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A survey of outsourcing November 13th 2004

A world of work

The global deployment of work has its critics, but it holds hugeopportunities for rich and poor countries alike, says Ben Edwards

1990s are now blamed for the relentlessexport of manufacturing jobs from rich topoorer countries. Brillian’s use of Indianengineers is no longer seen as a sign of theadmirable �exibility of a fast-growing tech�rm, but as a depressing commentary onthe West’s declining competitiveness inengineering skills. The �bre-optic cablerunning between America and India thatused to be hailed as futuristic transport forthe digital economy is now seen as a giantpipe down which jobs are disappearing asfast as America’s greedy and unpatrioticbosses can shovel them.

These anxieties have crystallised into aperceived threat called �outsourcing�, ashorthand for the process by which goodjobs in America, Britain or Germany be-come much lower-paying jobs in India,China or Mexico. Politicians decry out-sourcing and the bosses they blame for-perpetrating it. The same media thatgreeted the rise of the new economy in the1990s now mourn the jobs that suppos-edly migrate from rich countries to less de-veloped ones.

Forrester, an American research �rm,has estimated these future casualtiesdown to the last poor soul. By 2015, Amer-ica is expected to have lost 74,642 legal jobsto poorer countries, and Europe will have118,712 fewer computer professionals. AsAmar Bhide of Columbia University com-ments drily, �Graphs from a few years agothat used to predict explosive growth in e-

Men and machinesTechnology and economics have already revo-lutionised manufacturing. White-collar workwill be next. Page 3

A desperate embraceCompanies do not always outsource for thebest of reasons. Page 5

The place to beIn the global market for white-collar work, India rules supreme. But others are lining up.Page 6

Faster, cheaper, betterIndia’s emerging IT �rms are trying to beattheir western rivals on their home turf.Page 8

Into the unknownWhere will the jobs of the future come from?Page 10

Sink or SchwinnSourcing from low-cost countries works onlyin open and �exible labour markets. Europe’sare neither. Page 12

A world of opportunityWhy the protectionists are wrong. Page 13

The Economist November 13th 2004 A survey of outsourcing 1

1

A world of work

ON A technology campus o� the bustleof the Hosur Road in Electronics City,

Bangalore, engineers are �ddling with theinnards of a 65-inch television, destinedfor American shops in 2006. The bo�ns inthe white lab coats work for Wipro, an In-dian technology company. Wipro has a re-search-and-development contract with a�rm called Brillian, an American companybased half a world away in Tempe, Ari-zona. Brillian’s expertise is in display tech-nology. Wipro’s job is to put together thebits that will turn Brillian’s technologyinto a top-end TV.

Wipro is sourcing the television’s bitsand pieces from companies in America, Ja-pan, Taiwan and South Korea. After designand testing, assembly will pass to a spe-cialist contract manufacturer, such as Flex-tronics or Solectron. The buyer of the �n-ished television might use a credit cardadministered from Kuala Lumpur, Malay-sia. After-sales service might be providedby a polite young Indian call-centre agent,trained in stress management and taughthow to aspirate her Ps the American way.

A few years ago, the combination oftechnology and management know-howthat makes this global network of relation-ships possible would have been cele-brated as a wonder of the new economy.Today, the reaction tends to be less exuber-ant. The same forces of globalisation thatpushed Flextronics into China and itsshare price into the stratosphere in the

Also in this section

www.economist.com/audio

An audio interview with the author is at

www.economist.com/surveys

A list of sources can be found online

www.economist.com/outsourcing

Past articles on outsourcing are at

2 A survey of outsourcing The Economist November 13th 2004

2 commerce have apparently been re-la-belled to show hyperbolic increases in themigration of professional jobs.�

Amid all this clamour, some of thevocabulary has become mixed up. Prop-erly speaking, outsourcing means thatcompanies hand work they used to per-form in-house to outside �rms. For exam-ple, Brillian is outsourcing the manufac-ture of its televisions to Flextronics orSolectron. Where that work should bedone involves a separate decision. Flex-tronics might assemble bits of its televi-sions in Asia but put together the �nal pro-ducts close to its customers in America. If itdoes, it will have moved part of its manu-facturing �o�shore�. Not all o�shore pro-duction is outsourced, however: Brillianmight one day open its own �captive� re-search-and-development facility in Banga-lore, for instance.

What agitates worriers in the West isthe movement of work abroad, regardlessof whether it is then outsourced or per-formed in-house. But the reality is morecomplicated than they acknowledge.

A well-established modelThe age of mass mechanisation beganwith the rise of large, integrated assemblylines, such as the one Henry Ford built in1913 at Dearborn, Michigan, to make theModel T. Over the course of the 20th cen-tury, companies reorganised industrialproduction into ever more intricate layersof designers, subcontractors, assemblersand logistics specialists, but by and largecompanies have mostly continued to man-ufacture close to where their goods areconsumed. They have then grown interna-tionally by producing overseas, for newcustomers, the same goods they produceand sell to their customers at home: 87% offoreign direct investment is made in searchof local markets, according to McKinsey, aconsultancy. Products and brands have be-come global, but production has not.

Conversely, white-collar work contin-ues to be produced in the same way thatFord produced the Model T: at home andin-house. Bruce Harreld, the head of strat-egy at IBM, reckons that the world’s com-panies between them spend about $19 tril-lion each year on sales, general andadministrative expenses. Only $1.4 tril-lion-worth of this, says Mr Harreld, hasbeen outsourced to other �rms.

Brillian obtains both the goods and theservices it needs to put together its televi-sions from outsiders all over the world,which means each bit of work goes towhatever company or country is best

suited to it. This opens up huge opportuni-ties. Diana Farrell, the head of McKinsey’sGlobal Institute, thinks that by reorganis-ing production intelligently, a multinat-ional �rm can hope to lower its costs by asmuch as 50-70%.

Such reorganisation takes two mainforms. First, thanks to the spread of the in-ternet, along with cheap and abundanttelecommunications bandwidth, busi-nesses are able to hand over more white-collar work to specialist outside suppliers,in the same way as manufacturers are do-ing already. A growing number of special-ists o�er, say, corporate human-resourcesservices, credit-card processing, debt col-lection or information-technology work.

Second, as transport costs fall, globali-sation is beginning to separate the geogra-phy of production and consumption, with�rms producing goods and services in onecountry and shipping them to their cus-tomers in another. Over the past ten years,countries such as Mexico, Brazil, the CzechRepublic and, most notably, China haveemerged as important manufacturinghubs for televisions, cars, computers andother goods which are then consumed inAmerica, Japan and Europe. Such o�shoreproduction is central to the strategies ofsome of the world’s most powerful busi-nesses, including Wal-Mart and Dell.

Over the next ten years, Russia, Chinaand particularly India will emerge as im-portant hubs for producing services such

as software engineering, insurance under-writing and market research. These ser-vices will be consumed at the other end ofa �bre-optic cable in America, Japan andEurope. Just as Dell and Wal-Mart are ob-taining manufactured goods from low-costcountries, companies such as Wipro, TCS

and Infosys, for instance, are already pro-viding IT services from low-cost India.

As businesses take advantage of declin-ing shipping costs, abundant and cheaptelecommunications bandwidth and theopen standards of the internet, the reorga-nisation of work in each of these areas islikely to advance rapidly. IBM’s �gures sug-gest that companies have so far outsourcedless than 8% of their administrative o�cework. Privately, some big companies saythat they could outsource half or more ofall the work they currently do in-house.

Rich-country manufacturers have al-ready invested hundreds of billions of dol-lars in building factories in China to makeclothes, toys, computers and consumergoods. In the next few years, they may in-vest hundreds of billions more to shift theproduction of cars, chemicals, plastics,medical equipment and industrial goods.Yet the globalisation of white-collar workhas only just begun.

A forthcoming study by McKinseylooks at possible shifts in global employ-ment patterns in various service indus-tries, including software engineering,banking and IT services. Between them,these three industries employ more than20m workers worldwide. The supply of ITservices is the most global. Already, 16% ofall the work done by the world’s IT-ser-vices industry is carried out remotely,away from where these services are con-sumed, says McKinsey. In the software in-dustry the proportion is 6%. The supply ofbanking services is the least global, withless than 1% delivered remotely.

McKinsey reckons that in each of theseindustries, perhaps as much as half of thework could be moved abroad. But even amuch smaller volume would represent ahuge shift in the way that work in theseindustries is organised. There may be justas much potential in insurance, market re-search, legal services and other industries.

