Sustainable Development and the Globalization of Services: A focus on

Business Process Outsourcing (BPO) and Information Technology Enabled Services (ITES)

Scoping and Consultation Presentation

February 2007 Oshani Perera International Institute for Sustainable Development

Part 1 Globalization of Services

In 2004, Jagdish N. Bhagwati commented that :

‘Off-shoring and outsourcing are not destroying jobs in the rich world. These jobs are going anyway, because otherwise the services would be too expensive to produce and the companies that

make them would no longer be competitive” . Today, globalising service functions has moved well beyond a cost cutting strategy.

It is a critical business model to competitively operate increasingly complex and globally dispersed value chains. As commented in the Times UK, in June 2007 ‘Outsourcing payroll and

HR – can you afford not to?’.

Why are outsourcing and off-shoring critical business models?

The globalization of services reflects increasing modularity in value chains and the need for specialisation therein. To compete in global markets, companies need to internalise, on a global scale, a range of specialised competencies which include asset management, production, organizational and managerial know how, supplier and customer networks management and market intelligence. But no company, not even market leaders, can effectively build all these capacities internally while also managing them at the global level. Hence businesses need to concentrate on their core competencies and outsource and/or offshore other functions, including value added functions which are more effectively delivered by others.

The Rise of the Global Service Providers

The globalization of services given rise the growth of large multinational firms: 

System Integrators (SI)

SI are firms that specialize in building complete computer systems by putting together components from different vendors. Unlike software developers, systems integrators typically do not produce any original code. Instead they enable a company to use off-the-shelf hardware and software packages to meet its needs. For example, a system integrator may build an IT solution integrating customer.

an Oracle-based inventory tracking system, a document management system, a Microsoft CRM system, a group of Panasonic scanners, and a Rimage storage system to produce an overall solution for the SI reporting on corporate sustainability include Satyam, Wipro, Infosys, Tata Consultancy Services, Cap Gemeni, Congnizant, CISCO Systems.

These companies have recorded over 120% growth since 2004.



IT product/software developers

Examples including un Micro Systems, Wipro, Google, Adobe, SAP

The changing business models of SI and IT Product/Software Developers Service functions being outsourced have sifted from repetitive, routine functions (which represent 10% to 20% of a firms workforce), to specialized and more expert tasks. (see notes page for additional details).

- Schools and universities are turning to teachers and lecturers in India to provide support with tutorials and thesis supervision. - consumer product firms are outsourcing accounting, marketing, design and R&D functions. - Legal firms are off-shoring litigation and IPR research. - The insurance and investment industries are off-shoring analysis and actuarial functions. - Hospitals are off-shoring medical transcription, diagnosis and even decisions on surgical intervention. According to a worldwide survey of 104 senior executives conducted by the Economist Intelligence Unit in 2006, 70% of respondents reported that their company already employed R&D personnel overseas, and 52% of executives plan to increase their investments in overseas research in the next three years. When asked where they would spend the most on R&D in the next three years, 39% said China, 29% the US, 28% said India, 24% referred to the UK, and 19% mentioned Germany . In tandem, SI and IT product/software are offering a diverse array of more integrated and sophisticated, IT-enabled business solutions, which can be executed through a balance of off-shore, near shoring and on-shore strategies.

‘Today we are an information technology company, delivering consulting, systems integration, and outsourcing

solutions. We leverage deep industry and functional expertise, leading technology practices, and an advanced, global delivery model to help clients transform their highest-value business processes and improve their business performance. We have operations in over 20 countries.

Senior VP Technology, Satyam

Our clients are operating globally and their operations are more and more sophisticated. To meet their demands we are offering an array of wholistic and integrated business solutions. This is the way to go in the future now have campuses in 20 geographies, with near and on shore operations in many more’ – the buzzword is ‘right shoring’. We hence need to globalize to be closer to our clients in their different locations. We

VP for the Americas, Tata Consulting Services.

The most active receiving geographies in the globalization of services

The Leaders The Challengers The Next Tier The hopefuls India, China, Canadá, México, South África, Ireland, Rusia, The Phillippines Brazil, The Caribbean, Eastern Europe, Malaysia, Israel, Singapore, Vietnam, Costa Rica, Chile Bangladesh, Ghana, Korea, Senegal, Sri Lanka, Taiwan, Mauritius and Thailand Argentina, Botswana, Guatemala, Panama, Source: updated from WTO/UNCTAD 2005

Share and types of processes being outsourced

Frequently used terms in the business of globalise services: Outsourcing: The World Trade Organisation definition reads as ‘the act of transferring some of a company’s recurring and repetitive activities and decision rights to outside providers, as set in a contract’.

Off-shoring: The OECD defines services off-shoring as contracting, of all or part of the production of services to another country with the intention to re-import them to the home country’.

