Week 01- Case Study 01

India: The Employment Black Hole?

After independence from Great Britain in 1947, India established a socialist oriented
government that discouraged foreign investment. Major industries were state-owned and
government heavily regulated private businesses. Westerners viewed India as a very poor
country with little to offer the international business community. In 1991, India experienced a
currency crisis and was forced to fly its remaining stock of gold to London as collateral for an
IMF loan. Faced with a very difficult situation, India then began to reform its economy. Since
the early 1990s the Indian economy has transformed itself into a very competitive global
competitor. With an abundance of workers and very low wage levels, India is attractive to
international companies for low-end manufacturing and service delivery. Of special interest is
the recent outsourcing of service jobs that can be performed over satellite and fiber optics
communication channels.

India produces over 3 million college graduates a year. With high unemployment, companies
have no difficulty in finding young college graduates who are content to handle customer
service for American and European companies, at a fraction of the cost of their American and
European counterparts. Typical of this new approach is AOL which now employs 1,500
people in India to answer its calls for customer service. Even though AOL is not available in
India, AOL customers in the U.S. and elsewhere call an 800 number and may never realize
that they are talking with someone half way around the world. AOL reports much lower
operating costs, and lower turnover in its Indian call center than it experiences in the United
States. Costs are lower even though training costs are higher, and the company must provide
employees with transportation to and from work.

Like AOL, other well-known foreign companies have beaten a path to India to
outsource their back-office services. Recently, Microsoft announced that it was moving some
of its customer service jobs to India. Microsoft joins a long list of companies already
operating back-office operations in India, such as: Oracle, IBM, Intel, and HP. Lloyds TSB,
the UK’s fourth-largest bank, has announced the closing of its call center in England, and its
movement to India. Lloyds TSB call center workers earn on average ten times the wages to
be paid to their Indian substitutes. Even the World Bank has moved its accounting function
from Washington to India. American businesses are realizing that almost any back-office or
service job can be moved overseas.

While the call center and other lower-level service jobs which have moved to India
are becoming commonplace, India is also embarking on a much more ambitious approach to
job creation. India has attracted international contracts in software development, chip design,
IT consulting, financial services, and drug research. An estimated 20,000 U.S. tax returns
were prepared in India last year, and the number is expected to skyrocket to 200,000 this
year. The returns are prepared by Indian accountants familiar with the U.S. tax code and are
signed by CPAs in the United States. Indians now process mortgage applications, do legal
and medical transcription, and book travel reservations. The management consulting firm,
McKinsey, now outsources to India the design of its PowerPoint presentations that it shows
its clients.

The skill level of jobs being outsourced is increasing. GE has established the Jack
Welch Technology Center in India and employs 1,800 engineers, many with doctoral
degrees, to conduct basic research. The relatively new center has already earned 95 patents
globally. India has an abundance of well-trained engineers and scientists, and MNCs are
beginning to realize the potential of this human capital. According to the managing director
of the Welch Center, it isn’t about saving money on labor costs. “The game here really isn’t
about saving costs but to speed innovation and generate growth for the company.”
Nevertheless, a top of the line electrical engineer in India earns only about $10,000 USD a
year, a fraction of the salary of western Engineers with the same qualifications.

While GE may not be primarily concerned with cost-savings, most companies

moving, or establishing operations in India are doing so because of the labor rate differential.
One UK travel agency has put a different spin on the outsourcing concept. Ebookings is
moving both its work, and workers to India. The London-based travel agency is not only
moving the jobs of selling and booking travel, but also moving workers to India, and paying
the prevailing Indian wage level. Ebookings is selling the idea of living in India as an
adventure and a way to sell the world. The firm’s employees in India, both European and
Indian will be paid about $6,000 USD a year, resulting in a significant cost savings to the
company. While most companies that have moved their back-office operations to India are
American or British, India is seeking additional jobs from other English speaking countries
such as Australia, and non-English speaking countries in which customer service is
conducted in English.

