Outsourcing of Services

Basic Trends 1
Outsourcing as in manufacturing
Off shoring, or offshore outsourcing to another country
applicable for both manufacturing and services
For services, we also have on-site offshoring for example,
through H-1B and L1 visas with work permits in US
Maximum outsourcing in the services have come from the US
economy
Some European companies esp. in IT & software sector have
started to increase only on-site offshoring
But again US has the early starter advantage
European companies are not finding enough good quality
professionals
They are already in the US or working for some US company in
India

Basic Trends 2
On-site outsourcing has been taking place in the US since at least
the 1960s
Trend increased sharply in the 1980s in US
Much of the technical advancement of US in IT and R&D sectors
have been made possible by on-site offshoring
By attracting the best brains from around the world
But offshore outsourcing in services started in the late 1990s,
Followed by pioneering moves by GE and TI.
The impact on the US economy has been significant
2.7 million jobs were lost during 2000 2003 in manufacturing
sector, of which 500,000 in high tech industries a 28.7% of the
employment lost
Not entirely outsourced, but significant portion went abroad

Basic Trends 3
In the services sector, the job loss is impressive
6,32,000 white collar jobs lost between 2000 and 2003 in data
processing, telecommunications, hardware design, software,
engineering, and R & D
A report estimates that 14 million US services job (11% of US
employment) are at risk of being exported
Another report (Forrester) estimates that 3.3 million US services
jobs will be outsourced over the next 15 years
The IT industries (hardware, software, telecom services &
communication equipments) accounted for $ 829 billion GDP in
2001
Services sector employ 86% of non-agricultural workers, and
account for 66% of GDP in the US
Services export ($ 291 billion) and surplus on this ($ 74 billion)
reduces much of the deficit (13%) on goods trading

Basic Trends 4
Two factors triggered the process in late 1990s:
Shortage of IT labour in USA on the face of
Y2K compliance job
Dot-com boom
Forced US companies to go abroad
Initially it started with basic and low end activities like data entry,
typing, etc.
Over time, more and more knowledge-intensive and sophisticated
tasks have been outsourced to other countries
This has happened as US corporations have become more
familiar with the offshore partners
High paying professional jobs that are now routinely outsourced
include IC design, architecture,engineering, prototyping,
testing, medical transcription, statistical analyses, etc.

Basic Trends 5
Big names of Wall Street JP Morgan, Lehman Brothers,
Goldman Sachs, and others outsoucring complex financial tasks
Investment analysis
Industry reports
Tax preparation
Stock research
Credit companies & retailers & marketing companies are
outsourcing high-end statistical analyses for
Risk analyses & card modeling
Marketing research
GE is employing 10,000 scientists and engineers in 10 different
countries (China, India, Israel, Hungary & France) to deign,
develop and assemble high-tech medical equipments

Basic Trends 6
Radiologists in India and Australia are interpreting CT Scan
reports of patients in US hospitals
Chinese labs of Intel working for enhancing Linux technology for
Intel servers
Texas Instruments India R & D center is developing next
generation chips for mobile phones
HP designed, engineered and assembled its Proliant server in its
own facilities in Singapore, Taiwan, India and China
The list is almost endless,
And growing rapidly by the day

Offshoring Destination Worldwide

Factors Behind Outsourcing 1

Technology Computer & Communications
Falling prices of hardware,
explosive growth in hardware capability
Huge growth in communications infrastructure
With falling costs
A PC was priced $ 1000 in 1996 in India, now a PC with 100
times more disk space, 60 times faster processor, and 128 times
RAM come with $ 600;
Inflation in India averaged 4% during this period (1996 2006)
$ 1000 in 1996 would mean $ 1480 in 2006
That is, 60% fall in prices in real terms, but hundreds of times
increase in capabilities
Cost of a call from India to US fell by 80% from 2000

Factors Behind Outsourcing 2

Communication capacity between India/China and US increased
from 0 in 1999 to 11,000 GB/second in 2001, but costs remained
unchanged
Low Labour Cost
Surplus labour in developing countries
that are low cost
Highly skilled and educated
May lead to 90% saving on labour cost
An engineer can be hired for $ 15,000 per annum in China and $
13,000 - $ 14,000 in India, compared with 10-11 times more than
that in Silicon Valley
US corporations are forced to go to these destinations to remain
competitive
Because their competitors are doing so

Factors Behind Outsourcing 3

Labour cost advantage of these countries are unlikely to go down
in near future
Besides, more and more developing countries are joining the fray
Loss of US Position on Education
China churns out 200,000 engineering graduate every year, 3
times more than US
The number is growing in China (and in India), but falling by 1%
per annum in US
Engineering graduates are 44% of all undergraduates in China,
but only 5% in the USA
Only 2.2% of Chinese population aged 24 earned a bachelors
degree in 1999, compared to 35.3% in the USA
China has even greater potential
India is also not much behind

Factors Behind Outsourcing 4

Scientists of foreign origin have been a key factor in US
advantage in high-technology areas and R&D
They are going back to their home countries on lower salary
But higher position
And cost of living is much lower
US needs to revive the interest of its population in mathematics
and science (Role of Calculator?)
Favourable Investment Climate in Developing Countries
Developing countries are liberalizing
Providing tax and other incentives to FDI
They are improving their infrastructure rapidly (es. China)
Other policies are also used actively
Offset by Russia for Boeing purchase
New encryption technology in wirless LAN in China

Factors Behind Outsourcing 5

Time Zones
Once low-cost communication is available all over the world,
Work can now happen on 24X7 basis
Without paying for overtime
Proven and Established Outsourcing Practices
After the first companies GE and TI successfully
demonstrated the potential of outsourcing, others followed
Third-party auctioneers of outsourcing jobs have emerged
Many of them are internet based
Now even the very small US companies can get their work
outsourced, without getting into the hassles of coordinating and
negotiating

Factors Behind Outsourcing 6

Lure of Large Market (China & India)
Currency Undervaluation by China and other East Asian
economies (but not India overvalued)
What are the Lessons for Tanzania?
Education & Health (Soft infrastructure)
All level of education
Health first remove the preventable diseases, then make
healthcare available to all, at affordable cost
Communication
Power (very critical for service sector)
Other infrastructure

Readings
Offshore Outsourcing and Americas Competitive Advantage:
Losing out in the High Technology R & D and Services
Sectors Office of Senator, Joeph I. Liberman