‘the transfer, through foreign direct investment or sub Near-shoring/near-shore outsourcing

:

Sourcing service activities to a foreign, lower-wage country that is relatively close in distance or time zone (or both). The customer expects to benefit from one or more of the following constructs of proximity: geographic, temporal, cultural, linguistic, economic, political, or historical linkages. For example, near shoring destinations for US businesses will be Mexico, Central America and Canada, while for Western Europe, they will be Ireland and Eastern Europe. Most organizations give preferences to near-shoring over offshore outsourcing for a variety of reasons (both internal and external), including physical and time zone proximity, cultural affinity and other ones.

Right Shoring

:

Balancing outsourcing, off-shoring, near-shoring and on-shore options to leverage optimum value.

On-shore outsourcing: Obtaining of services from someone outside a company but within the same country.

In-sourcing: A practice in which work that would otherwise have been contracted out is performed in house.

involves bringing in specialists to fill temporary needs onsite.

This

Enablers and drivers of the globalisation of services

( A broader discussion is provided in the notes page) 1.

The advancement and cost effectiveness of information and communication technologies have removed the need for face-to face interaction and special proximity when managing value chains. 2.

When managing increasing modular value chain, businesses need to build on core competencies. 3.

The proliferation of standardised software platforms.

4.

Despite the 2006-07 hike in salaries in the service providing geographies, outsourcing and off shoring offer lower labour costs.

Enablers and drivers of the globalization of services.. (continued)

4.

Access to large pools of educated and skilled labour enable the large scale centralisation of functions in one location. One of the key attractions of India and China, the leading geographies for service provision, is that SI and IT product/software developers are able to tap into large pools of skilled, western language speaking workers at a lower cost.

5.

6.

7.

Productivity gains by working across time zones and, in effect, realising a 24-hour working day. Additional benefits of economies of scale such as the pooling of clients and services, cost-effective management peak loads, greater productivity through a more effective division of labour. Before jobs are off-shored or outsourced, companies need to undertake a detailed review of the daily operational procedures that are embedded within them. Such reviews identify process inefficiencies and procedural bottlenecks which can be corrected to further increase to productivity gains.

Enablers and drivers of the globalization of services.. (continued)

8.

Most products and services are characteristic of continuous innovation with limited shelf and user life. Management strategies for managing value chains are dynamic, based on flexible, just-in time, low-inventory strategies. This increases the need for a firm to outsource both low and value-added functions which can be effectively performed elsewhere. 9.

The redeployment of people from less productive to more productive uses creates stimulates innovation, competition and growth. For example, when back offices are outsourced or off shored, operating capital can be freed for more productive, valued added uses such as R&D or marketing. This drives innovation which further fuels the trade in services.

How large is the market for globalized business services?

The discussion is continued in the notes page

   The OECD (2005) reports the global market for outsourced IT and business process (BP) services to be close to $260 billion in 2001, which is over 28% of the global IT market.

McKinsey (2004) reports that US companies off-shored IT and business process (BP) services worth $26 billion to 12 major markets in 2003. The share of US companies in global off-shoring activities is estimated at 70%. Gartner (2004) claims that “outsourcing will account for 53% of the total worldwide IT services market in 2004”. This would be equivalent to $322 billion. At first glance these growth rates may appear impressive, but when viewed through the lenses of balance of payment data from key out sourcing and off-shoring countries, the current levels of services migration appear to be relatively small at the aggregate level. (The discussion is continued in the notes page).

‘

I’ve been Bangalored’…. public perceptions on globalizing services:

It was difficult not to miss the public outcry following the Y2K as larger numbers of professionals were being made redundant and their jobs outsourced and/or transferred offshore. This prompted a 1994 flurry of proposed legislation in 34 States in the USA which aimed at curbing off-shoring activities. Most of these bills intended to restrict the off-shoring of functions related to government services and to prohibit off-shoring on State contracts. Several years on, the present mood in the silicon valley and the UK is more resigned to the fact that professional services are mobile, and will move between geographies. In tandem, outsourcing and off-shoring firms are re-examining their strategies on re-training, carrier change, relocation and their integration into redundancy packages. In Western Europe, where services are only just beginning to globalize, the debate remains in its very early day. In the global media, despite the proven efficiency of the outsourcing model, concerns on the delivery of the outsourced services are media favourite. Anecdotal evidence abounds on script fixed call centre operators, fault ridden software programmes, and other services, where corrective action linked to poor quality outweighs the forecasted benefits that off-shoring was first predicted to bring. There is also still very unclear if there indeed sufficient jobs and re-skilling opportunities availed to the processionals ‘being Bangalored’. While some sources suggest that the relatively low and stable unemployment statistics are an indicator that such opportunities abound, others are quick to point out that these figures do not indicate if high value and wage jobs are giving way to those involving less skill and a lot less pay.

