Norbert Elliot's Web-Page

Does Outsourcing to India Level the Playing Field, and is America Ready?

Author: Sharon Thomas

Case Objective

In the contemporary environment of global competitiveness, business is rapidly evolving following the advancement of technology that has been built according to increasing business demands. With the emergence of Net and Web capabilities, outsourcing has become a recent phenomenon in American business as new branches are established in foreign nations, particularly India. Many, however, have opposed the idea of outsourcing for fear of job losses within the United States, posing a possible detriment to economic and social growth for the nation now and in the future. Thomas L. Friedman’s commented in his guest lecture at the Massachusetts Institute of Technology (MIT) that the “… global economic playing field is being leveled, and (we) Americans are not ready”. If this statement is accurate, how can improved communication strategies within the infrastructure of American business help ensure a thriving economy for the United States and social stability for the average American worker? In other words, how can America compete in this changing environment?

Executive Summary

Outsourcing has existed for centuries in diverse settings. According to Thomas L. Friedman’s book, The World is Flat, the earliest form of outsourcing began with Christopher Columbus—an Italian explorer hired by a Spanish monarchy in search of the best route to India—and has changed to an average customer service department in Bangalore, India. Friedman argues that the world has essentially become “flat” by the advancement of communicative and informational technology which created a competitive playing field between developed and emerging countries. In essence, the globalization of business via outsourcing has opened the opportunity for all nations to be equally advantaged and competitive (Appelbaum 37). Could it be assumed that the United States has been falling behind in the advancement and accommodation for communicative and informational technology? If so, improved communication strategies are necessary to strengthen and further develop the infrastructure of American business to help overcome this inadequacy.

Twentieth century outsourcing became imminent during the 1970s when American companies sought cost-effective manufacturing departments overseas. As the information technology sector increased with the emergence of Microsoft, Apple, and other dominating computer companies during the 1980s and early 1990s, software developers were sought out in other nations. In the late 1990s, information technology introduced the phenomenon of the Internet bandwidth for affordable public further, which enabled the outsourcing of IT-Enabled Services to offshore countries, including India. The technology was so advanced that tax returns could be processed from a SurePrep employee in India. Because of this capability, financial investors, consultants, and insurance companies were also welcome to expanding their business overseas. Most of the jobs that went overseas, and are still going overseas, are not unwanted, elementary-leveled jobs, but advanced, well-paid positions (Ahlawat 102). Such jobs include skilled blue and white collar positions, including the relocation of approximately 20,000 manufacturing plants in the U.S. and the establishment of 246 U.S.-based multinational branches. Outsourced white collar jobs are comprised at least 3.3 million positions in service industries, accounting for $136 billion in wages (Ahwalat 101).

Background

How It All Began

Outsourcing, according to Oza et al., is “turning over all or part of an organizational activity to an outside vendor, and is often considered the generic solution to cost-cutting by moving certain positions of employment to another branch or another vendor overseas, thereby saving money by paying new employees according to the foreign nation’s currency and quality-of-living standards—usually much affordable when compared to the standard United States dollar. Another potential advantage to outsourcing is that companies “gain the potential market share,” thereby expanding their services, business opportunities, profits, and corporate territory (Oza 15). After the domino affect of economic lapses from September 2008 when Lehman Brother’s officiated bankruptcy and Merrill Lynch was acquired by Bank of America (http://edition.cnn.com/2008/US/09/15/banks.bigchanges/), it has become even more crucial than ever before for companies to find ways to accomplish more with less resources and limited financial opportunity (Oza 15).

The beginnings of outsourcing took shape with the emergence of international trading which was enabled by socioeconomic philosophies and evolving technology, as shown in Figure 1.

Figure 1. The History of Outsourcing

1776: Adam Smith, in the 'The Wealth of Nations', formulates a theory of competitive advantage, extracting the notion of outsourcing as a way to cut costs by hiring cheaper labor in less developed countries.

1830s: England's textile industry is so efficient that eventually Indian manufacturers can't compete, and work is outsourced to England.

1960s: It becomes common to outsource tasks that involve massive amounts of information, such as data processing, to external vendors, due to the large costs and physical storage requirements associated with computers.

1962: JCR Licklider of MIT publishes a paper discussing his "Galactic Network" concept. He envisions a globally interconnected set of computers through which everyone can quickly access data and programs from any site.

