your job can be done from your home, it can be done from India, for a lot less.

[sinkspur]

I sell software, and I've been in IT sales for 25 years. I know about the programming environment, and it is changing, dramatically.

[sinkspur]

Or how about forcing EPA, OSHA and Workman's Comp onto China so we can level the playing field.

You're not going to force it on China. So, we eliminate some of the onerous regulations here, or remain uncompetitive.

[RockyMtnMan]

Nobody on this thread has uttered one word about the reason the costs of doing business are so high in America: regulations and taxes.

Give it time somebody will begin that train of thought.

Line coders are gone, forever. You're just going to have to accept that fact. As are, likely, some financial industry jobs that require boring, repititive tasks.

How does one become a good designer/archtitect/Sr. Engineer without first being a "coder"? Do you think all IT people start at the top?

[superloser]

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

No, it doesn't, really.. Development work doesn't have to be "sold" -- labor, material, and "research and development" can be defined by a clever piece of legislation as components of a product or service - and require declaration thereof - and therefore be deemed subject to a tariff.

The Constitution grants the power to impose tariffs. The definition of what particular goods and services may be taxed is left to Congress.

Besides, R&D is not held as an asset on the balance sheet -- so it cannot be deemed "infrastructure." Take a look at automobiles which must declare point of assembly and "place of origin" of parts for an example.

If Congress can make that part of how autos are sold, there is nothing that says they cannot apply similar principles -- and tax them -- to any other product or service consumed within the borders of the United States which is of foreign origin or contains any foreign components whatsoever.

In terms of technology, Government can pass whatever law it wishes and regulate any commerce it likes of this sort via the commerce clause. Goods, services, labor, capital all may find themselves landing under that particular Constitutional clause.

IMHO, this would be a very, VERY bad thing, but it may just happen if enough people become perturbed about offshoring.

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

Unfortunately, I do. I will not underestimate the creativity of a Congresscritter and I also will not underestimate the ability of the Supreme Court to uphold such a law.

If I can figure out very quickly a simple method of making such a tax legitimate, do not, for one moment assume that 535 Congresscritters cannot do the same quick analysis and then act on it.

[RockyMtnMan]

Sales and Marketing are one in the same brainless job. Who do you think wrote the products that you've made a living on over the last 25 years? You stand more to lose than most by the offshoring trend.

Have you ever thought that maybe this trend will negatively affect the market thereby reducing your sales?