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THE CHANGING INTERNATIONAL COMPETITIVE ENVIRONMENT PROSPECTS AND by fuk43069

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									     THE CHANGING INTERNATIONAL COMPETITIVE
    ENVIRONMENT PROSPECTS AND CHALLENGES FOR
    BUSINESS PROCESS OUTSOURCING UNITS IN INDIA
                                                    Dr R.Raman
                       Assistant Professor-Kohinoor Business School, Khandala

                                                   Parag Waknis
              Research Scholar, University of Connecticut,United States of America



ISSN – 146
Year May 2008                                                                                     Volume 2, Issue 2/4


Key Words: Business Process Outsourcing, International Competitive Environment, Global Competitive
Environment

Abstract: Gartner, the market research agency, defines Business Process outsourcing (BPO) as the delegation of
one or more IT-enabled business processes to a third party that owns, administers and manages the business
process(es) according to a defined set of metrics1. In simple terms BPO is the leveraging of technology or specialist
process vendors to provide and manage an organization's critical and/or non-critical enterprise processes and
applications. Outsourcing is not a new concept to the global economy. India is one of the most preferred destinations
for outsourcing2.The main reason for this is abundant availability of labor at a very low cost,3 hence the major
advantage of outsourcing are cost-reduction, comparative advantage by division of labor and economies of scale,
lower turn-around time, data-backup for disaster management. The major areas of concern for this Industry are
service quality, data-theft, attrition rate, privacy laws and personal-information misuse and credit-card frauds,
increased standard of living in India, the appreciating rupee etc.. There are also other issues like cultural differences
and information security. Given the areas of concern, countries like Ireland, Israel, Canada, Philippines, South
Africa Argentina, China, the Czech Republic, Ukraine, Russia, Poland, Mexico and Pakistan Chile, Venezuela,
Thailand, South Korea, Malaysia, Vietnam, Singapore and Romania all are competing to become the leader in
outsourcing sector4. In this scenario, this paper tries to examine the changing international competitive environment
and examines the prospects and challenges for Business Process Outsourcing (BPO) Units in India and also tries to
suggest strategies for achieving global competitive advantage.




1
  Arundhuti Dasgupta (2002), “Global Call” Indian Management, Vol 41, Issue 6, pp 31-35.
2
  www.Nasscom.org
3
  Rajas Kelkar(2002), “India, Ireland Turn Outsourcing Hubs” The Economic Times,20th December 2002, p1.
4
  http://www.godrejglobal.co.in/rNewsDisplay.asp?NewsID=news20021220



                                                                                                                       1
Methodology of Study                                                 Caselet 2– Tata Consultancy Services
                                                                     setting up global development center in
This research paper is based on the                                  Brazil – The Changing International
secondary data available from NASSCOM,                               Competitive Environment6
Department of Information Technology,
Ministry of Communications & Information                             Tata Consultancy Services (TCS), the Indian
Technology, and Government of India                                  IT services company, is planning to set up a
websites, and other refereed journal articles,                       new global development center in Brazil to
magazines and newspapers .Also views from                            facilitate its USD 260 million outsourcing
CEOs’ of different outsourcing companies                             order from ABN AMRO. Also TCS is
have also been taken into consideration to                           investing heavily in local operations in
understand the prospects and challenges                              South America. Sergio Rodrigues, President,
from the real time business perspective.                             TCS Brazil, stated that the company had
Introduction                                                         won a USD 260 million contract from ABN
                                                                     Amro, and majority of this comes from
Caselet 1– Why Apple Logged out of                                   Latin America. TCS is planning to expand
India – The Changing International                                   and hire over 1,000 people over the next
Competitive Environment5                                             year for its operations in Brazil and
Recently, it was in the news that Apple was                          Uruguay.
planning to employ 3,000 workers in India
by 2007, who would handle technical and                              This case-lets gives an insight about the
customer-service support for Macintosh                               prospects for Indian Business Process
computers. There was even speculation that                           Outsourcing (BPO) Units out side India, at
Jobs would travel to India in the fall to                            the same time it also gives the indication on
publicize Apple's commitment to the                                  the challenges that Indian BPO units have to
country. It so happened that, Apple's                                face in the country, given the areas of
subsidiary in Bangalore was closed down                              concern like the high attrition, lack of robust
recently. All decisions were changed and the                         cyber laws, higher living standards, which
company decided to maintain only a small                             are in turn affecting the core strength - The
sales and marketing arm in the city. Apple                           low operating costs.
decided to re-evaluate their plans and
decided to focus support center activities in                        The Global Scenario & Prospects and
other countries and not India. Apple too was                         Challenges for Indian BPO units
looking at the cost as one basic factor for                          A recent study by Merrill Lynch on global
outsourcing, and still felt that India isn't as                      outsourcing destinations classifies various
inexpensive as it used to be! The other                              global destinations in three categories. These
reasons for the management from Apple to                             include main, upcoming and others. The
take the decisions included the high turnover                        ‘main’ destinations include Ireland, India,
rate, poor infrastructure facility, unfriendly                       Israel, Canada, Philippines and South
privacy laws etc. Apple felt that it could do                        Africa. The study identifies Argentina,
business more efficiently elsewhere, like in                         China, the Czech Republic, Ukraine, Russia,
Srilanka, Ireland or Philippines.                                    Poland, Mexico and Pakistan as ‘upcoming’
                                                                     destinations. The ‘others’ category include
                                                                     countries such as Chile, Venezuela,
                                                                     Thailand, South Korea, Malaysia, Vietnam,
                                                                     Singapore and Romania. Among all this, the
5
  Manjeet Kripalani and Peter Burrows( 2006), Why Apple Logged out
of India , BusinessWeek, 15th June 2006
                                                                     6
                                                                         http://www.outsource2philippines.com/news/091905.asp