Outsourcing inspires more fear aboutjobs than hope about growth. But theagents of change are the same as those thatbrought about the 1990s boom. New-economy communications and computertechnologies are combining with globali-sation to bring down costs, lift pro�ts andboost growth. This survey will try to re-store some of the hope. 7

Distance no object

Source: McKinsey Global Institute

*Revenue used as a proxy for prices; adjusted for inflation†January figures ‡International leased line for India;

long-distance domestic leased line in the US

Transport costsRevenue per ton mile, cents*

Telecom costs$’000 per year† for two Mbps fibre leased line, half circuit‡

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1980 85 90 95 99

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THE industrial complex that Henry Fordbuilt on the banks of the Rouge River in

Dearborn, Michigan, was a wonder of thenew age of mass production. Into one endof the plant went iron ore, coal, sand andrubber, brought in by railway and on GreatLakes steamships. Out of the other endrolled Model T Fords. By 1927, there hadbeen 15m of them. At that stage, Dearbornwas handling every step of the car’s pro-duction, from rolling steel to makingsprings, axles and car bodies, and castingengine blocks and cylinder heads. Theplant even had its own glass factory.

Ford built the Dearborn plant aroundthe labour-saving properties of machines.Automation lowers production costs,which bolsters pro�ts. Companies spendthese pro�ts on improving what they sell,and on building more labour-saving ma-chines. As technology advances, these im-provements make products more com-plex. To the basic design, modern carmakers add heated seats, air conditioning,guidance and entertainment systems,computer chips that regulate engine per-formance, and many other gadgets toplease their customers. It took 700 parts tomake the Model T. Modern cars packmany more into their radios alone.

As industries advance, manufacturersmanage the growing complexity of theirproducts by outsourcing: they share thework of making them with others. This en-ables each company in the production

chain to specialise in part of the compli-cated task. The car industry, for instance,relies on parts companies that make noth-ing but electrical systems, brakes or trans-missions. These parts companies, in turn,depend on the work of other suppliers tomake individual components. At eachlevel of production, outsourcing dividesup growing complexity into more manage-able pieces.

In the o�ce, the tool used to mechanisework is the computer. Computers auto-mate paperwork and hence the �ow of in-formation. Companies that sell informa-tion products, such as banks and insurance�rms, employ computers to automate pro-duction. And all companies use computersto automate the administrative workneeded to maintain their organisations:keeping their books in good order, comply-ing with rules and regulations, recruiting,training and looking after their employees,managing o�ces, dealing with companytravel and so on.

Bells and whistlesLike assembly-line machinery, computerssave labour, bring down costs and raisepro�ts. Banks and insurance companieshave used some of these pro�ts to addbells and whistles to their products, mak-ing them more complex. Banks that usedto provide basic mortgages now sell �xedloans and �oaters, caps, collars, locks andother �nancial exotica to befuddled home-

buyers. Credit-card companies o�er loy-alty programmes, membership rewardsand cash-back deals. Insurance �rms tailorcar and life insurance to �t their customers’appetite for risk.

Corporate administrative work hasalso become more complicated. The de-mands of securities regulators and inves-tors for �nancial information have ex-panded with the capacity of �rms tosupply it. IBM’s annual report for 1964 con-tains a scant half-dozen pages of �nancialinformation; its most recent one includes40 pages of �nancial statements and ac-counting notes. The more services that cor-porate HR departments provide to em-ployees, the more employees expect.Ever-more prescriptive accounting and au-dit rules proliferate as fast as accountingdepartments can automate the work ofcomplying with them.

The spread of computers through com-panies has added a third layer of complex-ity: the task of managing the informationsystems themselves. The work of com-pany IT departments is particularly com-plicated at older and larger �rms that havebought di�erent sorts of computer sys-tems at di�erent times. The core processingsystems of insurance companies, airlinesand banks, for instance, are built on amainframe-computer technology thatcelebrated its 40th anniversary this year.Companies have added extra systems asthey have sold new products, grown

Men and machines

Technology and economics have already revolutionised manufacturing. White-collar work will be next

1


2 abroad or acquired competitors. Most ITdepartments at most large companiesspend most of their time simply �ghting tokeep this tangle of systems going.

In all three areas of white-collar work,companies are struggling to manage grow-ing complexity. The chief reason for the re-cent recession in corporate IT spending isthat the IT industry’s customers are no lon-ger able to absorb new technologies,thinks IBM’s Mr Harreld. Entangled in newproducts and the computer systems thatsupport them, banks cannot even dosomething as basic as ensuring that cus-tomers who asked one department not tosend junk mail do not receive it from an-other. �If a bank was making cars, everytenth car would come out without a steer-ing wheel,� says Myles Wright of Booz Al-len Hamilton, a consultancy.

Just as in manufacturing, the solutionto the growing complexity of white-collarwork is to do less of it in-house. Some com-panies have outsourced the work of theirIT departments, from managing the physi-cal hardware to maintaining and develop-ing business software and managing cor-porate computer networks. Up to half theworld’s biggest companies have out-sourced some IT work, reckons IBM.

As well as outsourcing their businesssystems, some companies are doing thesame with the workers who operate them.This is called business-process outsourc-ing (BPO). First Data Corporation (FDC), forinstance, will handle some or all of the ad-ministrative work involved in running acredit-card business, from dealing withapplications to authorising credit limits,processing transactions, issuing cards andproviding customer service. Few bank cus-tomers will have heard of the company,yet FDC employs nearly 30,000 people,who administer 417m credit-card accountsfor 1,400 card issuers.

Likewise, companies are outsourcingchunks of administrative work and theirsupporting systems. Accounting depart-ments are farming out tasks such as pro-cessing invoices and collecting paymentsfrom debtors. HR departments have shedpayroll work. ADP, a payroll-outsourcingcompany, pays one in six private-sectorworkers in America. Increasingly, big com-panies are handing over entire HR depart-ments and the systems that support themto outside specialists such as Hewitt, Ac-centure and Convergys, says Duncan Har-wood of PricewaterhouseCoopers.

One way for manufacturers to managegrowing complexity is to adopt commonstandards. Carmakers, for instance, have

reworked their manufacturing processesso they can assemble di�erent car modelsfrom the same production �platform�,with several cars sharing a number ofparts. This allows parts companies to spe-cialise more and produce fewer parts inlarger numbers.

Eventually the organisation of carmanufacturing may begin to resemble pro-duction in the consumer-electronics in-dustry, where the adoption of industry-wide standards (along with de facto stan-dards, such as the Intel microprocessor)has enabled suppliers to become highlyspecialised. Companies such as Flextron-ics and Selectron now o�er outsourcedmanufacturing platforms for whole cate-gories of consumer electronics. All thebranded makers have to do is handle thelogistics, badge the goods and send themo� to the shops.

A similar platform-production systemis emerging in white-collar work. A fewpopular business-software packages soldby companies such as SAP, a German soft-ware �rm, and PeopleSoft, an Americanone, are now o�ering standard ways of or-ganising and delivering administrative of-

�ce work. When companies outsource HR

departments, specialists such as Hewittand Accenture add them to their HR-ser-vices production platform. Convergys, forinstance, claims to be the world’s largestoperator of SAP’s HR software. FDC, for itspart, has built a production platform thato�ers credit-card services.

Thanks to the internet’s open stan-dards, extreme specialisation is nowemerging in outsourced business services,just as it did earlier in consumer electron-ics. Next door to a Safeway supermarketon the Edgware Road in London, a groupof British accountants and tax experts hasbuilt a business service called GlobalEx-pense that handles employees’ expensesover the internet. Employees of its cus-tomer companies log on to the GlobalEx-pense website, record their expenses onstandard forms and put their receipts in themail. GlobalExpense checks the receipts,pays the expenses and throws in a few ex-tras such as related tax work and informa-tion on whom the company’s employeesare wining and dining.

This year GlobalExpense will pay out£60m-worth of employee expenses,which probably makes it the biggest ex-pense-payer in Britain. With a large, �exi-ble pool of foreign students in London todraw on, the company says it can handleexpense claims and receipts from any-where in the world.

