Indian BPOs – Waking up to the Philippines opportunity

1. How has the global economic downturn, discussed in the opening profile and throughout this chapter, impacted jobs outsourcing in the BPO industry?

Starting out as a mortgage crises in the United States the economic crisis spread globally and lead to a worldwide recession. In such a difficult time, companies need to reduce costs and improve their performance in order to remain competitive on the market. Obviously, Outsourcing provides many benefits, such as improvement of process performance, reduction of fixed costs, increased flexibility, greater focus on core competencies and strategic business operations. The BPO service market presents growth estimated in 10 to 20% in the period 2008-2009, particularly in the last two quarters of 2008 and first quarters of 2009.
However, in the short term, companies might not consider outsourcing as a solution in a financial crisis due to upfront investment and lack of managerial capabilities. In the first place, companies’ primary goal is to survive. They won’t start new projects. Thus, in times of crisis, company prefer cost reduction and investment delays rather than BPO and Offshoring. Nevertheless, in the long term, the economic crisis would result in an increase in demand for BPO services once the economy starts recovering. Furthermore, delay of other projects in times of crisis and recession also contributes to the expansion in the BPO industry. Companies will want to achieve more flexible organization structures in order to be better prepared to deal with future economic crises. This trend will result in a higher employment in the BPO industry. The IT and BPO outsourcing boom created a huge impact in the Indian economy and it increased the IT salary, cost of living, real-estate price and eventually it increased the outsource cost for many companies.

In the case of India, the economic downturn has a negative effect on the BPO market. The crisis has on the one hand, weakened the dollar but on the other hand, strengthened the rupee, which made it harder for firms to be profitable in India. Additionally, India’s growing infrastructure and transportation costs are potential threats to BPO margins. All these make it more costly to do business in India than in other countries like Singapore, China, the Philippines, and Malaysia. Especially the Philippines emerged to a popular outsourcing country with excellent infrastructure, favorable tax regulations, an Americanized culture and language due to 50 years of colonial influence.

To sum up, the economic downturn has 2 major impacts on the BPO market. First, in the long term, the economic downturn will result in a growth of the BPO industry. Second, the economic recession results in a reshape of the global Offshore market share. India, which represents half of the total global Offshore market is gradually shrinking where as other countries, especially the Philippines become a more popular outsourcing target.

2. Referring to this chapter and this case, discuss the general trends in the globalization of human capital.

Before you can give an accurate answer to this task you have to define “Human Capital”.
This is a stock of competencies, knowledge, social and personality attributes which you need to perform labor so to get a profit out of it and which is necessary to be competitive in a global world.
In this case study you can often read parts like: “… educated, young and English speaking population and the cheaper bandwidth were the key factors behind this growth”, or “…an abundant, skilled and English speaking manpower…” and “… had a young educated workforce…” So it seems that human capital is a basic and a necessity for multinational companies (MNCs) to invest or outsource in developing countries such as India and Philippines. Especially since the third sector of economy is the most important, education is combined with it. Furthermore time is a key factor and if a country has not a good educated workforce it is not attractive to MNCs also when there are low labor costs. So there must be a good combination of both: low costs and high qualified workers.
All in all you can say human capital especially in developing countries such as India or Philippines brings profit for both sides: the country and the MNCs which invest in the countries and can be more competitive in the global market because they found there a specialized workforce and low cost in comparison to the western countries.

3. What are the effects of the Indian government policies on the Indian BPO industry and on MNC decisions regarding locations for outsourcing jobs?

Tax

In March 2011 expired the software technology parks of India (STPI). STPI was a ”tax holiday” in India, that made it possible for foreign companies to be excluded from the taxation, for they’re income on exports. From 2012 foreign companies have to start paying taxes, with a minimum tax rate at 18,5 percent. Under the tax holiday they paid only around 7 percent tax.

Education

India has a literacy rate of only 66%. And also those who go out of the university ready to work need to be trained and transported. The cost for both training expenses and the salaries has had a rise between 10-15 percent the last five years.

Infrastructure

The infrastructure in India is poor. The roads are not so good; you can end up being stuck in traffic. The Internet is slow and expensive and the electricity is unstable. It is not unusual to experience power outage. This leads to unpredictable conditions for the BPO`s in India.

The effects of the policies on decisions regarding locations for MNC`s

These Indian government policies make it less attractive for MNC`s to use India as an outsourcing country. After the salary rise and cost rise, expiration of tax holiday and the rupee got strengthen, it does not exist big advantages using India. This makes other countries attractive for outsourcing also, and leads to a weakening of India’s position as the biggest outsourcing country. Philippines has emerged as an BPO country because of the high literacy rate, a large workforce who is fluent in English with an neutral accent, good infrastructure, good program from the government who train the workers for BPO and the benefits of them being a colony state of the US and therefore always had a good contact with the US and understands the culture.

4. How does this case highlight the threats and opportunities facing global companies in developing their strategies?

When MNCs want to invest in developing countries or want to outsource some parts of their enterprises in states such as India or the Philippines they are faced with a lot of factors which can be positive or negative for their future.
In this case study we can find opportunities which make it attractive for MNCs to come in developing countries, for example: to get advantages out of the high-qualified workforce or take new experiences and knowledge from them according to the IT service sector in India which is probably one of the best in the world.
Furthermore you can find low labor and social costs in such countries and a good basic infrastructure. Low taxation or even taxation holidays are key factors for developing or new developed countries to attract MNCs. Besides you can find a high productivity of the workers, too. An another important point is the geographical location where MNCs can take benefit from when they want to operate in strong growing markets, in this case South-East Asia. Similarities to the western world which are often caused by the former colonization make it often easier for huge companies to gaining a foothold.
On the other hand there are also threats which are also mentioned in this case study. Here the suddenly strength of a currency can affect the profitability of international players. Changes in the taxation policies bring MNCs under pressure because their advantages to their competitors get lost. The growing costs of infrastructure and transportation, here with the example in India, bring companies in tricky situations because they are not competitive anymore and then they are forced to react as the statement of Pramod Bhasin at the end of the case study highlight that.
All in all it is important to weigh both sides before investing or outsourcing in low cost countries. This case study also shows both sides and how quickly the former advantages can develop the detriment for companies in a tough global market.

Sources:

• Case study
• Opening Profile: Economic Crisis Spreads Through Financial Globalization
• http://businesstoday.intoday.in/story/bpo-future-india/1/22946.html
• http://www.chrmglobal.com/Articles/424/1/BPO-Policies--Emerging-Trends.html
• http://www.ukessays.com/dissertations/marketing/business-process-outsourcing.php
• http://www.pillsburylaw.com/sitefiles/publications/globalsourcingalertindiabudget2011expirationoftaxholidaysapplicabletoindianoffshoreproviders030711_final.pdf
• www.wikipedia.org