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.

[Victoria_R]

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

The United States ought to start billing the UN and other countries for the "peace-keeping services".

[RockyMtnMan]

Especially don't underestimate the middle-classe's voting power over congress. Because of the level of education in the middle-class it will be next to impossible to "pull the wool over their eyes".

[superloser]

Especially don't underestimate the middle-classe's voting power over congress.

If you'll note what I'm posting, its the Congresscritters that I'm concerned about, not John Q. Public. If they think this is an "electable issue" for them, then go down to Vegas and put it all on black because they'll take it and run with it.

They'll win too.

Because of the level of education in the middle-class it will be next to impossible to "pull the wool over their eyes".

What education? :-)

However, once Hoovervilles start popping up or people start marching on Washington, its quite a different game...only the folks doing that won't be talking about reducing regulation to be competitive.

They'll be carrying pitchforks and torches and demanding something be done. Now. Anything. Get to work on it.

Sigh....

[RockyMtnMan]

This is both a short term and long term problem. In the short term they will have to enact some kind of tariff system. In the long term they SHOULD address the root causes of the problem of the imbalance; taxes, regulations, law-suites, etc.

After that the tariffs should come off, but we know their track record on eliminating taxes.

[sandpit]

I work for one of the nation's largest companies. In dealing with systems admins, programmers, etc, I see that almost all of them have names like Muhammed, Chin, Vasaprinatathong (or some other tongue twister name).
Now maybe some of them are good ol' red-blooded American citizens, but I doubt it.
I am a helpdesk contractor. My pay was cut 8% last year, after going on 3 years, I'm still getting only 5 days of vacation, no sick days, no raises, and they just cancelled our health insurance (guess it was too expensive). I stay because the job is very easy and I don't mind working the graveyard shift. If they could find some sort of instant language translation machine, we will probably be replaced by foreigners, too.

[WRhine]

After that the tariffs should come off, but we know their track record on eliminating taxes.

Tariffs should remain on all imported goods/services with 3rd world nations. Free Trade, true Free Trade is only possible when trading among the First World. Even there it barely works.

I'm perpetually amazed at those that go off the deep end about tariffs but rarely say a word about the staggering income tax burden the government places on its citizens. Tariffs are a much better way to raise government revenue than income taxes. For one, it is a tax that is avoidable to some extent unlike income taxes. For another, it puts American businesses on a more level playing field without unduly depressing wages.

As you mentioned, if wages keep on collapsing in this country there will be a backlash and who knows what will come out of that.

[eccl1212]

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

---

good point... probably because NONE of us really believe there is much hope of doing anything meaningful in these arenas. the pittance of tax reduction and regulation reduction we have heard so much about, in the scheme of things add a certain level despondency, when you consider that the jobs and cutting edges of development are leaving FASTER than you can get a federal judge appointed...

In other words... WAY too little, and a DAMNED bit WAY too late. We have more conservatives at the throttle of this nation's tax and spend carburetor than we have had in my lifetime! And the government is not shrinking or cutting much of anything. What you suggest would require not "tinkering" with half points of income tax refunded on "special" middle and lower income households, but instead a revamping of the whole federalist structure.

Gotta love your optism, but it is NOT going to happen. Period. I WISH that I was wrong about it. Honestly it is NOT going to happen. We have illegal aliens to support and the masses of Africa to save, plus programs for all americans with hangnails to fund... there will be NO MEANINGFUL tax reform in the quantities required to stem the tide.

I will dance in the streets with you, and eat my socks with barbecue sauce when it does.

[superloser]

Absolutely, and I share your realism as well :(

[iopscusa]

Hi Rocky, excuse my ranting, I have been trying to understand this economic paradox re: jobs and society. I am very sensitive about losses to our manufacturing base due to my up-close involvement in recruiting engineering and operations personnel for domestic manufacturing for 20+ yrs. A late night thought...disengagement and fair trade....what if we threw out all the backstabbing, back-riding, copyright stealing, patent infringing, dangerous tyrannical, assh___ country products (incl. oil) until there is Fair Trade (can be defined by utilizing all costs, esp. opportunity costs like peacekeeping, foreign aid, taxes, regulations, etc.)...we need to realize we have been taken advantage of by our so-called political & corporate business leaders & other allies/enemies...if they want security, let them pay for it. If they threaten security, let them pay the price...we have every right to be as ruthless as them. The US economy could become much more self-contained and independent. What do we need from China or India??? We are in danger from the WTO, UN, Import/Export idiots and every other politician/b-rat in the Federal 1 world crew....bar the doors now, we can make things happen right here...I try to refuse to put my $$ into any product that comes from the (WCC) world criminal countries! As for paying more for products if we restrict or close the bogus "Free Trade"...we already pay a premium due to 40% tax rates and another 40% added cost to support regulations and non-productive social programs....get those under control or eliminated and we will blow the doors off any competitor...screw the World Order BS, it is just a way to keep back riding/stabbing the USA and I am sick of it!!!

[SteveH]

The old paradigm consists of what we today regard as conventional governments at the national level.

The new paradigm is "The Company" in the movie "Alien."

Under global free trade, corporations dominate conventional governments.

Following this train of thought, it explains why individual freedoms in the US will undergo increasing attacks in the name of "reducing costs."

In the new paradigm, there will not be countries as we recognize them today. There will only be classes.