And so to BangaloreIn the late 1980s and early 1990s, as trans-port and communications costs fell and lo-gistics technology improved, rich-countrymanufacturers began moving productionto cheaper nearby countries. Americancarmakers and consumer-electronics�rms started manufacturing in Mexico;European makers went to the Czech Re-public, Slovakia and Poland; and Japa-nese, Taiwanese and Korean �rms movedto China. By the late 1990s, European man-ufacturers such as Philips, Siemens andNokia, and American ones such as GE andMotorola, were moving further a�eld, toChina. American imports from China rosefrom $66 billion in 1997 to $163 billion lastyear. By one estimate, foreign companiesopened 60,000 factories in China be-tween 2000 and 2003. The country’s ex-ports rocketed (see chart 3).

In the same way, with the cost of tele-communications bandwidth falling, some�rms in rich countries, mostly in Americaand Britain, began moving some of theirbusiness services abroad, so far mostly toIndia. IT-service companies such as IBM,

2Must-haveGlobal spending on IT and BPO outsourcing$bn

Source: Gartner

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2 EDS and Accenture have hired thousandsof Indian software engineers to carry outwork previously done near their custom-ers in rich countries. An Indian GE subsid-iary called GECIS handles administrativeprocessing work for the �rm’s �nancialbusinesses. NASSCOM, the Indian IT-in-dustry lobby, has high hopes for theseyoung export industries. By 2008, it thinks,they will employ over 4m Indians, gener-ating up to $80 billion-worth of sales.

Firms may choose to outsource workwhen they move it abroad, and they maynot. But actually moving particular opera-tions abroad is more akin to introducinglabour-saving machinery than to out-sourcing in the sense of improving themanagement of complexity. It bringsdown the cost of production, mostly bymaking use of cheaper employees.

Sometimes companies even changetheir technology when they move abroad,making their production less automatedso they capture more bene�ts from lowerlabour costs. For example, some big car-makers are recon�guring their productionto use more manual work in their Chinesefactories than they do elsewhere, says HalSirkin of the Boston Consulting Group. Wi-

pro Spectramind, an Indian �rm, recentlymoved work for an American company toIndia. This work involved 100 people,each of whom cost the �rm $6,000 in soft-ware-licence fees. The American companyhad been trying to write software to auto-mate some of this work and reduce its li-cence-fee payments. Wipro scrapped thesoftware project, hired 110 Indians and stilldid the work more cheaply.

Once work has moved abroad, how-ever, it joins the same cycle of automationand innovation that pushes technologyforward everywhere. Optical-character-recognition software is automating thework of Indian data-entry workers. Elec-tronic airline tickets are eliminating someof the ticket-reconciliation work airlinescarry out in India. Eventually, natural-lan-guage speech recognition is likely to auto-mate some of the call-centre work that iscurrently going to India, says Steve Rolls,the heir apparent at Convergys, theworld’s largest call-centre operator.

All this helps to promote outsourcingand the building of production platformsin India. GE is selling GECIS, its Indian �-nancial-services administrator, and Citi-bank, Deutsche Bank and others have dis-

posed of some of their Indian IT

operations. Thanks to the growth of thesenewly independent �rms, along with therapid development of domestic Indiancompetitors, such as Wipro and Infosys,companies will increasingly be able to out-source work when they move it.

Dashing white collarsManufacturing has already gone a longway down the road of outsourcing andglobalisation, but there are now fears thatwhite-collar work will be reorganisedmuch more quickly and disruptively,thanks to the spread of the internet, plum-meting telecommunications costs and therealisation that the machines used by mil-lions of expensive white-collar workers inthe West could be plugged in anywhere.

Manufacturers’ shipping costs have de-clined more slowly than the telecommuni-cations costs of providers of remote ser-vices. The logistics of shipping goods overlong distances remain complicated and in-exact. For example, the V6 car engines thatToyota sends from Nagoya in Japan to Chi-cago take anywhere between 25 and 37days to arrive, forcing the car company tohold costly stocks. The movement of

IN 2001 and 2002, KPN, a Dutch telecomscarrier, signed several long-term deals

to outsource 80% of the work done by itsIT department to Atos Origin, a Europeanprovider of IT services. Three years later,both parties are still putting a lot of e�ortinto reworking these contracts. It showsthat not all decisions to outsource arestraightforward and problem-free.

In 2001, KPN, like most telecoms �rms,was in desperate trouble: having run uphuge debts as it expanded during the tele-coms bubble, it was close to bankruptcy.Atos Origin said it could help, and not justwith the IT. In return for a guarantee fromKPN to buy about �300m-worth of ITfrom it every year for the next six years,Atos Origin paid KPN �206m up front forthe IT assets that the telecoms �rm hadhanded over.

But as the spread of mobile phonesand digital �xed-line technology ate intoKPN’s sales, the �rm had to make drastic

cuts. Within two years its headcount hadshrunk from 28,000 to 18,000. It was nowless than two-thirds its size when it signedits IT deal, yet it was still bound by con-tract to buy the same �300m-worth of ITservices a year.

Both parties admit that relations overthe past year have not been easy. Neitherparty, however, can easily walk away.The solution they are groping towards isthat in the next two years Atos Origin willwork to transform KPN’s IT systems.KPN’s �xed-line division, for instance,runs 779 di�erent applications, which thecompany itself thinks it can shrink to 80.That should keep its IT purchases up for awhile, and so avoid any immediate dam-age to Atos Origin’s revenues. After that,hopes Atos Origin, it will have earned theright to more transformation work fromits customer, thus maintaining the valueof its original contract.

Whether such �transformational�

agreements are the best way forward isthe subject of much debate in the indus-try. Supporters argue that they help toalign the interests of outsourcing �rmswith those of their customers. Critics saythey are a way of landing the industry’scustomers with the risk that somethingmay go wrong: the criteria for a successfultransformation are su�ciently nebulousfor clever lawyers to claim that they havebeen met, whatever the outcome.

The larger issue, however, is the wayIT �rms sell �nancial engineering alongwith their systems and software. Govern-ments, for instance, are avid advocates oflong-term contracts because they canspread the cost of a large IT investmentover many years, making it look moremanageable. So long as the industry con-tinues to o�er this sort of balance-sheetsupport along with the technological va-riety, its customers may sometimes betempted to make the wrong decision.

Companies do not alwaysoutsource for the best of reasonsA desperate embrace

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2 white-collar work, on the other hand, issubject to no physical constraints. Com-munications are instant and their cost isdeclining rapidly towards becoming free.

Yet powerful barriers to moving white-collar work remain. When work movesout of a company, the �rm negotiates acommercial agreement to buy it from asupplier. For manufacturers, this isstraightforward: they take delivery, in-spect the goods and pay their suppliers.Supplying a service, by contrast, is a con-tinuous process. The outsourcing industry

has evolved legal contracts in which sup-pliers bind themselves to deliver promisedlevels of service. There has been much le-gal innovation around these contracts, notall of which has been satisfactory (see box,previous page). The upshot is that it stilltakes trust and cross-cultural understand-ing to achieve a good working relation-ship. Moving a company’s IT departmentto India is likely to put such understandingto the test.

The other big barrier is that, despite thespread of business machines, white-collar

work still tends to be much less structuredand rule-bound than work done on theshop �oor. Unstructured work is hard toperform over long distances: without guid-ance, workers are apt to lose their way. Themost likely outcome is that would-be out-sourcers will proceed in two steps. Firstthey will hand IT services, administrativetasks and other white-collar work totrusted specialist suppliers close to home.But once those suppliers have added struc-ture, rules and standards, the outsourcerswill move the work abroad. 7

MOST Americans or Britons would behard pressed to name their national

call-centre champions or top providers ofIT services. In India they are like rock stars,endlessly featured in the media. All ofthem claim to be hiring by the thousandsevery month. New business models comeand go. Hero bosses such as Raman Roy,chief executive of Wipro Spectramind and�father of Indian business-process out-sourcing� (an industry all of six years old),have developed the same preposterousswagger adopted by erstwhile leaders ofAmerica’s dotcom boom. Is India headingfor a fall, too?

India’s IT industry is growing at a ver-tiginous rate. A dozen years ago, the entirecountry boasted just four or �ve IBMmain-frame computers, says Lakshmi Naraya-nan, the boss of Cognizant, a big Indian IT-service company. Last year the industrynotched up sales of $16 billion, three-quar-ters of which went abroad, according toNASSCOM, the lobby group. By 2008, saysNASSCOM, annual sales are likely to sur-pass $50 billion. The big �rms are hiringabout 1,000 graduates a month straightfrom Indian technical colleges.