India has the advantage of having an educated workforce that can speak English and
is willing to work for a fraction of the wage level of developed country workers. India,
however, does have a number of disadvantages to consider when companies decide to
outsource work. India has experienced very impressive economic growth in the years since
economic liberalization; however, India is still very much a less developed country. An
estimated one-third of the population is illiterate and only the higher classes speak English
well. The official language of India is not English but Hindi. And India still possesses a very
poor infrastructure with unreliable power sourcing and frequent flooding. Government
bureaucracy is still very much a factor in business activity, and presently India’s fiscal deficit
is running at over 10% of GDP. While India has made great strides in eliminating excessive
government, much improvement needs to be made. In addition to concerns over budget
deficits, political tensions are also troublesome. India has an uneasy relationship with its
neighbor, Pakistan, and the tension between Muslims and Hindus produces violent conflict at
times.

While educated Indians speak English, it is considered to be the “Queens English” and has a
different accent from American English. Although many Indians are enrolling in accent
reduction classes, some customers have complained about the ability to communicate with
Indian customer service personnel. Indians tend to speak rapidly, averaging 180 words a
minute, compared to 120 for Americans and 90 for the British. Dell recently announced that
it was moving its call center operations out of Bangalore, India and back to Texas because it
“had issues with differing Indian accents.” GE, while investing heavily in research in India,
nevertheless, moved its appliance call center from India back to the United States. GE had
discovered that many Indian employees could not relate well to the concerns of GE’s
customers because many did not own, or were not familiar with the appliances they were
discussing.

At the present time, India is the lead country in attracting service outsourcing,
however, other countries are now beginning to compete with India. Like India, the
Philippines is an English speaking country with a low wage level. Unlike India, the
Philippines is closer to the U.S. in language and culture. While the number of jobs outsourced
to the Philippines is currently much lower, estimated to be around 30,000, the number is
expected to grow rapidly. Currently, Filipinos work in the Philippines for international
companies doing medical and legal transcription, answering call centers, and providing
technical support. In addition to the Philippines, a number of Eastern European countries may
rival India for job outsourcing. One indication is the bidding process on a web site for
programmers called Rent-A-Coder. Companies, mostly small and medium sized firms from
the United States and Europe, post jobs for free-lancing software developers. Indians still are
able to solicit most of the programming jobs from the site, however, Romania is the second
most popular country for this outsourcing. Under Soviet domination, Romania like many
Eastern European countries emphasized science, math, and engineering instruction and now
has an abundance of technically qualified people who are willing to work at low wage levels.
Like Romania, the Czech Republic has an abundance of technically qualified workers who
are available at a lower wage level. The Czech Republic also has the advantage of impeding
membership in the European Union. Recently, DHL announced a 500 million euro
investment that will employ Czechs to track shipments, provide customer service, and
perform billing operations. The Czech Republic has a strong telecommunication
infrastructure, workers who are proficient in many languages, and a skilled and inexpensive
labor force.

An additional factor which may slow the growth of outsourcing to India is political
backlash caused by job loss in the United States and Great Britain. In the United States, the
state of Indiana recently cancelled a $15 million contract with the software arm of large
Indian company, Tata Group, over fears of unemployment in the United States. Protection of
domestic jobs is a very strong political motive and one that will likely be raised as more and
more jobs are outsourced to India. Many will argue the costs and benefits of overseas
outsourcing. A study by the McKinsey Global Institute found that for every dollar invested in
overseas outsourcing, $1.25 returned to the United States. Supporters of foreign outsourcing
argue the benefits of free trade and comparative advantage, while critics argue that foreign
workers are taking jobs and potentially destroying the country’s technical competitive
advantage.
Discussion Questions

1. From the perspective of American and European companies, analyze the advantages
and disadvantages of outsourcing work to India.

2. What would you recommend to Indian government officials to ensure continued job
creation?

3. Is it fair to workers of developed countries when companies shift work to lower wage
countries? Explain.

4. Your Scenario:

You currently own three answering call centers in India that are staffed by local people
who can speak good English that is understandable to the English and Europeans. The
three operations are profitable at present with a reliable mid term outlook however you are
conscious of the increase in competition in the industry and decide to make three strategic
changes in the next twelve months? What would they be and why?