                                                                                                                                2
study says that China is emerging as a strong
contender. (The study compares these
countries on parameters such as total size,
average IT employee costs, total workforce,
number of quality certifications, main clients
and main positives or negatives.) The study
states that Ireland is the largest IT services
outsourcing destination in the world
followed by India. Philippines is India’s
closest competitor in terms of low average
IT employee costs7. Looking at the business
model of BPOs, the main strategy that
companies are depending on is of the “Cost
Advantage”. The business model is a “Cost
Centric Model” In the future, the cost
advantage can be reduced by various other
factors in addition to an increase in the                           Fig 1.1
standard of living of Indians. Indian salaries
have increased by leaps and bounds. A study
done by Hay Group, United Kingdom
reveals that as on August 2006 the highest-
paid senior managers in the world are from
India.8 A study by ECA International says
that India has the seen the highest pay hikes
in the world in 20079 This will pose a real
challenge for BPO units operating in India
as other destinations will be much more
lucrative.

Fig 1.1 gives an idea on the ease of doing
business in India. World bank surveyed 178
countries and the data shown in the Fig 1.1
are only the key developing economy
countries. The lower the ranking, the easier
it is to do business in the respective country.
India ranks 177th in enforcing contracts,
which is very crucial for BPO business , and
is placed 134th in dealing with licenses, 111th
in starting a business, which are vital
parameters for BPO operations. Taking
global perspective into considerations these
factors pose a real challenge for BPO
operations in India.

7
   Rajas Kelkar(2002), “India, Ireland Turn Outsourcing Hubs” The
Economic Times,20th December 2002, p1.
8
  http://www.dnaindia.com/report.asp?NewsID=1046984
9
  http://nitawriter.wordpress.com/2007/02/07/pay-hikes-
highest-in-india/



                                                                              3
In the Indian constitution, there are 45
Central Acts and 16 associated rules which
deal directly with labour10. Arguably, the
law which has the greatest impact on
business is Chapter 5B of the 1947
Industrial Disputes Act which bars
companies with more than 100 employees
from firing workers without receiving
permission from the state government. It is
this law which underpins India’s very high
score of 70 on the World Bank’s “difficulty
of firing” index (which assumes full
compliance with the relevant laws), and is
the highest among large developing
economies (Fig 1.2). Also the ranking for
rigidity of employment and firing costs are
on the higher side when compared to
countries like China, Brazil Malaysia. The       Fig 1.3
lower the ranking, the better it is to do
business in the respective country and these
factors are for sure challenges for the Indian
BPO units.

Another area of concern is India’s “average
years of schooling” statistic, given in the
cross country comparison of education
profile by World Bank. India ranks lowest in
the group of countries, (as shown in Fig
1.3). Countries like Philippines, Thailand
and China are way ahead in comparison to
India. In comparison to other competitor
countries in the BPO arena, the youth
literacy is low in India, this also poses a
major challenge for Indian BPO units.




