Wednesday, December 28, 2005

Offshore Outsourcing Fears: Highly Exaggerated

In favour of free trade, the World Trade Organisation (WTO), and more to the point off-shoring / outsourcing clearly upholds the trend. According to it off-shoring / outsourcing computer and information services (CIS) to low cost, high skilled countries like India. Philippines, Ireland and China is neither heralds high employment levels in undeveloped service providing countries nor of massive job losses in developed countries outsourcing to them.

The annual World Trade Report 2005 states the fears related to the dynamics of off-shoring / outsourcing IT-services are highly exaggerated, and the impact of off-shored / outsourced jobs seems stronger in common perception than on employment, production and trade patterns.

The report emphasises comparative advantage as being the thinking rationale behind off-shoring / outsourcing of IT and IT-related services, in much the same manner as for physical goods and merchandise. It, further, brings out the ambiguity and incompatibility in BPO statistics quoted by global consultants, governments, including India’s National Association of Software & Service Companies (NASSCOM).

The WTO report believes the most forceful element of off-shored services “is not within the high-skill-intensive IT (information technology) sector, but, in the generally low-skilled business services sector.” And, even in the “broadly defined IT sector” (namely, IT services and low-end IT-enabled services i.e. call centres, medical transcription, etc.), it offers less than 0.25 per cent employment to the Indian labour force. However, “there are pockets of relatively high-skilled services being off-shored / outsourced to state-of-the-art firms, for example, in India or South Africa.”

The report goes on to say the relatively miniscule number of high skilled jobs being off-shored / outsourced to developing nations will have a negligibly negative impact on white collar jobs in developed countries. It is rising wages and need for personal customer contact in several services that will be responsible for placing a check on off-shoring / outsourcing of certain services. Further, if developed countries increase service import, it will lead to a weakening of domestic currencies, thus countering the unbridled growth of off-shoring / outsourcing. Poor legal frame-work and infrastructure are other risks that drive off-shored / outsourced jobs to middle-income countries like India, Ireland, China, Philippines, rather than least developed nations.

The WTO report states while UK and USA are leading the off-shoring / outsourcing trend, an English-speaking workforce is partially responsible for India and Ireland attracting a major portion of the off-shoring / outsourcing business. Other leading industrial countries off-shore / outsource work to a lesser extent, and restrict the trend to countries geographically and culturally closer to home. For example, a major part of German off-shoring / outsourcing contracts go to Central Europe, while Spain sends the bulk of its contracts to Latin American countries.

Applauding the supportive role played the Indian government in creating Software Technology Parks of India Ltd. (STPI), putting up quality infrastructure, giving tax sops and foreign direct investment (FDI) friendly regulations, WTO says this alone is not the reason for India’s success in IT and IT-enable service industries. It is the ability of service providing Indian companies to provide managerial skills that have helped the country take advantage of low cost labour and new market opportunities.
For more information read here.

The article is sponsored by A-1 Technology Inc, dealing in offshore outsourcing and offshore software development.