The sales of Infosys alone, one of thetop providers of IT services, have grownmore than eightfold in �ve years, to over $1billion in the year ending in March 2004.The �rm claims to run the biggest cor-porate training facility in the world, with4,000 students at a time and three coursesa year. The company’s chairman, Na-rayana Murthy, says Infosys is going to ex-pand further.

India’s BPO industry is younger andsmaller, but growing even faster. Last year

its sales were $3.6 billion; by 2008 they areexpected to reach $21 billion-24 billion,says NASSCOM. About 70% of the BPO in-dustry’s revenue comes from call-centres;20% from high-volume, low-value datawork, such as transcribing health-insur-ance claims; and the remaining 10% fromhigher-value information work, such asdealing with insurance claims. But the BPO

industry is more fragmented than the ITbusiness, and could change shape rapidly.

The roots of India’s competitiveness inIT reach back to the late 1980s, whenAmerican �rms such as Texas Instrumentsand Motorola came to Bangalore for the lo-cal talent. Other American �rms, such asHewlett-Packard, American Express, Citi-bank and Dun & Bradstreet, followed thesepioneers, setting up their own �captive� In-dian IT organisations in the 1990s.

The Indian companies got their �rst bigboost with the so-called �Y2K crisis� at theturn of the millennium. IT experts fearedthat because elderly software code al-lowed only two digits to record the year,some computer systems would read theyear 2000 as 1900, causing mayhem assystems crashed. Big western IT-servicescompanies such as IBM, Accenture andEDS ran out of engineers to check old codeand subcontracted some of the work to In-dian �rms instead.

Once the Indians had saved the world,they set out to conquer it. Wipro, TCS, Info-sys and their peers grabbed a growingshare of the global giants’ business. Theymade most inroads in the routine butcostly business of maintaining business-software applications from vendors suchas PeopleSoft and SAP.

As the Indian �rms grew, the captiveoperations of foreign �rms became lesscompetitive, and most of them have nowsold out. Dun & Bradstreet led the �eld,with its captive transforming itself intoCognizant in 1994. More recently, Citibanksold some of its Indian IT operation to anIndian �nancial-software specialist calledPolaris. Deutsche Bank sold its captive toHCL, another Indian �rm. The big westernIT specialists, meanwhile, have squaredup to the new, low-cost competition by hir-ing in India themselves. Accenture’s In-dian payroll has shot up from 150 in 2001to about 10,000 now.

India’s BPO industry also started withforeign captives. The pioneers were GE,American Express and British Airways,who all arrived in the late 1990s. Thesecompanies were joined by home-growncall-centre operators such as 24x7, vCus-tomer, Spectramind and Daksh. Spectra-mind has since been bought by Wipro, andDaksh by IBM.

These Indian �rms also face compe-tition from specialist American call-centrecompanies which, like the global IT �rms,have been adjusting to the cheap Indiancompetition by taking themselves to India.By far the most successful of these foreign�rms has been America’s Convergys,

The place to be

In the global market for white-collar work, India rules supreme. But others are lining up

Sustainable?IT and BPO employment in India, ’000

2002 2003 2006* 2009* 2012*

IT 106 160 379 1,004 2,717

BPO 170 205 285 479 972

Source: NASSCOM *Forecast

4

which with a total of around 60,000 em-ployees is the biggest call-centre operatorin the world. By the end of next year, saysthe company’s local boss, JaswinderGhumman, Convergys hopes to em-ploy 20,000 people in India. Re-cently a fourth wave of BPO start-ups, many of them funded byAmerican venture capitalists, hasbeen experimenting with the re-mote delivery from India of allsorts of work, from hedge-fundadministration to pre-press digi-tal publishing.

In both the IT and the BPO

industries, the leading companiesin India are �ghting hard to win abroader variety of work, particu-larly higher-value activities. EXL Ser-vice carries out a broad range of insur-ance work for British and American�rms, from �nding customers to under-writing policies, administering claims,changing policies and providing customerservices. The company is a licensed insur-ance underwriter in 45 American states,with applications for the remaining statespending. �These are very high-end jobs,�says EXL Service’s boss, Vikram Talwar.

The fancy stu�In September, ICICI OneSource, an IndianBPO company which has so far concen-trated on call-centre work, took a 51% stakein Pipal Research, a �rm set up by formerMcKinsey employees to provide researchservices for consultants, investment bank-ers and company strategy departments.Mr Roy of Wipro Spectramind says that his�rm is moving from basic call-centrework�helping people with forgotten pass-words, for instance�to better-quality workin telesales, telemarketing and technicalsupport. Wipro Spectramind is alsospreading into accounting, insurance, pro-curement and product liability. �We takethe raw material and convert it,� says MrRoy, his eyes gleaming. �That is ourskill�to cut and polish the raw diamonds.�

The top end of the market is more inter-esting still. Viteos, an Indian start-up, paysnew MBA graduates in Bangalore $10,000a year to administer American hedgefunds, work that involves reconcilingtrades and valuing investments for a de-manding set of customers. Shailen Gupta,who runs an o�shore advisory consul-tancy called Renodis, has been helpingone of his American customers to hire In-dian PhDs to model demand planning.

The best Indian IT and BPO companiesare aiming not only to lower the cost of

western white-collar work, from softwareprogramming to insurance underwriting,but to improve its quality as well. Firmssuch as Wipro, EXL Service and WNS, a for-mer British Airways BPO captive that wonits independence in 2002, are applying thesame management disciplines to the waythey provide services that GE applies to itsindustrial businesses. Tasks are brokeninto modules, examined and reworked toreduce errors, improve consistency andspeed things up.

In both industries, the in�uence in In-dia of GE, which has applied the �sixsigma� method of quality improvementsto its industrial businesses for years, is per-vasive. Mr Roy of Wipro Spectramind usedto run GECIS, which was then GE’s BPO

captive but is now being sold. It had be-come �too fat and happy�, according toone Indian competitor. One of the found-ing investors in Mr Talwar’s company isGary Wendt, the former head of GE’s �-nancial businesses. Wipro’s chairman,Azim Premji, has introduced so many ofGE’s techniques to his company that the�rm is known as India’s �baby GE�.

Certainly, �Wiproites� seem to sharethe intensity of GE’s employees. Six-sigma�black belts� hurtle about Wipro’s 100-acre technology campus in Bangalore, im-proving everything from software codingto the way the company cleans its toilets.(Among other things, this involves analys-ing liquid-soap availability, tissue supplyand waste management, explains a seri-ous-looking Wipro o�cial.)

The claims of India’s marketing mentend to be a little ahead of reality. AmarBhide of Columbia University, whohas spent most of the past 18 monthsin Bangalore, is sceptical. The Y2K cri-sis pushed �the grungiest IT work on to

India’s best software engineers,� saysMr Bhide. �It was like asking Oxfordgraduates to dig ditches. It created theimpression that Indians were fantas-tic at programming.�

Still, the outline of a distinctbrand of Indian competitiveness�inperforming carefully de�ned, rules-bound, repetitive white-collar busi-

ness work�appears to be takingshape. Already, the Indian IT

�rms, along with some of the for-eign captives in India, boast the

world’s most impressive set of in-ternational quality certi�cations for

software engineering. In the longer term, India’s success at

winning global white-collar work will de-pend on two things: the supply of high-quality technical and business graduates;and, more distantly, an improvement inIndia’s awful infrastructure.

India’s most often-cited advantage is itslarge English-speaking population, whichhas helped to fuel the call-centre boom. Yetalready the market for call-centre workersis tightening. Pay and sta� turnover areshooting up as operators poach sta� whohave already undergone costly �accentneutralisation� training at rival �rms. Eventhe best call-centre operators in India loseabout half their employees each year (butthen turnover in British call-centres isabout 70%). One Convergys job advertise-ment in the Times of India promises tomake prospective call-centre employees �aprime target of all the dons of the industry.You will be hunted down, with almost aking’s ransom on your head.�

No dream jobPart of the problem is that call-centre worktends not to be much fun�although Indi-ans enjoy much better pay, relative toother local jobs, than British or Americancall-centre employees. At Wipro Spectra-mind, two �fun day� employees try to jollythe place up as rows of cubicle-farm work-ers use a piece of software called �reten-tion buddy 1.3� to dissuade Americansfrom cancelling their internet subscrip-tions. Sanjay Kumar, the boss of vCus-tomer, one of the few remaining indepen-dent Indian call-centre companies, saysthe industry’s growth potential may belimited. He thinks the total pool of call-cen-1


2

1


2 tre workers is only about 2m, and awk-wardly scattered across India�althoughthat still leaves a lot of room for expansionfrom the current 300,000 or so.