                                                 Fig 1.4




10
     Indian Constitution



                                                           4
The government has extended the tax                          needed by FY12 to upgrade the country’s
concessions (under Section 10A of the                        infrastructure13, and expects about 30% to
Income Tax Act) to March 2010, which can                     be financed by the private sector – a share
make the IT and ITES/BPO companies                           which is looking increasingly feasible. K.V.
enjoy benefits of the Software Technology                    Kamath, CEO of ICICI Bank, India’s
Parks of India (STPI) scheme for another                     biggest private lender, projected in April
year11. The scheme was to expire in March                    2007 that Indian private companies will
2009 under the sunset clause provided in the                 invest US$500bn over the coming three
scheme. On an average, IT and ITES/BPO                       years, with about US$300bn of this
companies would get a revenue benefit of at                  earmarked       for     infrastructure   and
least 5-7% — on the effective tax rate —                     infrastructure-related projects. This money
because of this extension. Normally,                         earmarked       for     infrastructure   and
companies have about 50% business located                    infrastructure-related projects has to be
in technology parks, export revenue from                     increased and government should provide
which is fully tax-exempt. After 2010, the                   tax holidays for private sector who invest in
tax rates would be one of a major constrain                  infrastructure and related projects.
in achieving global competitive advantage,
as tax will have its role in sullying the image              Investment in Education
of India in being a low cost player. The                     The budget raised the total expenditure on
World       Economic         Forums       global             education by 34.2% to INR 324cr14 This is
competitiveness report FY07 (shown in Fig                    good but not sufficient. This level should
1.4) gives the details on bottle necks on                    rise to at least 45.0%. A study published in
doing business in India. This report places                  2006 by India’s National Association of
infrastructure as one of the major problem of                Software      and     Services     Companies
doing business in India followed by                          (Nasscom) suggested that, of the 3 million
government       bureaucracy       and     labor             students graduating from Indian universities
regulations.                                                 each year, only 10-15% of general college
                                                             graduates and just 25% of engineering
                                                             graduates are considered suitable for
Strategies to be followed by BPO units in                    employment in the offshore IT and ITES
India for achieving Global Competitive                       /BPO      industry15.       The     projected
Advantage                                                    consequence of this is a shortfall of 500,000
                                                             professionals by 2010. Commenting on the
Invest in Improving Infrastructure                           study, Nasscom president Kiran Karnik
According to Dr Raghuram Rajan, former                       reported that, our education system is not
Director of Research at the IMF poor                         producing enough people with the skill-sets
infrastructure will lead to increases in costs               our economy needs. This could seriously
and this will make low-margin and labour-                    stymie India’s economic growth16.
intensive industries ( like the BPOs) to be
uncompetitive.12 The Indian Government
                                                             13
Planning Commission has just released a                        ‘Projections of Investment in Infrastructure during the
                                                             Eleventh Plan’ a consultation paper by the Planning
consultation     paper      projecting    that               Commission of the Government of India, 24 Sep. 2007.
investment of about US$492bn will be                         14                                   st
                                                                Union Budget tabled on March 31 2007 by Mr. P
                                                             Chidambaram
                                                             15
11                                                              Globalisation Of Engineering Services – The Next Growth
http://economictimes.indiatimes.com/Infotech/Govt_extends_   Frontier For India Nasscom/Booz Allen Hamilton, August
tax_concessions_on_STPI_by_a_year/rssarticleshow/29969       2006.
                                                             16
60.cms                                                          Jo Johnson “Engaging India: Demographic Dividend Or
12
   Dr Raghuram G Rajan ( 2006) “From Paternalistic To        Disaster?” FT.com, 15 November 2006.
Enabling” Finance & Development, Sept 2006, Vol 43, No3