1963: Electronic Data Systems signs an agreement with Blue Cross of Pennsylvania for the handling of its data-processing services. It's the first time a large business has turned over its entire data-processing department to a third party.

1969: The ARPAnet is born. The ARPAnet, intended to link research centres across the country, provides the foundation for advanced networking and breaks a path toward the Internet.

1970s: It is common for computer companies to export their payrolls to outside service providers for processing.

1970: The earliest known device that bears any significant resemblance to the modern personal computer is launched. A programmable terminal called the Datapoint 2200 is made by CTC (now known as Datapoint) and is a complete system in a small case bearing the approximate footprint of an IBM Selectric typewriter.

1972: The first computer-to-computer chat takes place at UCLA, and is repeated during the International Computer Communication Conference.

1980s: Outsourcing enters the business lexicon. Accounting services, payroll, billing and word processing all became outsourced work.

1980: Widespread development of workstations, PCs and LANs.

1985: The Internet is a well-established technology supporting a wide community of researchers and developers.

1989: Outsourcing is formally identified as a business strategy

1989: Eastman Kodak decides to outsource the IT systems that underpin its business, a revolutionary move for business and seen as a watershed event.

1990s: Shift to outsourcing mainframes, PCs, and telecommunications. Outsourcing becomes very profitable with the advent of the WWW.

1990s: As organizations begin to focus more on cost-saving measures, they start to outsource those functions necessary to run a company but not related specifically to the core business.

1991: The World Wide Web is developed at CERN (Centre Européan pour la Recherche Nucléaire; European Laboratory for Particle Physics) by Tim Berners-Lee.

1991: The first Web server is nxoc01.cern.ch, launched in November, and later renamed info.cern.ch.

1991: Wide Area Information Servers (WAIS) are invented by Brewster Kahle, released by Thinking Machines Corporation. WAIS is a distributed text-searching system that searches index databases on remote computers.

1998: Outsourcing is a $100 billion per year industry.

2003: Outsourcing accumulates $298.5 billion in global revenues.

2004: Outsourcing is one of the topics of debate between the candidates in the United States presidential election.

What Made India So Attractive?

India caught the eye of American investors, entrepreneur, and business executives for several factors. First, India’s huge population has brought forth a younger work force (compared to the United States), of which 50% are college graduates, translated to 550 million, are under 25 years of age. Second, the education system in India is highly advanced, allowing this sizeable number of young professionals to be already well-equipped with an impressive background in information technology (IT), computer engineering, and English fluency and bilingual capabilities (from my personal experience as an American of east Indian roots, most Indian people speak at least two languages—usually English and Hindi as a minimum).

According to Asher et al, it is predicted that India will be home to an additional 2 billion people in the developing world, thus promising an even greater work force for these outsourcing American companies. However, during the same period, it is predicted that the average working population within 15-59 years of age will experience a decrease of 17 million new employees in the work force. Asher further embodies the shock at the looming competitiveness of India “(By) 2020, India is projected to have additional of 47 million workers, almost equal to the total world shortfall” (Asher 10). In total, India has 2 million English-speaking graduates, 15,000 law graduates, and about 9000 doctoral graduates every year. Approximately 300,000 engineering graduates are added to the existing pool of 2.1 million. In addition, India has 840 business schools, which produced 85,000 MBAs yearly. Last, but certainly not least, as 5,000 IT graduates embarked on the work force in Germany and 25,000 in the United States (U.S.) yearly, 120,000 graduates enter the labor force in India (Asher 15).

How did India win the hearts of American business? The Indian work force has been consistently and constantly under the rigorous academic training by its 290 universities, 1500 research institution, and over 10,000 centers of other forms of higher education, particularly in information technology, engineering, and the pharmaceutical and healthcare industry. In addition, the Indian government has been making great strides in making education more affordable, easily accessible, and desirable through appropriate policymaking (Asher 10).

