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BPO Journal

Tuesday, September 06, 2005

Its not over yet!

CNN Money has an article on the future (or lack of) of the Indian BPO market. It somewhat echoes my sentiment on an earlier post, viz. that process ownership savings from outsourcing to India may thin out in the face of wage inflation and a labor crunch. However, the article predicts a more dire future - erosion of as much as 45 percent of India's market share by 2007! The article bases its findings on a recent Gartner report which cautions that a host of emerging countries such as the Philippines, Malaysia, and East European nations including Hungary and Poland, are starting to challenge India's leadership in offshore business process outsourcing (BPO). Gartner warns that an imbalance in the labor demand-supply equation, the onset of wage inflation and high levels of attrition are all factors that threaten India's outsourcing industry.

Here's why I think the findings of the report are slightly off-base. First, the Indian service providers have developed scale and skill in various outsourced business functions over the past decade. Further, the Indian firms have acquired an allied reputation and customer empathy that the outsourcing firm must include in the costs of switching to a new provider. If the truth of the positive impact of trust and prior cooperative association on performance of inter-firm alliances be believed, such expertise, reputation and customer empathy are sources of (sustainable) competitive adantage for the Indian firms. Gartner forgot to mention a probable solution. The Indian outsourcing industry may adapt to changing labor conditions such as wage inflation and attrition by outsourcing the business process to the emerging low-cost destinations and develop skills as an integrator who manages a geographically distributed process. This mirrors the American outsourcing phenomenon - after all, although a business process is outsourced to a low-cost location, the American consumer of that process believes he is interacting with the American firm. So too with the Indian outsourcing firm. Therefore, to assume that a decline in the labor force will result in a decline in market share is a simplistic and premature argument.

Second, there is not adequate insight into the coordination costs of BPO relationships serviced by emerging low-cost countries. For example, institutional factors such as mandatory health insurance, unstable political systems, etc. may all add to the labor costs of externalizing a business process to emerging low cost countries such as Hungary and Poland. The incentive structures and work norms in these countries are farther from the US work ways than India, and may require correspondingly more management attention and resources. Third, the Indian outsourcing industry is moving up the food chain and increasingly servicing processes such as R&D, new product development, etc. that are complex and strategically important. This, in conjunction with process innovation, is a timely solution to a resource-constrained market that receives no mention in the article.

Finally, the study focuses on American firms that have outsourced one or more business processes to an external provider. As Europe and other non-English speaking markets emerge as popular client markets, the US-focused Indian outsourcing industry may well shift attention to these markets.

All is not over yet.

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