Skip to main content

New research counters anti-outsourcing lobby

At last, there is some research to counter the huge negative press generated by the "3.3 million US jobs to be lost due to offshoring" report put out by Forrestor Research.

The Indian software industry and BPO industry association, Nassom, in combination with BPO firm Evalueserve, has published a report--backed with numbers--that makes the case that outsourcing (including offshoring) benefits the US economy in the long-term.

Here are some extracts:

Outsourcing is being understood today as a win-win partnership between Indian and US companies. Both are expected to benefit, with the gains spilling over to the overall economies and domestic markets of the two nations. The Evalueserve-NASSCOM research projects the following benefits for the US economy as a result of outsourcing:

* The US economy can expect net savings of billions of dollars due to offshoring over the period 2002-2010. This is over and above the positive impact on the bottom-lines of companies
* For every US$ 100 of call center work offshored by US firms, US$ 145 is invested back into the US economy in the form of repatriated profits, increased sales of telecom equipment and cost savings.
* Similarly, the amount invested back into the US economy (for every US$100 of work) is US$133 for IT services, and US$ 142 for high end knowledge services like equity research, underwriting, tax preparation and risk management
* Offshoring of IT services has enabled US workers to move to specialized and creative roles while moving process oriented programming to offshore locations. The proportion of specialists in the US IT workforce increased from 38 percent in 1983 to 74 percent in 2002
* Utilization of offshore facilities results in the growth of the local economies and an increase in the disposable income, leading to the expansion of the global market for US goods and services. For instance, in India, the proportion of the consuming class in the overall population expanded from 14 percent to 30 percent in the 1990s and is set to touch 40 percent in 2006-07. The Indian retail sector is expected to expand from US$ 180 billion in 2003 to US$ 300 billion in 2010
* Further liberalization of the Indian economy will provide increased access for US companies to Indian markets.
* India's large middle class will open up a major opportunity for US companies
* The US economy will continue to benefit from the Indian community in the country. Indians are the most advanced minority group in the US, with IT professionals contributing over US$ 500 million to US Social Security, $500 million to income tax and spending over US$1.8 billion during visits

Click Here to read the full report at the Nasscom web site.

Other articles & resources in defense of offshoring/outsourcing

Why Offshoring Is Good for America

"Focusing on job losses in America without recognising the corresponding job gains is like managing a bank account by counting the withdrawals, and not the deposits; disregarding the improvements in the quality of jobs is like ignoring the interest payments," says Max P. Michaels, Co-founder of CRYZTAL Capital. "Indian business and political leaders should not get embroiled in these debates, lest India become the lightning rod that bears the brunt of the fury of the US workers. Let the invisible hand of the market make its way. Let US companies and their shareholders enlighten their consumers and workers on the merits of cross-border outsourcing," he advises in a column appearing in Business Today magazine.

Click Here to read the full column. (Subscription required).

The Real economics of offshoring: McKinsey

"Any move to slow down the job migration could actually hurt the United States," says a research report from global consulting firm McKinsey. "Sending US jobs offshore to cheaper labor markets generates heated political debate. Yet offshoring benefits not only individual US companies and their foreign partners but also the US economy, primarily by freeing up funds to create higher-value jobs," the report says

Focusing the offshoring debate on job losses misses the most important point: Offshoring creates value for the US economy by creating value for US companies and freeing US resources for activities with more value added, McKinsey says.

McKinsey says offshoring creates value in four ways:

Cost savings
For every dollar of spending on business services that moves offshore, US companies save 58 cents, mainly in wages. Offshore workers, who enjoy higher-than-usual wages (in their countries), tend to be more motivated compared to US workers who perform the same role. "Reduced costs are by far the greatest source of value creation for the US economy," the report says.

New revenue
In order to provide offshore services, Indian outsourcing companies buy equipment and services--from computers and telecommunications equipment to legal, financial, and marketing expertise--from US companies. McKinsey estimates that for every dollar of corporate spending that moves offshore, suppliers of offshore services buy an additional 5 cents worth of goods and services in the US. Exports from the United States to India stood at $4.1 billion in 2002, compared with less than $2.5 billion in 1990.

Repatriated earnings
Many Indian offshore service providers are in fact US companies that repatriate earnings. Such companies generate 30% of the revenues of the Indian offshore industry. Thus an additional 4 cents of every dollar spent on offshoring creates value for the US.

Redeployed labor
Offshoring also brings indirect benefits to the US economy: Capital savings can be invested to create new jobs. "Indeed, this is exactly what has happened over the past two decades as manufacturing jobs moved offshore," McKinsey says. "As jobs in call centers, back-office operations and repetitive IT functions go offshore, opportunities to train labor and invest capital to generate opportunities in higher-value-added occupations such as research and design will appear."

Net-Net, offshoring, far from being bad for the US, creates net value for the economy. "It directly recaptures 67 cents of every dollar of spending that goes abroad and indirectly might capture an additional 45 to 47 cents--producing a net gain of 12 cents to 14 cents for every dollar of costs moved offshore," McKinsey says.

The report acknowledges that the total possible wealth creation does not ease the plight of people who lose their jobs or find lower-wage ones. "These issues must be addressed. Training programs and generous severance packages, perhaps accompanied by innovative insurance programs, are among the measures that could mitigate the effects of the transition without great cost to the economy," McKinsey says.