According to Oza et al, other reasons for companies choosing India for outsourcing are: (1) time difference—10-hour time difference allows for 24-hour capabilities, such as customer service; and (2) direct governmental support—India has a National Minister of IT directly works with businesses nationwide (Oza 17)

The Controversy Sparked By Outsourcing

Geoffrey Colvin of Fortune seemed a bit fearful of whether or not the United States is really ready to fight India’s rapidly growing competitive edge in his podcast:  “If you think your job is safe from offshoring, think harder… The briefly flaring media supernova about call centers in Bangalore at least illuminated a significant issue: Service jobs can be exported too, especially as global telecommunication increasingly becomes nearly free. Even more important, though not nearly as media-friendly, is the torrent of college graduates, hundreds of thousands of them in engineering, from Chinese and Indian universities. Earning $18,000 a year, they're often just as good as an $85,000 Westerner” (13). Evidently, Colvin was speaking for the thousands of Americans who were deeply concerned about putting food on the table as well as enjoying the comforts of a rich American economy consistently filled with available employment, while feeling helpless about the comparatively poor educational system within the United States.

Problem: India is the New Competitor, and America Isn’t Ready

Outsourcing has empowered India economically and socially by providing new jobs that are considered better-paying than the jobs normally provided for from an Indian company. This has opened the door not only for more jobs for the Indian work force, but a booming economy for India as a nation and the opportunity for business advancements from India’s end. Even Indian companies are beginning to look into expanding overseas, and many of them are—as witnessed in Tata Consultancy Services, who acquired Citigroup’s Global Services in October 2008 at the beginning of America’s economic crises. If new ownership of one of the United States’ largest banking/financial companies could be purchased by an Indian corporate giant, is United States really ready to confront new competition on the leveled playing field of globalized business?  According to commentator Stan Gibson, India has become “India 2.0” (Gibson 14).

Gibson asked “[W]hat will India 2.0 look like?” (Gibson 14). American companies will still resort to India for high-quality service at comparatively lower wages (according to American standards). However, it is also very possible, and probable, that Indian companies will expand their business to the countries of their United States clients (who ironically hired them for outsourcing in the first place), setting up new offices staffed with local employees to cater to outsourcing needs as well as new services. Indian companies are also beginning to strive to patent and license their own intellectual property (IP), instead of essentially being “robbed” of their ideas by their outsourcing employer and not receiving the credit and monetary reward they feel they deserve. Microsoft and Apple may also feel the pressure, as Indian companies are preparing to sell competing superior software products designed by the best IT professionals in the world (Gibson 14).

Potential Resolution: Implement Innovative Means of Adaptation

Adaptation in American Corporations

First, it is imperative for company executives and senior managerial staff to recognize that their corporation needs to adapt to the constantly changing business environment.  This changing business environment is mainly marked and driven by a technological evolution that can be overwhelming to accommodate at such short, unexpected notice (Argenti 11).

Technological innovations happen very quickly and have a paramount impact on the business world and their targeted customers. It is the determining factor of financial success and opens the door for more business opportunities, Companies should be ready to adapt to these new changes in an innovative manner without changing the quality of their service and the ethical guidelines of procedure. One of the primary reasons companies do well is because they always stay tuned to what is going on in the outside world (Argenti 12).

The best way to begin this process of adaptation is by employing communication experts to act as “watchdogs” for the company. As Argenti shows, the executive branch should work closely with communications experts in the media relations, investor relations, internal communications, and government relations sectors to ensure all possible new business demands are catered to in the most innovative and practical way possible. American companies should adapt an infrastructure that embodies and is surrounded by such “watchdogs”, as shown in the proposed model by Argenti (Argenti 51):

As shown in the figure above, companies should strive to go as far as electing a vice president who oversees all aspects of corporate communication. The director of media relations will explore new trends in technology, strategies, and services by competing companies, and will serve as a messenger of those new trends to the rest of the company. The director of investor relations will direct potential donors and clients to spend money on new ventures that the director of media relations has advocated to be a promising, booming new business. The director of internal communications voices the new information from media relations and investor relations to the rest of the company as the chief internal communicator, assuring that all employees are aware of new business ventures in terms of service, products, procedure, and investment. Last, but not least, the director of government relations will be on constant watch for the changing political climate, and will ensure that the company will be able to meet the demands imposed by the government as well as adapt to the fluctuating economy according to lawful standards.

If companies establish such a model, American industry would be more prepared for the competition posed by India and other foreign nations. Communication is imperative in sharing information and developing and implementing solutions. Furthermore, the CEO is entitled to be the most involved with developing the communication strategy and consistently working with communication experts in transmitting and receiving updates on local and international business conditions, as Argenti states “(i)deally, the corporate communication function will have a direct line to the CEO” (Argenti 51).