Part 2 Opportunities and challenges for sustainable development

Opportunities for sustainable development A way out of low-value industries Globalization of services is providing poorer geographies with a way out of low-value industries and a way into developing high value niches and new industries. For example in India (where data on services is most easily obtainable), business processing industries accounted for 6% of GDP and 95% absolute growth between 2000-04. Direct employment is estimated at 700,000 and indirect employment at 2.5 million IT enabled services can provide the blueprints for a sustainable future At the Stanford University 2007 Conference on the Globalization of Services ,’ the ‘green portfolio’ was considered as a key growth area by SI’s and IT product/software firms. The Financial Times reported that compliance and regulation, mobility and green issues featured 7 th ,10 th and 11 th respectively on CIO’s priority listings for 2008.

Examples of such it-enabled services that promote sustainable development include traffic management and urban energy efficiency systems being developed by Cisco for the local authority of Amsterdam. IBM has developed internet-enabled electronics that will allow consumers to control applications via web browsers or mobile telephones. IBM is also looking at ways to re-purpose scrap semi-conductor wafers into a form that can be used to make PV panels.

‘ Our greatest contribution to the environment is in the potential our services and solutions in Information Technologies have to offer, in order to help our clients contribute to the improvement of environmental management and thus benefit society in general.’

Tata Consulting Services, 2007 Sustainability Report

Opportunities for sustainable development

(continued)

Can investment incentives be coupled with partnerships for sustainable development?

Governments of service providing geographies are vying to provide investment incentives for outsourcing and off-shoring. For example:

  

The government of China has agreed to meet the recruitment costs and wages of all graduates during their first 2 years of employment with the SI Satyam. India is deregulating its higher education sector to encourage private sector investment to meet the demand for skilled professionals in IT enables service provision. Senegal and Mexico are providing capital investment tax breaks for outsourcing campuses. Can these incentives be coupled with breakthrough public/private partnerships on e-waste, energy efficiency, urban/export zone design, and social sustainability aspects such as higher and adult education, work environment improvement, and wage differentials (especially important when dealing with skilled labour)? Such partnerships are critical ensure that the benefits of ‘world-sourced’ services are distributed across the economy.

Opportunities

for sustainable development

(continued)

Energy and greenhouse gases Public-private partnerships on energy would be particularly valuable as China emerges as the worlds foremost carbon dioxide emitter, with India 7th place. Even as we question if the industrialized world is off-shoring a generous slice of its environment footprint, the 2007 Bali roadmap, which will lead to the post-2012 international agreement on climate change, is likely to include emissions reduction targets for emerging economies. One of the prerequisites for services outsourcing and off shoring is the roll-out of the enabling ICT infrastructure, underwritten by reliable power grids, both of which pose notable challenges on the environmental bottom lines of the receiving geographies. Coal accounts for largest energy source in most service providing countries - 69% in China, 70% in India, and 65% in the Philippines. The urban infrastructure challenge The prerequisite need to upgrade service provision infrastructure provide important opportunities to master plan sustainable development. The 2006 Nasscom McKinsey Report on

India’s

Leadership in the Global Business Process and IT Service sector states:

“India needs to deliver on both basic (e.g., power, public transport, international connectivity) as well as business infrastructure (office and retail space, security services, etc.). Between today and 2010 we estimate that the IT and BPO industries will have to employ an additional workforce of approximately 1 million workers near five Tier I cities (New Delhi, Bangalore, Hyderabad, Chennai and Mumbai), and approximately 600,000 workers across other towns in India. Thus the IT and BPO industries need at least five new “Gurgaon-plus” and five to seven new 'Pune-plus‘ integrated townships. The resulting burden on urban infrastructure is likely to be substantial. For example, over 1 million international airline trips a year will be required for these industries in 2010, constituting around 20% of total international airline trips undertaken by Indians in 2010’.

Opportunities

for sustainable development



Supplying large pools of talent

(continued)

NASSCOM reports that India will need a 2.3 million-strong IT and BPO workforce by 2010 to maintain its current market share and a by 2010, a potential shortfall is project for nearly 0.5 million qualified employees – nearly 70 per cent of which will be concentrated in the Business Processing Industries. Geographies that will win as services go global will be those that will continue to supply large pools of educated labour, and this will require substantial rethinking of education, urban infrastructure, legislation on wages and benefits, and the overall social and cultural infrastructure in both the outsourcing and service providing geographies.