The key message is that while many people will undoubtedly suffer short-term disruption, it should be set against the consequences of resisting change: If US companies can't move work abroad, they will become less competitive--weakening the economy and endangering more jobs--and also miss the chance to raise their productivity by focusing on the creation of jobs with higher value added. "The openness of the US economy and its inherent flexibility--particularly that of its labor market--are two of its great recognized strengths. The current danger is that public policy will make its economy less flexible. To do so would endanger the economic well-being of the US."

Click Here to read the full version of McKinsey's defense of offshore outsourcing.

Click Here to view the chart describing the McKinsey's numbers.

An argument for outsourcing

In a recent article, E5 Systems' CEO Gordon Brooks says that while limits on outsourcing may protect some U.S. jobs in the short term, the bans would end up doing more harm than good.

Click Here to read the full article.

Popular posts from this blog

VC Interview: Shailendra Singh of Sequoia Capital India

In a recent interview to Venture Intelligence, Shailendra Singh discussed some of the firm’s newer investments in the early stage segment including in the online payments space, the progress at a few existing portfolio companies and the active role the firm is playing in helping its portfolio companies scale and succeed in India and globally. Prior to joining the firm in 2006, Singh was a strategy consultant at Bain & Company in New York and before that, an entrepreneur in the digital media industry. Venture Intelligence: How does Sequoia go about identifying potential early stage investments in India? Is there anything different you are doing today than, say, a couple of years back? Shailendra Singh: There is a lot more focus on technology investing and early stage investing. In general, as you might remember a few years ago, we were doing primarily growth investing but in the past 18-odd months, we have had a very strong focus on early stage and that’s continuing. In terms

ChrysCapital, Motilal Oswal PE & Sequoia named PE-VC Firms of the Decade

Press Release ChrysCapital, Motilal Oswal Private Equity and Sequoia Capital India have been named the top Private Equity & Venture Capital investors in India during the last decade, as part of Venture Intelligence’s APEX Awards. The Venture Intelligence “Awards for Private Equity Excellence” (APEX) is dedicated to celebrating the best that the Indian Private Equity & Venture Capital industry has to offer.  While ChrysCapital won the “Private Equity Investor of the Decade” award, Motilal Oswal Private Equity was feted as India’s “Growth Capital Investor of the Decade”. The Indian arm of the storied Silicon Valley VC firm, Sequoia Capital, was named the country’s “Venture Capital Investor of the Decade”. The APEX Awardees are selected based on both Self Nomination by the participating PE-VC firms as well as "crowd sourced" nominations and voting from the Limited Partner, PE-VC and advisory communities. (The main criteria were Exit Track Record, New Fund Raises & Fo

Ambit tops League Table for Transaction Advisors to Private Equity deals in 2019

Ambit Corporate Finance topped the Venture Intelligence League Table for Transaction Advisor to Private Equity Transactions for the year 2019. Ambit advised PE deals worth $2.4 Billion (across 4 qualifying transactions) during the period. Citi ($1.1 Billion across 2 deals) and  Avendus  ($969 million across 12 deals) took the second and third spot. Edelweiss Financial Services ($758 million across 9 deals) and  PwC  ($708 million across 15 deals) completed the top five in 2019.  The  Venture Intelligence League Tables , the first such initiative exclusively tracking transactions involving India-based companies, are based on value of PE and M&A transactions advised by Financial and Legal Advisory firms. Ambit Corporate Finance advised the $1.9 Billion buyout of Pipeline Infrastructure from Reliance Industries   by Brookfield Asset Management  and the IFC and I Squared Capital-backed   Cube Highways' acquisition of Delhi-Agra Toll Road from Reliance Infrastructu

Jio deals help PE investments climb 12% in H1'20 to $18.8 B

Press Release With Reliance Industries' communications unit Jio Platforms attracting 51% of the investment value, Private Equity-Venture Capital (PE-VC) investments in India rose 12% during the first 6 months of 2020 to $18.8 Billion (across 341 deals), shows data from  Venture Intelligence , a research service focused on private company financials, transactions and their valuations. Investments totaling over $9.5 Billion in Jio by a troop of global private equity firms, following social media giant Facebook's $5.7 Billion mid April investment in the company, helped overall PE-VC investments better the $16.8 Billion (across 503 transactions) invested during the same period in 2019. (Note: These figures include Venture Capital investments, but exclude PE investments in Real Estate).   Jio Platforms' $9.5 Billion Private Equity haul (excluding Facebook’s strategic investment) was led by Middle Eastern and American investors with KKR, Saudi Arabia's Public Invest

Inventus, Sixth Sense, Blume & Norwest win Apex'20 Venture Capital Awards

Inventus Capital Partners, Sixth Sense Ventures, Blume Ventures and Norwest Venture Partners were voted the top Venture Capital investors in India during 2019. The Venture Intelligence “Awards for Private Equity Excellence” (APEX) is dedicated to celebrating the best that the Indian Private Equity & Venture Capital industry has to offer. Other 2019 winners in the VC segment included  Axilor Ventures which was voted   the  Accelerator of the Year for the second year running, 3one4 Capital (VC Fund Raise of the Year) and Innoven Capital (Venture Debt firm of the Year). The APEX Awardees are selected based on both Self Nomination by the participating PE-VC firms as well as "crowd sourced" nominations and voting from the Limited Partner, PE-VC and advisory communities. (The main criteria are Exit Track Record, New Fund Raises & Follow-on Funding Rounds for Portfolio Companies).    " It is an honour to be recognised by entrepreneurs and investors as