Outsourcing Helps in the Long-Run

Contrary to public opinion, a study by the McKinsey Global Institute revealed that for every U.S. dollar spent on outsourcing business to India, the U.S. economy receives a minimum of $1.12 in return, out of which the largest portion—58 cents—goes back to the original employer. In relation, 30% of Indian offshoring is performed by U.S. companies, which guarantees this return does apply. Additional benefits include the reduction of healthcare, which according to McKinsey Global Institute’s Diana Farrell, is caused by outsourcing certain parts of the healthcare industry (such as conducting analyses of X-rays).  Finally, though the two million jobs were lost in the U.S. due to outsourcing over the past twenty years, there will be 35 million net new jobs within the next ten years.

Instead, what the United States must do is not to demand an end to outsourcing, but to create an equally competitive education system that would make American graduates even better qualified than expert professionals overseas (Kirkpatrick 23).

Adapation in America’s Academia

Within the science and technology fields, the United States has disappointing numbers; the numbers of Ph.D. graduates in science and engineering have decreased, as well as the export of U.S. high-tech products. On the contrary, China and India is showing an increasing number of Ph.D. professionals and a rising number of exports of highly advanced technical products. Ironically, 25% of the Ph.D. students in American universities specializing in an field within science and engineering are Asian citizens. It is very evident that the United States has failed to well-equip our work force with the advanced knowledge and skills they need to compete in the global playing field, as Ahlwat et al states, “The U.S. must go beyond larger government-sponsored research budgets, better K-12 education, and closer government-business cooperation to keep its technology lead” (Ahlawat 103). Today’s college students are now confronting by more challenging jobs than the ones available in the thirty years ago,  and it is imperative that the educational system be as aggressive, alert, and flexible to change according to the advancements of technology, science, and other new business trends. Perhaps even business schools must spend multiple semesters in preparing their students for the global business environment through the internationalization of the business curriculum, the requirement of fluency in foreign language(s), and the introduction of new technological software that is applicable and essential to their target career specialization (Ahlawat 101).

Discussion Questions

1. How far should corporate communication go to ensure future generations of American workers are educated through a global-friendly curriculum?

2. Should the government and educational institutions begin creating their own communication branches that interact on a daily basis with major U.S. industries?

Works Cited

Argenti, Paul A. Corporate Communication. New York: McGraw-Hill Irwin, 2009. Print.

Ahlawat, Sunita S., and Sucheta Ahlawat. “Competing in the Global Knowledge Economy: Implications for Business Education.” The Journal of American Academy of Business. 8.1 (2006):101-105. Print.

Andric, Mia. “Outsourcing Timelines”. ITWeb. 12 March 2007. Web. 22 February 2009. <http://www.itweb.co.za/sections/features/outsourcing/feature0703120705.asp>.

Appelbaum, Steven H. Appelbaum and Anis Samaha. “Business Process Outsourcing: Lessons From Case Studies In India, Poland, And Canada.” Journal of Business Case Studies. 4.12. (2008):37-54. Print.

Argenti, Paul A. Corporate Communication. New York: McGraw Hill Co., 2009. Print.

Asher, Mukul G. and Amarendu Nandy. Demographic Complementarities and Outsourcing: Implications for India. Proc. of IMRC 2006 Conf. on Global Competitiveness through Outsourcing: Implications for Services & Manufacturing. 13-15 July 2006. Bangalore: Indian Institute of Management, 2006. 1-33. Print.

Colvin, Geoffrey. “Think your job can't be sent to India? Just watch.” Fortune. 150.2. (2004):80. Print.

Friedman, Thomas L. “The World is Flat.” MIT World. <http://mitworld.mit.edu/video/266>. Web. 1 February 2009.

Gibson, Stan. “India 2.0: New Ideas for the world.” eWeek. 23.9. (2006):18. Print.

Kirkpatrick, David. “Rage Against Off-Shoring Is Off Target.” Fortune. 149.4. (2004):68. Print.

Kuruvilla, Sarosh and Aruna Ranganathan. “Economic Development Strategies and Macro- and Micro-level Human Resource Policies: The Case of India’s “'Outsourcing” Industry.'” Cornell University ILR School. Ithaca: Cornell University, 2008. 1-59. Print.

 Oza, Ashish and Kathy L. Hill. Outsourcing to India: Advantage or Disadvantage? Proceedings: Allied Academies International Conference. 11-14 April 2007. Jacksonsville: Academy of Information and Management Sciences, 2007. 15-20. Print.