Warning knell

New Delhi: In his recent budget speech, Indian Finance Minister Jaswant Singh referred to the Indian IT industry as India''s ''showpiece'' industry. He expected the industry to continue to achieve spectacular growth and as a gesture of encouragement, decided to continue with the incentives offered to this industry.

The leader in the IT segment in the coming years is going to be the business process outsourcing (BPO) industry. While this industry may have heaved a sigh of relief at Singh''s gesture, there are other fears stalking this sector which the industry and others concerned should take note of.

A few weeks back, the State of New Jersey, USA, proposed a bill which if passed could put restrictions on government undertakings from outsourcing their business processes to overseas countries. The bill proposes that if government undertakings are to outsource their business processes to overseas countries, undertakings have to pay their contractors the same wages as are payable in the US.

Now if American undertakings have to pay the same wages to its contractors overseas, the advantage of offshore outsourcing will be lost and American undertakings will stop outsourcing.

Losers all?
India, which is a favoured destination for outsourcing, will definitely stand to lose, but what is more noteworthy is that American enterprises, which are looking to offshore outsourcing, will also lose heavily and the very purpose of the proposed bill will be defeated.

A study undertaken by Nasscom has indicated that the differential in wages between an undertaking in India and that in the US is 70 to 80 per cent for offshore processes. Taking into account the interaction cost, net savings achieved by companies from offshore outsourcing are about 40 to 60 per cent. The Nasscom report goes on to add that what stands in India''s advantage is the fact that this labour cost savings is likely to exist for the next 20 to 30 years.

The Nasscom study has also found that Indian call centres are more productive compared to US call centres. For example, according to Nasscom, an Indian call centre agent makes, on an average, 98 correct transactions out of 100 compared to 95 by an agent in the US.

An Indian call centre agent makes 120 transactions in an hour as against 100 by an agent in the US. Further, the average speed of answer by an Indian call centre agent is about 8 seconds whereas the average speed of answer by a call centre agent in the US is about 20 seconds.

The above advantages are driven home by the fact that in the last four years, the US financial services industry has made savings to the tune of $8 billion by outsourcing to companies in India.

Thus, if restrictions are put on offshore outsourcing, American companies stand to lose as much. These companies will lose their competitive edge and given the sluggish state of their economy, some companies may even have to wind up operations.

Wake up to reality
Of course, the proposed bill will only put restrictions on government undertakings from offshore outsourcing while private enterprises will not be stopped from offshore outsourcing. And the truth is that offshore outsourcing from government undertakings comprise less than 5 per cent of the total offshore outsourcing business.

This fact seems to have left the Indian BPO sector unfazed. However, the sense of complacency is unjustified as there are certain developments that should make the industry wake up and take suitable proactive action.

Apart from New Jersey, now there are several other US states which are thinking of putting restrictions on offshore outsourcing. Elections for the American Senate are due next year and offshore outsourcing is tending to become a political issue in the US.

Selection for candidates by parties are due to begin later this year and many legislators have begun advocating protective legislations which, they believe, would bring back jobs to their constituencies and help them win the elections. Some of the legislators are making offshore outsourcing their main election issue.

Also, as unemployment in the US is rising and as the US economy is not showing any signs of an early revival, offshore outsourcing by American enterprises is coming under close scrutiny by American trade unions and workers who are demanding an end to it. This protectionist sentiment is slowly but surely spreading all over America.

Need for awareness
To counter this sentiment, American legislators, trade unions and workers must be made to realise that offshore outsourcing has evolved as a natural result of globalisation. Offshore outsourcing has, and will, bring about efficiencies and will make American enterprises more competitive. This will ultimately lead to an economic revival, resulting in more jobs and relief to the American taxpayer.

Towards this end, the Indian government and industry, in conjunction with corporate America, should launch robust lobbying efforts in the US. The lobbying should not just stop at Washington but should extended to all state capitals and further on to the grassroots levels like various town halls.

The Indian government and industry must consider the developments in the US as a wake-up call and counter the emerging protectionist sentiment with a sense of urgency. If they fail to do so, they may not be able to retain the crown of ''showpiece'' industry for long.