According to o�cial �gures, India pro-duces about 300,000 IT engineering grad-uates every year, against America’s50,000. But the quality is mixed. The bestIndian IT �rms �ght over the top 30,000-40,000 graduates, a pool in which foreigncompanies such as IBM and Accenturealso �sh. Wage in�ation at Wipro and Info-sys is running at 15-17% a year, and is likelyto worsen. Assuming a supply of 40,000decent IT engineers a year, McKinsey’s Di-ana Farrell thinks that India will �not evencome close� to meeting the demand for 1mo�shore IT and software workers her com-pany forecasts for 2008.

The supply of top-quality Indian MBAsis also thinner than it might look at �rstsight. Indian business schools produceabout 90,000 graduates a year, but every-body �ghts over the top 5,000 from the sixstate-run Indian Institutes of Manage-ment. �I’m afraid to say that for some of theprivate business schools it is two class-rooms, 25 desktops, four faculty members,600 books and you’re away,� sni�s onestate-sector professor.

The biggest supply may be of BPO

workers who do not need to use the tele-phone much: claims processors, credit-card administrators, health-insuranceworkers and so on. Indian universitieschurn out 2.5m graduates a year. Perhaps aquarter to half of these have the right skills

to do this sort of BPO work, says NASS-

COM’s president, Kiran Karnik. To improvethat ratio, he is working with India’s Uni-versity Grants Commission to have three-year degree courses supplemented by one-year technical certi�cates in IT or Ameri-can accounting standards.

Mr Karnik thinks that the market itselfwill exact higher standards. The inferiorprivate technical institutes and manage-ment schools that have sprung up sincethe government deregulated higher educa-tion in the 1990s charge about three timesthe fees of the elite state institutions, saysMr Karnik. No doubt the private schoolswill try to do better, but it will take time.Meanwhile, growing demand for o�shoreIT and call-centre workers is already direct-ing companies to other parts of the world.

Where to look nextThe call-centre business in the Philippinesis booming. China is attracting a healthyshare of manufacturing-related R&D work:GE, Siemens and Nokia all do researchthere. Although China’s IT industry ispatchy and much less well organised thanIndia’s, this is likely to change in the next�ve years: China already churns out moreIT engineers than India. Atos Origin, a bigEuropean IT-services �rm, says it is moreinterested in China than in India becausethere is less competition for engineers.

The IT industry in eastern Europe andRussia is also scattered and poorly organ-ised, but the talent is there if you look for it,says Arkadiy Dobkin. He is the head of

Epam, an IT �rm that claims to be the larg-est provider of o�shore IT services in thatpart of the world, with over 1,000 engi-neers in Budapest, St Petersburg, Minskand Moscow. �The engineers that Russiaproduces are comparable to India’s,� saysMr Dobkin. �The educational machine isstill working.� He reckons that a Russian orHungarian IT engineer costs �about thesame, or a little bit more� than an Indianengineer. American multinationals are al-ready scouring the region for talent.

For the moment, India accounts forabout 80% of the low-cost o�shore market,and is probably exerting a stronger pullthan ever. In the long run, however, it issure to face hotter competition, especiallyfrom China and Russia. When it does, theabysmal quality of its infrastructure willbecome crucial. The most important thingto improve is India’s airports, says Mr Mur-thy of Infosys: �The moment of truthcomes when foreigners land in India. Theyneed to feel comfortable.� After airports,Mr Murthy lists better hotels, roads,schools and power supply, in that order.

The headquarters of Infosys in Banga-lore sit on 70 acres of pristine lawns andpaths. The facilities include open-air res-taurants, an amphitheatre, basketballcourts, a swimming pool and even a one-hole golf course. �When we created thiscampus, we wanted everything to work aswell as it does in America, to be as clean asAmerica is,� says Mr Murthy. But outsidethe perimeter walls, the place remains un-mistakably India. 7

CAN India’s IT industry do to the West’sIT giants what Wal-Mart has done to

rival retail �rms, or Dell to computer mak-ers? The Indians talk a good game. �Theproductivity growth of Indian IT servicesis the highest in the world,� says Mr Na-rayanan at Cognizant. He should know:one-third of his �rm’s employees are inAmerica and two-thirds in India. NandanNilekani, the chief executive of Infosys,goes further. �Almost everything that isdone can be done by us faster, cheaper andbetter,� he says.

The argument for an Indian takeover ofthe world goes something like this. LikeDell and Wal-Mart, companies such as In-

fosys, TCS, Wipro and Cognizant sourcetheir o�erings from poor, cheap countries.Wal-Mart has grown by adding Chinese-made toys, clothing and household appli-ances. Dell has added printers, hand-helddevices and televisions to its line of made-in-Asia computers. In the same way, pred-ict the Indian �rms breezily, they will growby adding new lines of IT services, o�eringglobal standards or better but produced atIndian costs. Investors understand this,say the Indians. Accenture’s revenue is 14times that of Infosys, but the American�rm’s market value is only one-thirdhigher than that of its Indian competitor.

IBM and Accenture have been recruit-

ing in India to lower their costs in areaswhere the Indian �rms have grown fastest,such as maintaining popular business-software packages. But these global �rmsare so large (IBM employs 340,000 people;Accenture 100,000) that hiring even10,000 extra sta� in India has made littledi�erence to their overall costs, most ofwhich are still incurred in rich, expensiveeconomies, the Indian �rms point outgleefully. �The multinationals will neverbe able to restructure their costs fastenough to shift their centres of gravity,�says Arindam Bhattacharya of the BostonConsulting Group in New Delhi.

Moreover, because the Indian �rms

Faster, cheaper, better

India’s emerging IT �rms are trying to beat their western rivals on their home turf

know India better than their Americanand European rivals do, they cangrow (and are indeed growing)more quickly and more cheaplyin India than anyone else.This will lower their costseven further. �We’re add-ing close to 5,000 peoplein India this year,� saysMr Narayanan. �NoAmerican company cando that.� However, Accen-ture may recently havegrown far more quickly inIndia than it can easilymanage�though it bristles atthe suggestion that it is �ndingIndia unusually di�cult.

Wal-Mart sells commodities,such at microwave ovens at $28. Incommodity businesses, the �rm with thelowest price, which is often achieved byselling at the highest volume, wins themost customers. But not everything the ITindustry sells is a commodity.

Layer cakeBroadly, the industry has three layers. Thebottom one consists of businesses thathave clearly become commodities. Theseare ruled by common standards, as in IThardware manufacturing (where high-vol-ume, low-cost Dell operates). A lot of thishas moved to Asia.

The top layer is made up of tailored, be-spoke technology services. Accenture, forinstance, advertises work it has done for alarge Australian casino to introduce atracking technology, called Radio Fre-quency Identi�cation, to improve the waythe casino handles the 80,000 bits of sta�clothing it has dry-cleaned every year. IBM

is working with an American limousine-�eet company to introduce the same math-ematical models the airline industry usesto route aircraft. Atos Origin, the EuropeanIT-services �rm, is working with a Britishgovernment agency, the Vehicle and Oper-ator Services Agency, to equip its inspec-tors with hand-held computers to helpthem decide which passing vehicles tocheck. Because these services are tailoredto meet the needs of individual customers,they are likely to continue to be providedclose to the IT industry’s biggest customersin America, Europe and Japan.

That leaves a large block of servicessandwiched in the middle. These servicesare on their way to becoming commod-ities as shared standards spread. The readyadoption of a small number of business-software packages sold by �rms such as

SAP and PeopleSoft, for instance, is mak-ing the maintenance and even the installa-tion of such software increasingly routineas these popular packages are becomingde facto standards. It is this large middlelayer of services that is currently feedingthe rapid growth of Indian �rms such asTCS and Infosys.