Opportunities

for sustainable development

(continued) 

Social protection policies The debate on Aid for Trade has highlighted the value of social protection. Training and retraining is critical for both workers who lose their jobs in off-shoring regions and for workers who gain new employment in receiving geographies. Workers on both sides may also be required to relocate and live through periods on unemployment. Labour market policies that provide for such employment shifts include passive income support during unemployment and active policies that meet the costs of retraining in order to facilitate re employment. The globalization of services is triggering industrialized countries to develop/reform labour policies social support systems to better suit the needs of global markets. What support is available for policy makers in service providing geographies to develop similar safeguards?

How do present policies on education need to be reformed to create more flexible workforces? Education levels determine a country’s absorptive capacity, including the ability to learn and improve on new technologies and new fields of knowledge. Education also affects the flexibility of people and their ability to live and work with change. Global markets require that workers remain flexible and mobile to adapt to new situations and to relocate to new hubs. At the company level, skills that improve coordination, collaboration, teambuilding, and cultural sensitivity are the buzzwords. Are educational systems been reformed to research and responded to these requirements?

Challenges

for sustainable development

/2 

E-waste Shorter user-life and continuous upgrading is intrinsic in I-enabled functions, and as services globalize, there has been a ‘corresponding explosion of electronic scrap ’. As noted by UNEP, 20 to 50 million tones of e-waste is generated annually around the world, with 2 million PCs being discard in China alone. Of this volume, only 10% to 12% can be considered to be responsibly recycled. (The discussion is continued in the notes page). IPR Globalized service provision involves the transfer of critical operational and commercial information to the vendors and offshore sites. This raises concerns over IP infringement including patent protection, copyright and trademark protection and the compliance with non-disclosure agreements. Data security “Data security and privacy concerns are now the largest barriers to BPO in India”, Sunil Mehta, vice president of NASSCOM India. A number of security breeches have caused outsourcing companies to question the security of overseas operations. In one widely publicized incident in 2007, former call centre employees of a leading vendor in India were accused of stealing $350,000 from U.S. consumers' bank accounts. In response, NASSCOM has announced plans to create a self-regulating security watchdog to oversee security issues surrounding outsourcing in India. NASSCOM has also launched an national skills registry to track IT employees records on IT security.

Challenges for sustainable development

/2 

The ‘skills premium’

The globalization of services opens the debate on the ‘skills premium’, i.e. the wage differential between low and high skilled jobs, which contributes directly to larger income inequalities across and within geographies

.



Employment Standards The Trade Union Advisory Committee (TUAC) to the OECD state that ‘

of government” policy response to the employment consequences of off

must guarantee core workers’ rights on a global basis’.

The international trade union movement has not called for national borders to be closed to flows of labour. But trade unions cannot passively accept the working of economists’ “relative price effect” in terms of labour, leading to a “race to

the bottom” in employment standards’. Rather unions have called for a “whole

shoring that also encompasses the international institutions. Governments

Hot issues in this context include minimizing compulsory lay-offs and increasing firm-level redeployment as well as support for re-training and up skilling.

Part 3 About this Project IISD is launching this project to further explore the services outsourcing debate and to establish partnerships to promote sustainable development in the BPO and ITES industries.

IISD is of the view that the globalization of services touches on some of the key opportunities for contemporary globalization and sustainable development

.

•

It recognizes the inextricable links between developed and developing countries.

•

It focuses on geographically dispersed tasks, responsibilities and value chains the challenges in building cohesion, trust, and common cultural values which are needed to enable them to operate in a streamline process.

•

It opens the debate on trade, equity and migratory labour, as not only are skilled workers from OECD nations are required to temporary relocate to service providing geographies, but that increased preferences for near shore and onshore outsourcing as well as in sourcing are demanding that professionals from the service providing geographies move to perform tasks in high and middle income geographies.

•

It opens the debate on wages, benefits and their wider implications across both the outsourcing and service providing economies.

•

Preliminary project ideas (continued) 1.

Addressing the multiplier environmental and social challenges and BPO infrastructure in leading BPO Geographies of ITES This project could explore the environmental and social challenges that have arise due to BPO and ITEs infrastructure, including energy efficiency, green building design, and mobility, which are growing challenges in leading BPO geographies. IISD is further interested to investigate how the solutions to the above.

‘green’

portfolios’ of software developers and solution providers can begin to provide 2.

Sustainability competitiveness/investment Index for BPO and ITES geographies The project envisages the development of sustainable development competitiveness index’s for key prevailing and emerging geographies.

•

Preliminary project ideas (continued) : 3.

Can BPO and ITES industries can promote enterprise and access to growth at the bottom of the pyramid?

The ITES and BPO industries are throwing new light into this debate. For example, TATA in India is enabling engineers to work in their own languages (as opposed to working in English) and this is increasing access to sustainable growth. What are other opportunities offered by BPO and ITES industries? How can they be scaled up and replicated as the industry expands to other geographies. This project proposed to explore these issues.

IISD welcomes expressions of interest on these and other related ideas.