                                                                                                                         5
Revamp Labor Law & Cyber Law                                    characteristic of trust is that, the bond or
India’s labor laws protect a minority of                        trust grows in strength the more it is utilized,
workers in the organized sector at the                          i.e., each success based on trust raises the
expense of the majority, a paradoxical                          level of trust that facilitates even greater
situation for a poor country with surplus                       levels of confidence in the relationship19.
unskilled labor specializing in skill- and                      The above observations clearly state that as
capital-intensive sectors. However, the                         the service provider provides more and more
impact of these laws has recently                               value for the client through various means,
diminished, as enforcement has slackened in                     trust grows and hence competitive
some states. The lack of flexibility in labor                   advantage is built and maintained.
can hurt BPO business. The amendments in
IT Act has to be made and all crime related
                                                                Bring in Tax Reforms
to cyber space must be considered and
treated at par with criminal and sexual                         The BPO industry is facing supply-side
crimes. The severity of punishment of                           challenges as demand for engineers
punishment can to some extent prevent                           continues to rise and average quality intake
cyber crimes to happen. The next best way                       falls. Additionally, the macro-environment
to deal with the current situation is to create                 is not very conducive: rupee appreciation
cyber court, similar to the consumer courts                     continues to erode revenue and margin.
that have been created to protect the rights                    Moreover, BPO companies may face
of consumer. The creation of cyber courts                       pressure on volume growth due to the US
can enable speedy punishment possible.                          slowdown which is led by a slowing of
                                                                Banking and Financial Services sector. In
Build and use TRUST as a shield to                              this situation Tax is another factor that could
overcome most of the threats                                    hurt BPO units as the tax benefits extended
The most important and significant factor to                    are to end in FY2010. Under this scenario,
overcome most of the threats that Indian                        the government should reform the policies
BPO is facing from the global competition is                    related to taxation and must extend the tax
to build TRUST. Some of the Indian                              holiday to IT and ITES/BPO units at least by
bureaucrats must be transform themselves to                     another 5 years, i.e. to FY 2015
show the world that they are trust worthy. In
a networked business environment, trust                         Moving from a “Cost Centric Model” to a
plays a crucial factor in the continuation of                   “Knowledge Centric Model”
businesses relationships. As uncertainty
towards future is very high, trust between                      Unlike conventional BPO where the focus is
partners becomes imperative. Trust has been                     on process expertise, in KPO the focus is on
defined as “one party’s willingness to be                       knowledge expertise. The difference lies in
vulnerable to another party” 17 and as “the                     domain specialization. A BPO employee,
mutual confidence that no party to an                           generally, does not require knowledge of a
exchange       will     exploit     another’s                   special field. For instance, all that a
                18                                              customer cares executive at a BPO needs is
vulnerabilities” .    The most important
                                                                knowledge of English, ability to articulate
17
                                                                well and basic computer skills. On the other
  Mishra, A.K ( 1996) , “Organizational Responses to Crisis:
The Centrality of Trust,” in Krame                              hand, an employee of a KPO that is into
r R M and Tyler, T R (eds), Trust in Organizations: Frontiers
                                                                equity or financial analysis should possess
of Theory and Research, London: Sage, 261-287, 1996
18                                                              19
  Barney, J.B and Hansen, M. H,(1994) “Trustworthiness as         Abhoy K Ojha, (2002 )“Trust as a Foundation for Strategic
a Source of Competitive Advantage,” Strategic Management        Alliances in Global Software Outsourcing,” Vikalpa, , Vol. 27,
Journal, vol. 15, 175-190. 1994                                 no. 2, April-June, 3-12, 2002



                                                                                                                            6
high-end knowledge of accounts and                aerospace industries, and animation and
finance. He or She should be a Master of          graphics in the entertainment sector.
Business Administration in Finance or
Charted Accountant. Hence KPO is                  The government should spend on setting up
knowledge-driven, BPO is process-driven;          schools of higher education and research
KPO needs specialized expertise, BPO can          laboratories to create the talent pool,
do with plain graduates or even                   required to migrate from the cost centric
undergraduates who have just good                 BPO model to knowledge centric KPO
command over spoken English. KPO                  model. The government must also encourage
employees require not just domain                 and allow the private players to ensure that
specialization, but also good knowledge of        this transion happens at the earliest.
English and Information Technology. A
Charted Accountant may be very good at            Conclusion
accounts but if he is not proficient in English
or lacks Information Technology skills, he is     In tandem with its bustling economy, the
unfit to deliver services to an outsourcing       India is currently preferred for setting up
company. People with all three qualities-         BPO units by global companies. The
domain specialization, English proficiency        changing        international   competitive
and Information Technology skills are the         environment is posing challenges for the
best fit to take up a job in KPO. The areas       numero-uno position that India holds. If the
covered under KPO can include healthcare -        strategies mentioned above are adopted, it
pharmaceuticals and biotechnology, legal          will be possible to watch Indian BPO units
support - intellectual property research,         to achieve global competitive advantage and
design and development for automotive and         retain       its        current    position.




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