Champions of the Indian �rms look atthe industry’s employees and see a largebulge of people o�ering this middle layerof IT services, with a thinner sliver of busi-ness consultants doing the bespoke workon top. This makes them think that itshould be far easier for the Indian �rms tomove up to that top layer by hiring consul-tants in America and Europe than for west-ern IT �rms to shift most of their employ-ees (and their costs) from rich countries topoor ones. �About 20% of our value isadded near our customers in America andEurope and 80% here in India,� says Info-sys’s Mr Murthy. �If IBM wants to replicatethis, it needs 80% of its employment in lessdeveloped countries as well.�

This analysis neglects several impor-tant points. Perhaps the most crucial

of these is that patterns of demandin the IT industry have shifted in

the past, and may well do soagain. Ten years ago custom-ers spent a much biggerchunk of their IT budgetson computer hardwarethan they do now. Be-tween 1993 and 2001, cal-culates Catherine Mann ofthe Institute for Interna-

tional Economics, spendingon software and services

grew by 12.5% a year, nearlytwice as fast as hardware

spending, pushing the share ofsoftware and services in overall ex-

penditure from 58% to 69%.As Ms Mann points out, the movement

of IT hardware manufacturing to low-costAsia helped to �nance this shift in de-mand, because falling hardware pricesfreed up money to spend on software andservices. Likewise, thinks Ms Mann, themigration of commodity IT services tolow-cost places such as India will leavecompanies with more money to spend onthe top-end bespoke services, which willhelp to expand this category of work.

If the world’s IT giants want to remainbig, they will have to change to meetchanging demand. IBM has already per-formed this trick once. At the beginning ofthe 1990s, the company was mainly ahardware manufacturer. By the end of thatdecade, it had shifted much of its weightinto IT services. Now, says IBM’s Mr Har-reld, the �rm needs to move its high-costemployees into tailored services as com-modity services migrate o�shore.

The end of the beginningMr Harreld predicts that demand for suchbespoke services will grow strongly, andthat it will be many years before every-thing the IT industry sells becomes a com-modity. To support his argument, he turnsto Carlota Perez, an economic historian. Inher book, �Technological Revolutions andFinancial Capital�, Ms Perez traces �veboom-and-bust cycles of technological in-novation: the industrial revolution; steamand railways; steel, electricity and heavyengineering; oil, cars and mass produc-tion; and information technology and tele-communications.

In each age, argues Ms Perez, a phase ofinnovation, fuelled by hot money, hasbeen followed by a �nancial bust, andthen by an extended period in which the

Tomorrow’s giants?India’s top IT-services firms, 2004*

Total Marketrevenue capitalisation Employees

$bn Oct 29th, $bn ’000

TCS 1.62 12.17 40.9

Wipro 1.34 10.13 32.0

Infosys 1.08 11.26 32.9

HCL Tech† 0.57 2.38 16.4

Satyam 0.57 2.62 15.6

Sources: Company annual reports; Thomson Datastream

5

*Financial years ending March †Financial years ending June

1


2

1


2 technology is deployed properly. Havingjust emerged from its bust, the informationage is only at the beginning of this long de-ployment period, says Mr Harreld. Properdeployment, he argues, will require a largenumber of people working close to the in-dustry’s customers, in the way that IBM isdoing for its limousine-�eet customer, orthat Atos Origin is doing for Britain’s vehi-cle-safety agency.

Two questions remain. The �rst is howlong it will take for the large middle layerof services to become a commodity. If thishappens too quickly, companies such asIBM, EDS and Accenture may �nd them-selves overwhelmed by the pace ofchange, just as IBM nearly found itselfruined by the shift of IT manufacturingoverseas in the early 1990s.

Of the three giants, EDS is in the weak-est position. Having struggled with �nan-cial troubles and management turmoil athome, it has done little so far to counter thethreat from Indian competitors, who areeating into large chunks of its business.

Other smaller IT-services companies, suchas BearingPoint and Capgemini, may alsostruggle with the shift of services abroad.

Most services in the middle layer, how-ever, are likely to move o�shore at a fairlymanageable speed. That is because the ITorganisations of most large companiestend to be a tangled mess of overlappingsystems which go wrong so often that, as apractical matter, it will be hard to move ITwork anywhere without �xing the sys-tems �rst. To illustrate this point, Mr Har-reld produces a diagram showing the dif-ferent systems of one of IBM’s customers,along with their interconnections. It is sointricate that it might pass for the design ofa semiconductor chip. IBM itself runs17,000 software applications, a �gure thatMr Harreld thinks can comfortably shrinkto 10,000 in due course.

The other big question is how easilycompanies such as Wipro, TCS and Infosyscan expand into that upper crust of be-spoke services that Mr Harreld predictswill �ourish close to the industry’s cus-

tomers in rich countries. The Indian �rmshave lots of cash to spend: the cost of an In-dian programmer is so much lower thanan American one that Wipro and Infosysare earning fat pro�ts on lines of businessthat may be only just pro�table for bigwestern companies. So far, the Indianshave spent their money cautiously, mak-ing small acquisitions and hiring the oddwestern consultant from rival �rms.

If they are serious about taking on com-panies such as IBM and Accenture, the In-dian �rms will have to act more boldly. Yetbuying or building people businesses ofthis kind is notoriously di�cult. Time andagain, and in all sorts of industries, frombanking to telecommunications, Amer-ica’s and Europe’s best managers havetried and failed miserably. Moreover, thecompetition is well entrenched. IBM, forexample, has built up good relations withits customers over decades. The Indiancompanies may yet �nd that the only thingthey can do faster and better on their rivals’home turf is to lose their shirts. 7

�HAS the machine in its last furiousmanifestation begun to eliminate

workers faster than new tasks can befound for them?� wonders Stuart Chase,an American writer. �Mechanical devicesare already ousting skilled clerical workersand replacing them with operators�Op-portunity in the white-collar services is be-ing steadily undermined.� The anxietysounds thoroughly contemporary. But MrChase’s publisher, MacMillan, �set up andelectrotyped� his book, �Men and Ma-chines�, in 1929.

The worry about �exporting� jobs thatcurrently grips America, Germany and Ja-pan is essentially the same as Mr Chase’sworry about mechanisation 75 years ago.When companies move manufacturingplants from Japan to China, or call-centreworkers from America to India, they arechanging the way they produce things.This change in production technology hasthe same e�ect as automation: some work-ers in America, Germany and Japan losetheir jobs as machines or foreign workerstake over. This fans fears of rising unem-ployment.

What the worriers always forget is that

the same changes in production technol-ogy that destroy jobs also create new ones.Because machines and foreign workerscan perform the same work more cheaply,the cost of production falls. That meanshigher pro�ts and lower prices, lifting de-mand for new goods and services. Entre-preneurs set up new businesses to meetdemand for these new necessities of life,creating new jobs.

As Alan Greenspan, chairman ofAmerica’s Federal Reserve Bank, haspointed out, there is always likely to beanxiety about the jobs of the future, be-cause in the long run most of them will in-volve producing goods and services thathave not yet been invented. William Nord-haus, an economist at Yale University, hascalculated that under 30% of the goodsand services consumed at the end of the20th century were variants of the goodsand services produced 100 years earlier.�We travel in vehicles that were not yet in-vented that are powered by fuels not yetproduced, communicate through devicesnot yet manufactured, enjoy cool air onthe hottest days, are entertained by elec-tronic wizardry that was not dreamed of

and receive medical treatments that wereunheard of,� writes Mr Nordhaus. Whathardy late 19th-century American pioneerwould have guessed that, barely morethan a century later, his country would�nd employment for (by the government’slatest count) 139,000 psychologists,104,000 �oral designers and 51,000 mani-curists and pedicurists?

Even relatively short-term labour-mar-ket predictions can be hazardous. In 1988,

Into the unknown

Where will the jobs of the future come from?

6Still recruitingIT-related white-collar jobs in the United Statesend-year estimates, m

Source: Catherine Mann, Institute for International Economics

*May †September

2.2

2.4

2.6

2.8

3.0

3.2

1999 2000 01 02 03* 04†

Computer & mathematical

Architecture & engineering


2 government experts at the Bureau of La-bour Statistics con�dently predictedstrong demand in America over the next 12years for, among others, travel agents andpetrol-station attendants. But by 2000, thenumber of travel agents had fallen by 6%because more travellers booked online,and the number of pump attendants wasdown to little more than half because driv-ers were �lling up their cars themselves.Of the 20 occupations that the govern-ment predicted would su�er the most joblosses between 1988 and 2000, half actu-ally gained jobs. Travel agents have nowjoined the government’s list of endan-gered occupations for 2012. Maybe theyare due for a modest revival.

You never knowThe bureau’s statisticians are now forecast-ing a large rise in the number of nurses,teachers, salespeople, �combined foodpreparation and serving workers, includ-ing fast food� (a fancy way of saying burger�ippers), waiters, truck drivers and secu-rity guards over the next eight years. If thatlist fails to strike a chord with recent Stan-ford graduates, the bureau also expectsAmerica to create an extra 179,000 soft-ware-engineering jobs and 185,000 moreplaces for computer-systems analysts overthe same period.