Large corporations will dictate public policy on a global level. "Harmonization" will continue to occur under global free trade, the corporate Nirvana. Jobs will continue to be "displaced."

Next we will learn, or be told, that in order to remain competitive, we will need to sacrifice benefits gained in the previous century regarding workplace safety, retirement, privacy, environment, and individual freedoms.

To the extent that the US Constitution is antithetical to international corporations, it will be modified or interpreted away (BTW, with the active help of Democrats and Republicans alike... I believe the trend was well underway by the time of FDR).

To the extent that individualism is doomed via international corporate dictates, socialism will prevail.

That which makes the US unique in the world today will be "harmonized."

Want to see the US of tomorrow? --- if current trends continue, it is the Bombay or Shanghai of today.

The only class that will survive in its current form is the investor class.

For the rest of us (those who don't attempt to assert their individuality in some way or another and become headline news), it's "will you be having fries with that today?"

[RockyMtnMan]

I wouldn't call it a rant, more like a reasonable amount of concern for the nation's economy.

[RockyMtnMan]

I think the term being used is "virtual economies". Which implies multinational companies that are wealthier than most countries.

Corporations are reaching or have reached the same power level, from a sociological point of view, as governments. They negotiate trade agreements with foreign powers just like the fed does today.

I think your assessment is very acurate. We are in the hands of a select group of elites that form public policy. Those policies will affect our lives dramatically in the future.

[sinkspur]

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?

How do you think anyone finds out about the crap you write?

Listen, bub, NOTHING happens in this country until somebody sells something.

And I can sell Indian code as easily as that developed here. In fact, some of the code my company sells is developed in Bangalore.

[RockyMtnMan]

Sort of a co-dependent relationship isn't it. Remember, products are developed FIRST then marketed and ultimately sold to a customer. Without products their can be no sales, this isn't a chicken-egg conundrum, one always comes before the other.

You started this tirade by equating Java programmers to the guy that cuts my grass. No offense but if asked I could easily perform the duties of salesman. The same cannot be said of a salesman asked to do my job. If the techies start looking for work, sales will be one of the first places they look. I know all about sales as I go on sales calls occasionally to explain what the salesman cannot.

How many top shelf software companies exist in India? Software developed in the US should carry a higher commision because it costs more to develop and therefore sells for a higher premium. You stand to lose more by selling software developed from a cheaper market.

[sinkspur]

Remember, products are developed FIRST then marketed and ultimately sold to a customer. Without products their can be no sales, this isn't a chicken-egg conundrum, one always comes before the other.

Actually, products are DEVELOPED to fulfill a DEMAND from the marketplace. The demand is known, of course, because salespeople and marketing people are out talking to prospects and uncovering the need, or the pain, or the gain, that could be satisfied by a product.

So, yes, one does come before the other. Without sales and business development, you wouldn't know what the hell to develop.

No offense but if asked I could easily perform the duties of salesman.

Why don't you do it? I'll bet I've outearned you in every year of your working life.

If it's so friggin' easy, why are you leaving money on the table by sitting in a cubicle? Come on out and wine and dine and enjoy the "easy" life of a salesman.

With these remarks, not only do you show ignorance, but laziness as well.

Techies make lousy salesmen; they know the product, but most of them don't want to be bothered with the refusals, the turndowns, the negativity, the need to explain why so many developers put out buggy code for sale.

Oh, and you've got to know a bit about cost of money and ROI today to close deals, and most techies don't know how much change they've got in their pocket.

You're funny.

I need you; you act like you don't need me.

Put an ad in the paper and see how many people buy your software.

[sinkspur]

How many top shelf software companies exist in India?

IBM, CA, Oracle, PeopleSoft, SAP, JDEdwards, mine...every major software company has development teams in India. Every one of them.

[RockyMtnMan]

I've been thinking about a sales job for a while now since our sales people can't seem to close the deal.

In general I agree that most techies do not have the people skills necessary to interact with customers. As for laziness I generally work 12-14 hour days and work weekends, as do most of my co-techies.

In our company's case we are innovators creating software that did not exist before that fills a large gap in the industry. Everyone in my department understands the business domain as well as the technology, so we are somewhat unique in our abilities.

It's been my experience that sales people rarely collect requirements that are worth the paper they are written on. Generally speaking the most useful customer interactions are with other techies that are trying to solve the problem. Most sales folks bypass techies and go straight to the check writer only to learn later the techies killed the deal because it didn't match their requirements.

Don't confuse intelligence with the ability to make money, not everyone is motivated solely by money. Some of the most intelligent people who ever lived ended up without a cent to their name. Conversely some of the biggest morons of our day make huge sums of money, Actors and Sports Stars.

[RockyMtnMan]

Those company's were born of American ingenuity. How many purely Indian companies that make software do you know of?

[sinkspur]

Those company's were born of American ingenuity. How many purely Indian companies that make software do you know of?

None. So what? There are no Mexican car manufacturers, but Mexican companies are making parts for cars born of American ingenuity, and putting American parts manufacturers on notice.

[RockyMtnMan]

The reason they don't have any is because they lack the creativity, perseverance, ingenuity and overall skills we have developed here in the USA. Why should companies trust their develop efforts to a country who has no track record? Sounds like shareholders should be concerned about the long-term viability of their investments.