India Sees Bright Side to US Outsourcing Threat

Asia Times, Hong Kong
http://www.atimes.com/atimes
January 27, 2004

By Indrajit Basu

KOLKATA - The sword of Damocles has been hanging for a while now, but few thought that United States lawmakers would finally allow it to drop. It was hardly surprising then, that when the US Senate, in its first federal move against outsourcing, passed a bill late last week seeking a ban on the sub-contracting of government jobs outside the US, India's money-spinning information technology industry was shell-shocked.

"We are dismayed to learn about the bill that restricts offshoring of work contracted out by the US government," said Kiran Karnik, president of the industry lobby, NASSCOM, while Anand Mahindra, president of India's most powerful business lobby, the Confederation of Indian Industry (CII), termed the moves as "unfortunate and unwarranted".

But even as many, starting from the industry minister, analysts to industry honchos, hastened to add that the move's financial blow on the country's IT-enabled sector would be "little to nil", nobody can deny that the economic and political implications of this bill are significant.

On the face of it, the bill may have little impact on India's relatively nascent but fast growing outsourcing service provider industry. According to US-based market analyst Datamonitor, the biggest Business Process Outsourcing (BPO) spending in 2003 came from the US government, which accounted for US$18.5 billion worth of contracts, out of which only 1.4 percent of the deals involved offshore delivery. Factoring in the total contracts given out by the US government and the US Defense Department, the magnitude is estimated to amount to $511 million.

In other words, although the US bill could dam up a lucrative portion of the flow of BPO contracts, for the country's close to $4 billion revenue-a-year IT-enabled services sector, slated to grow at 54 percent this year, $511 million is surely not a large enough chunk to be overly worried about. Moreover, NASSCOM's Karnik says that since the bill is limited to a period up to September 2004, and that it only covers contracts by government departments, its impact in numerical terms will be "small because the share of US federal government contracts in exports of IT software and services from India is less than 2 percent".

Industry sources also add that low-value IT-enabled sectors such as medical transcriptions, which depend heavily on third party contractors, have no cause for worry either. In this sector, the major chunk of the work flows to India from third parties. For example, says Suresh Menon of HealthScribe, one of the largest medical transcription companies, "most hospitals in the US are under private control and the bill does not seek to debar third party US contractors from outsourcing work to Indian medical transcriptions".

Still, Raman Roy, chairman of WiproSpectramind, one of India's most aggressive outsourcing service providers, says that the real significance of moves like this does not lie much in its monetary consequences. "Bills like these will alter the economic and political fundamentals between the US and India," he said.

Indeed, the moves may not even translate into law, as optimists in India have already started speculating, (and even if they do, the provision may lapse by the end of the year). However, the fact that a move like this has already been made by none other than the US Congress itself can set an example for others countries, which had been contemplating similar measures. Various West European governments, for example, already cagey about offshoring, will now find it easy to follow the US lead.

The development also bodes particularly ill for Indian-US ties. Already the move has been received with "surprise" by India's commerce and industry minister, Arun Jaitely, and is seen as an impediment to the future of "free and fair" global trade. "It sends out a wrong signal at a time when India and the US are working with others to lower trade barriers and to establish fair rules," said Jaitely.

And the CII feels that the US has stopped practicing what it has been preaching for long. "The US had pressed India to accede to 'Singapore issues' in the recent WTO [World Trade Organization] negotiations that includes transparency in government procurement and no special treatment to domestic suppliers. But this latest move by the US shows a discrepancy in its own stand," said a CII response.

Nevertheless, since the Senate ban is on US government contracts, the ultimate losers are perhaps US taxpayers, who will now pay more for government services. The first voice of protest from this move has come from business groups in the US itself. "We want to grow the worldwide economy and create jobs. Isolating ourselves is not the way to do it," said Tita T Freeman, director of Business Roundtable, an association of chief executive officers of leading US corporations with a combined workforce of more than 10 million employees in the US.

Meanwhile, it seems there's a spilt developing between US politicians and companies over outsourcing. Even as US senators were debating the legislative steps, reports said that a group of American company executives, in their pin stripe suits, were sipping cognac after dinner in the elegance of New York's Westin Hotel and discussing the very issue. These executives were among 150 of America's corporate leaders who had gathered in the Big Apple to promote the opposite of what the senators were attempting. They had paid $1,400 per head to attend a conference on how to send US jobs to cheap overseas destinations.

According to Business Roundtable, it has already "urged the Bush administration not to be swayed by the public furor over the loss of American jobs overseas and not to espouse policies that would prevent American firms from getting jobs done cost-effectively, including outsourcing and sub-contracting to countries like India, China or Russia".

Nevertheless, there could be an upside to this imbroglio; leading Indian IT companies, most of which are sitting on huge cash piles, will now be forced to be far more aggressive in acquiring US and European IT companies. "We must continue to move up the value chain and evolve such solutions and services which are good and cost-effective, and Indian IT companies must diversify to other markets," said IT minister Arun Shourie. Experts agree that Shourie's advice is the only suitable long-term solution to combat this phenomenon. "Now they have to aggressively become truly global players instead of thinking in terms of exports from India," said Vaibhav Parikh, a BPO and intellectual property expert.

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