Has the bureau forgotten about Banga-lore? Probably not. Catherine Mann of theInstitute for International Economicspoints out that the widely quoted numberof half a million for IT jobs �lost� to Indiain the past couple of years takes as its start-ing point the year 2001, the top of the in-dustry’s cycle. Most of the subsequent joblosses were due to the recession in the in-dustry rather than to an exodus to India.Measured from 1999 to 2003, the numberof IT-related white-collar jobs in Americahas risen (see chart 6, previous page).

Ms Mann thinks that demand will con-tinue to grow as falling prices help tospread IT more widely through the econ-omy, and as American companies de-mand more tailored software and services.Azim Premji, the boss of Wipro, is cur-rently trying to expand his business inAmerica. �IT professionals are in shortsupply in America,� says Mr Premji. �With-in the next few months, we will have a la-bour shortage.�

If that seems surprising, it illustrates alarger confusion about jobs and work.Those who worry about the migration ofwhite-collar work abroad like to talk about�lost jobs� or �jobs at risk�. Ashok Bard-han, an economist at the University of

California at Berkeley, thinks that 14mAmericans, a whopping 11% of the work-force, are in jobs �at risk to outsourcing�.The list includes computer operators, com-puter professionals, paralegals and legalassistants. But what Mr Bardhan is reallysaying is that some of this work can nowalso be done elsewhere.

What e�ect this has on jobs and paywill depend on supply and demand in thelabour market and on the opportunity,willingness and ability of workers to re-train. American computer professionals,for instance, have been �nding recentlythat certain skills, such as maintainingstandard business-software packages, areno longer in such demand in America, be-cause there are plenty of Indian program-mers willing to do this work more cheaply.On the other hand, IT �rms in Americaface a shortage of skills in areas such as tai-lored business software and services.There is a limited supply of fresh IT gradu-ates to recruit and train in America, socompanies such as IBM and Accenture arehaving to retrain their employees in thesesought-after skills.

Moreover, Mr Bardhan’s list of 14mjobs at risk features many that face auto-mation anyway, regardless of whether thework is �rst shipped abroad. Medical tran-scriptionists, data-entry clerks and a large

category of 8.6m miscellaneous �o�cesupport� workers may face the chop ascompanies �nd new ways of mechanisingpaperwork and capturing information.

Indeed, the de�nition of the sort ofwork that Indian outsourcing �rms aregood at doing remotely�repetitive andbound tightly by rules�sounds just likethe sort of work that could also be dele-gated to machines. If o�shoring is to beblamed for this �lost� work, then mechani-cal diggers should be blamed for usurpingthe work of men with shovels. In reality,shedding such lower-value tasks enableseconomies to redeploy the workers con-cerned to jobs that create more value.

Stuart Chase understood the virtuouseconomics of technological change, but hestill could not stop himself from fretting.�An uneasy suspicion has gathered thatthe saturation point has at last beenreached,� he re�ected darkly. Could it bethat, with the invention of the automobile,central heating, the phonograph and theelectric refrigerator, entrepreneurs had atlong last emptied the reservoir of humandesires? He need not have worried. To-day’s list of human desires includes in-stant messaging, online role-playinggames and internet dating services, all un-known in the 1920s. And there will bemany more tomorrow. 7

1


WHEN Hal Sirkin was growing up in1960s America, the bicycle that ev-

ery regular American child wanted was aSchwinn. In 1993, Schwinn �led for bank-ruptcy. The �rm had been overtaken byimported Chinese bicycles. In 2001, a com-pany called Paci�c Cycle bought theSchwinn brand out of bankruptcy. Paci�cCycle, now owned by a Canadian con-sumer-goods �rm called Dorel Industries,says the secret of its success is �combiningits powerful brand portfolio with low-costFar East sourcing.� Schwinn bicycles nowline the aisles at Wal-Mart.

Mr Sirkin is a consultant with the Bos-ton Consulting Group who helps his cus-tomers do what Paci�c Cycle has done toSchwinn: move production to East Asia,especially to China. Wal-Mart buys $15 bil-lion-worth of Chinese-made goods everyyear. Obtaining goods and services fromlow-cost countries helps to build strong,growing companies, such as Dorel Indus-tries, and healthy economies. But theSchwinn story also contains the oppositelesson: failing to buy in this way can seri-ously damage a company’s health.

Sourcing from low-cost countriesbrings many economic bene�ts. Cheaperlabour brings down production costs. Thiskeeps companies competitive, raises pro-�ts and reduces prices as �rms pass theirlower costs on to their customers. Higherpro�ts and lower prices lift demand andkeep in�ation in check. Companies spendtheir pro�ts on improving existing pro-ducts or introducing new ones. Customersbuy more of the things they already con-sume, or spend the money on new goodsand services. This stimulates innovationand creates new jobs to replace those thathave gone abroad.

Moving work abroad may also help tospeed up innovation directly, as Ameri-can, European and Japanese companiesget some of their R&D done by Chinese,Russian or Indian engineers. Randy Battat,the boss of Airvana, a telecoms-equip-ment start-up, has spent the past 18months setting up an R&D centre for hiscompany in Bangalore. This will comple-ment the work of Mr Battat’s engineers inChelmsford, Massachusetts. The onesworking in America will develop the next

generation of the company’s technology.The Bangalore centre will elaborate Air-vana’s existing technology. �They are add-ing bells and whistles that could not beadded otherwise because it would not becost-e�ective,� says Mr Battat.

By making IT more a�ordable, sourcingfrom cheaper countries also spreads theproductivity-enhancing e�ects of suchtechnology more widely through theeconomy. Ms Mann of the Institute for In-ternational Economics calculates thatglobalised production and internationaltrade has made IT hardware 10-30%cheaper than it would otherwise havebeen. She reckons that this price reductioncreated a cumulative $230 billion-worth ofadditional GDP in America between 1995and 2002 as more widespread adoption ofIT raised productivity growth. Sourcing ITservices (which account for 70% of overallcorporate spending on IT) from countriessuch as India will create a �second wave ofproductivity growth�, predicts Ms Mann,as cheaper IT spreads to parts of the econ-omy that have so far bought less of it, suchas the health-care industry and smallercompanies.

McKinsey calculates that for every dol-lar American �rms spend on service workfrom India, the American economy re-ceives $1.14 in return. This calculation de-pends in large part on the ability of Amer-

ica’s economy to create new jobs fordisplaced workers. America’s labour mar-ket is a miracle of �exibility: it creates anddestroys nearly 30m jobs a year.

However, in countries such as Ger-many, France and Japan a combination ofsocial legislation, stronger trade unions,regulations and corporate-governance ar-rangements make employment practicesmore rigid and sometimes keep wageshigher than they would otherwise be. Thisreduces demand for labour and pushesunemployment higher. According toMcKinsey, in Germany, the re-employ-ment rate for IT and service workers dis-placed by sourcing from low-cost coun-tries may be only 40%. As unemploymentat home rises, that process could actuallymake Germans poorer (see chart 7).

Reluctant EuropeansUdo Jung of the Boston Consulting Groupsays that, by and large, Germans acceptthat manufacturing companies such asHella, Bosch and Siemens must get sup-plies from China. Degussa, a chemicalsmanufacturer, recently invited its workers’council on a trip to China. The idea was totake emotion out of the debate, says MrJung. Nor do continental Europeans seembothered about white-collar work beingdone in low-cost countries. But that maybe because they are doing so little of it.

At present, perhaps 80-90% of the ser-vice work being done remotely in Indiacomes from either America or Britain, withwhich the country has linguistic and cul-tural links. Such links are absent from itsrelationship with Germany or France. Ger-many, like America, introduced a specialvisa programme for Indian IT workers inthe 1990s as its domestic supply of engi-neers ran dry. But most Indians that wentto work in Germany failed to learn the lan-guage and came back again, says Infosys’sMr Murthy. The opposite is true of Indiansin America. Those who have gone there towork or study are often reluctant to returnhome to their families.

