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Munich Economic Summit

The New Global Division of Labour: How is the World Economy Affected by Outsourcing and Offshoring?

N Chandrasekaran Executive Vice President & Global Head, Sales and Operations Tata Consultancy Services May 04, 2006

Munich Economic Summit

Agenda • The Global Division of Labour • Effects of the New Division of Labour • Outsourcing/Offshoring – The Drivers of Change Munich Economic Summit 2006 2

Continental Drift

• Advances in productivity – Introduction of machinery and other technology – Specialization of labour • Examples: – The mass manufacturing of single product lines in Chinese towns, where an entire Chinese town specializes making the same product – The specialized IT services capability in India, which has the world look to outsourcing and offshoring to India •

Technology and Globalisation have contributed to the growth of each other and both in turn are redefining the division of labour across continents, nations, companies and individuals.

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The Global Division of Labor

The global division and migration of labor is a worldwide reality today • Close to 200 million people worldwide live outside their countries of birth • Switzerland has 25% of its population as migrants, while Germany and the Netherlands have 10% migrant population • In the Philippines, a country of 75 million that churns out 380,000 college grads each year, there's an oversupply of accountants trained in US accounting standards • India already has a staggering 520,000 IT engineers delivering IT solutions to global corporations • US schools produce only 35,000 mechanical engineers a year; China graduates twice as many Source: Business Week Munich Economic Summit 2006 4

The Global Division of Labour

Changes occurring at National level • Globalisation and New Technologies have placed all nations on a level playing field • Developing nations are specialising in skills and bringing in huge economies of scale as they are also covering their own huge unaddressed internal demand.

• India, for example, delivers high quality software services through: – High bandwidth available to connect to the world – Skills available through 350,000 engineers graduating every year – TCS introduced the ‘Disruptive’ software offshoring concept to the world and all of you have seen its impact on IT and business • East Europe seems closer; new nations joining or aspiring to join the EU. Munich Economic Summit 2006 7

Outsourcing/Offshoring – The Driver of Change

Fundamental change driver in the landscape of labour & world economy • Outsourcing/Offshoring is a phenomenon that entails the organizational and technological ability to relocate specific tasks and coordinate a geographically dispersed network of activities • It decouples the linkages between economic value creation and geographic location. Today a very high percentage of value-creation in developed countries is driven by developing countries • Firms in developing countries are making global consolidations; thereby, driving the global labour movement In the near future, outsourcing/offshoring will be more of a competitive necessity than a strategic advantage Munich Economic Summit 2006 11

Outsourcing/Offshoring – The Driver of Change

Strong sets of facts and experiences that are driving outsourcing/offshoring • 85% of European and US firms plan to increase outsourcing levels within the next three years • 50% of companies that do not currently outsource are planning to outsource in the next two to three years • China and India are the favoured economies for specialized distributable services • Companies expect to save 22% on the cost of goods and services through outsourcing • Quality, security and cost-advantage are a given necessity in outsourcing today Source: PrintWorld Munich Economic Summit 2006 12

Key Impact of Outsourcing/Offshoring

Positive impact for those who have embraced the change • Today enterprises are defined as massive aggregations of monolithic business processes, tomorrow they will morph into flexible business networks • Outsourcing/Offshoring is expected to create a positive impact on the countries – Spatial distribution of production, profitability and wages – Full package production by developing firms – Increased possibilities for strategic investments – Transfer and upgradation of skills and technology – Increased productivity – Declining infrastructure & telecom costs – Revision of policies • IT solutions are critical to the economic survival and competitiveness of today’s businesses. Munich Economic Summit 2006 13

Outsourcing/Offshoring Benefits

Economic benefits from outsourcing/offshoring • The McKinsey Global Institute study, states that outsourcing delivers large and measurable benefits to the US economy – Reduces costs for IT and other services by as much as 60% – Returns profits to the United States from US-owned affiliates abroad – Allows US companies to re-deploy workers in more productive jobs at home – Every $1.00 spent on foreign outsourcing creates $1.12 to $1.14 of additional economic activity in the US • Another study by Global Insights estimated that the US economy will be $124 billion larger in 2008 if outsourcing continues compared with no outsourcing

All the above facts enable the US companies to remain competitive in global markets; thereby, benefiting workers and shareholders alike

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Outsourcing/Offshoring Benefits

Economic benefits from outsourcing/offshoring • The Wall Street Journal uses the case of the computer mouse manufacturer, Logitech, to show that outsourcing works both ways – Logitech sells a wireless mouse called Wanda, assembled in China, for about $40 – Of the $40, China gets only $3 while the rest goes to suppliers, many based in America, which make components for the mouse, and to domestic retailers – The biggest component of Logitech's cost is its marketing department based in Fremont, California, where the staff of 450 Americans makes far more than the 4,000 Chinese who actually manufacture the product – Those 450 Americans, making good wages in California, might not have jobs at all if Logitech wasn't able to stay competitive by outsourcing some of its costs Outsourcing works both ways; benefiting the outsourcing country as well as the host country Munich Economic Summit 2006 17

Managing Individual Impact

• Companies need to take decisions on offshoring which, reflect the long-term interests of their business and economy • Run cross-training programs for effective usage in other enterprise growth opportunities • Develop skill upgradation programs to present new opportunities • Consider building a fund to assist/train employees – To upgrade their skills – Minimize financial impact on individuals – Promote new specializations Munich Economic Summit 2006 18

"Efficient policies to encourage employment and combat unemployment are essential if countries are to reap the full benefits of globalisation and avoid a backlash against open trade... Job losses in some sectors, along with new job opportunities in other sectors, are an inevitable accompaniment of the process of globalisation... The challenge is to ensure that the adjustment process involved in matching available workers with new job openings works as smoothly as possible.“

Organisation for Economic Co-operation and Development

(OECD) 2005 Munich Economic Summit 2006 19

Thank You

References

• Offshoring A Challenge or Opportunity for British IT Professionals? Report by The British Computer Society, Working Party on Offshoring, November 2004 • Managing Movement& Temporary Stay of Labor Migrants Policy & Implementation - Source: UN Pop. Div.

• Offshoring in the New Global Political Economy David L. Levy, University of Massachusetts, Boston • Outsourcing, the IT of 2005-2015, Christopher S. Rollyson • Gartner on Outsourcing, 2005 • The Global Outsourcing Report Opportunities, Costs and Risks- The CIO Whiteboard • Outsourcing Benefits Michigan Economy and Taxpayers By Daniel T. Griswold and Dale D. Buss • Bruce Bartlett,

National Center for Policy Analysis

, February 4, 2004 • Ten Myths about Jobs and Outsourcing by Tim Kane, Brett D. Schaefer, and Alison Fraser • Strategic Review of IT, 2006 –Nasscom • Printing World • Business Week Munich Economic Summit 2006 21