Cultural ties appear to be important informing business relationships in remote-service work, says Rajendra Bandri of theIndian Institute of Management in Banga-lore. Mr Bandri has studied �ve examples

Sink or Schwinn

Sourcing from low-cost countries works only in open and �exible labour markets. Europe’s are neither

7All right for someEconomic impact on offshoring country, 2002

Source: McKinsey Global Institute

0

0.25

0.50

0.75

1.00

1.25

for every ¤1 ofcorporate spending

moved to India (40%) oreastern Europe (60%), ¤

0

0.25

0.50

0.75

1.00

1.25

for every $1 ofcorporate spendingmoved to India, $

United States Germany

Savings for customers and investors

Direct benefits (imports, transfers)

Indirect benefits (labour re-employed)

1


2 of European �rms outsourcing white-col-lar work to Sri Lanka. In each case, theychose that country because a well-placedSri Lankan worked for the European �rm,says Mr Bandri.

Eastern Europe and Russia, which brimover with skilled, underemployed engi-neers, present fewer cultural barriers forEuropean companies. French is spoken inRussia, German in Hungary and else-where. Yet neither German nor French�rms have yet shown much appetite forbuying services work from their neigh-bours, either. Arkadiy Dobkin, the boss ofEpam, which claims to be the largest sup-plier of IT services from eastern Europeand Russia, is based in Princeton, NewJersey, rather than in Paris or Berlin.

Beyond economicsA survey of 500 European �rms last sum-mer by IDC, a research �rm, found thatonly 11% of its sample were sourcing ITwork from low-cost countries, and thatnearly 80% would not even consider doingso. Attitudes were hardest in Italy, where90% of �rms were against the idea, fol-lowed by France and Germany. An Ameri-can study released at the same time by Ed-ward Perlin Associates, a consulting �rm,found that around 60% of the companies itsurveyed had some of their IT work donein low-cost countries.

In continental Europe, companies mayoutsource for reasons that have little to dowith favourable economics, says FrancisDelacourt, the head of outsourcing at AtosOrigin. In what he describes as �social out-sourcing�, �rms such as Atos Origin may

take on surplus IT employeesfrom companies that no longer need them.Europe-wide social legislation requires thenew employer to provide the same wagesand bene�ts as the old one. The alternativeis costly redundancy. Mr Delacourt saysthis works for his company, up to a point,because demand for IT workers in Europeis growing, and Atos Origin has foundways to re-employ such people pro�tably.But he concedes that his company needs tobe careful not to take on too many.

How well this system stands up tocompetition from India is anybody’sguess. A manager at one �rm in Europeprivately muses that Germany, Franceand other countries might introduce bar-riers to IT imports to counter the threat totheir domestic employment. If McKinseyis right and sourcing from abroad does

make unemployment in Germany andelsewhere worse, protectionist sentimentwill grow.

In the end, Europe’s big service �rmsare likely to get round to sourcing produc-tion from abroad, as its manufacturingcompanies have already done. But by thattime, says Andrew Parker of Forrester, Brit-ish and American companies will alreadyhave developed much stronger ties withIndia and other cheap countries, and costswill have risen. This will especially hurtEurope’s big �nancial �rms: the biggestbanks spend billions of dollars a year onIT. Mr Parker speculates that some Euro-pean �nancial �rms could be so badlydamaged by this loss of competitivenessthat they may fall into the arms of �tterAmerican and British rivals. Schwinncould tell them all about it. 7

EARLIER this year, a group of politiciansfrom Britain’s left-of-centre Labour

Party made a �eld trip to EXL Service, anIndian outsourcing �rm in Delhi. Itscharming boss, Vikram Talwar, must haveworked wonders. On their return, the poli-ticians chided Britain’s trade unions for be-ing negative about sourcing work frompoor countries, and praised EXL Service’sfacilities for its workers. These included ahealth clinic, a gym and a good sta� can-teen. Laura Mo�at, one of the politicians,approvingly told the Financial Times: �Thebene�ts EXL o�ered its employees would

be a wish-list for us in Britain.�More often than not in the past two

years, public champions of outsourcinghave found themselves bullied into si-lence. The chairman of President GeorgeBush’s Council of Economic Advisers,Gregory Mankiw, got howled o� the stageearlier this year when he dared to defendthe practice. Lou Dobbs, a TVnews anchor-man who names and shames unpatrioticAmerican �rms that hire workers abroad,is hawking around a new book, �Export-ing America: Why Corporate Greed isShipping American Jobs Overseas�.

Such attacks have instilled caution insome of the big technology �rms: IBM, forinstance, no longer likes to talk publiclyabout the growth of its business in India.Yet the backlash against outsourcing hasbeen less violent than people like MrDobbs might have hoped; indeed, as thereaction of Mr Talwar’s British visitorsshow, outsourcing is beginning to winsupport in unexpected quarters.

Protectionists are �nding it hard to ar-gue that �corporate greed� is draining jobsfrom Britain and America when those twoeconomies are close to full employment.

A world of opportunity

Why the protectionists are wrong

More awkwardly still, the very industriessaid to be badly hurt by the migration ofjobs overseas report a shortage of workersat home. Most of the jobs created in Indiaare either in call-centres or at IT �rms. Butcall-centre companies in both Britain andAmerica su�er from rising sta� turnoverand struggle to recruit more people. Brit-ain’s Call-Centre Association, a tradelobby, thinks that employment in the in-dustry in Britain will rise in the next fewyears; in the United States, call-centre em-ployment is expected to decline slightly.

As IT spending recovers from recession,labour markets in America and Europe arebecoming tighter in this industry too. Notmany students in rich countries choose tostudy engineering at college. Even a mod-est rise in the demand for IT workers inrich countries will create shortages�andtherefore openings for Indian, Chineseand Russian engineers.

In the longer run, ageing populations inrich countries will mean labour shortagesin many industries. Sourcing some of thework from abroad will ease the problem. Itwill also help to lift productivity amongrich-country workers who will have tosupport larger numbers of older people.Moreover, it could help to lower some ofthe costs of ageing populations, especiallyin health care. America’s health-carespending is rising at 12% a year, far fasterthan GDP. Farming out the huge job of ad-ministering this system to lower-costcountries would restrain such spending.Trade has the same sort of e�ect, andAmericans think nothing of shopping on-line for cheaper drugs from Canadianpharmacies. Yet, as McKinsey’s Diana Far-rell points out, it is precisely the supportersof drug imports (and haters of big busi-ness) who complain most about jobs go-ing to India.

Anti-globalisers claim that multinat-ional �rms that obtain goods and servicesin low-cost countries exploit the poor byputting them to work in sweatshops. Tradeunions and industrial lobbies use such ar-guments to make their demands for pro-tection look less self-interested, and guilt-wracked American and European bienpensants swallow them whole.

The spread of global sourcing may helpto unpick these politics. The smartlydressed, brand-conscious young men andwomen who stroll around the lush tech-nology parks of Bangalore are patently notsome new underclass. New wealth in theEast will help to expose old protectionistpolitics in the West. That might provideglobalisation with a new legitimacy and

moral strength.This survey has argued that, although

the opportunity to source large amountsof white-collar work from low-cost coun-tries has arisen quite suddenly, the workwill in fact move over gradually. This willgive rich economies time to adjust to newpatterns of work, and should keep the pol-itics of change manageable. But from timeto time, ugly protectionism is sure to �areup again.

Take it gentlyA sudden increase in global competitioncould force faster and deeper restructuringin rich countries. Big IT-services �rms suchas IBM and Accenture have scrambled tohire tens of thousands of new employeesin India to compete with Indian IT �rmssuch as Wipro and TCS. This could happenin other industries, too, as India becomesexpert at providing outsourced banking,insurance and business services.

O�ce workers everywhere are likely tobe discom�ted by the rise of Indian �rmsthat promise to do white-collar work

cheaper, faster and better. Just as the Japa-nese car makers licked Detroit into shape,India is going to change life on the cubiclefarm forever. So far only American andBritish �rms have sourced much workfrom low-cost countries, but other richeconomies such as France, Germany, Italyand Japan will eventually have to followas British and American �rms reduce theircosts and make their rivals look vulner-able. In Japan, France and Germany, thiscould lift high levels of unemployment(disguised in Japan; explicit in France andGermany) higher still if rigid, unreformedlabour markets continue to deny displacedworkers new jobs. This is likely to fuel pro-tectionism and cause a backlash.

That may be all the more reason to reas-sert both the economic and the moral casefor free trade. Buying goods and servicesfrom poor countries is not only hugelybene�cial to rich countries’ economies, itcan also provide opportunities for mil-lions of people in poor countries to liftthemselves up and improve their lives. It isa game in which everybody can win. 7

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