The Pace of White-Collar Outsourcing

How rapidly will outsourcing of U.S. white collar jobs proceed? The consensus bet is 300,000 a year, but it all depends on how rapidly the English-literate populations of emerging markets expand:

India%u2019s Outsourcing Industry Is Facing a Labor Shortage - New York Times : February 16, 2006 By SARITHA RAI MUMBAI, India, Feb. 16 — India’s leadership in global outsourcing may be in jeopardy unless it increases its supply of skilled workers.... Experts... said Thursday that an incipient skills shortage was the biggest threat to the industry’s blazing growth.... Pramod Bhasin, chief executive of Genpact, a back-office outsourcing company once owned by General Electric, set the tone when he said, “If the talent in India is scarce, we will go wherever the labor pool is available.”

Lower-cost centers like Eastern Europe and China could become serious rivals for outsourcing business from Western multinational companies.

Until now, corporations mainly looked to India to do work from customer support to writing software code to designing chips. But the supply of India’s famed “skilled, low-cost, English-speaking” work force may not quite match the sizzling demand.

India’s $23.4 billion outsourcing industry accounts for most of the country’s software and services industry, which makes up nearly 5 percent of gross domestic product. The industry employs 1.2 million workers, has sparked a consumer revolution in India, and is accelerating at more than 30 percent a year.

On the sidelines of the Nasscom meeting, B. Ramalinga Raju, chairman of India’s fourth- largest outsourcing company, Satyam Computer Services, said that India produced three million college graduates every year, including nearly 400,000 engineers. “But most of these are uncut diamonds that have to go through polishing factories, as the trade requires only polished stones,” Mr. Raju said.

In a country of 1.1 billion people, raw talent is plentiful, he said, but not all of it is market-ready.... The supply shortfall is even more acute in mid-level jobs, like software engineers. Salaries in this segment are rising an average 20 percent a year, and in some segments even 50 percent annually, compared with 5 percent annual raises for software engineers in the United States.

“The irony is that while the outsourcing industry partially fueled an economic boom amongst the middle classes, the growth has now spilled onto other areas offering ambitious young college graduates an array of job options outside of the outsourcing industry,” said M. S. Krishnan , professor of business information technology at the Stephen M. Ross School of Business at the University of Michigan....

Outsourcing companies are taking matters into their own hands to meet mid-level skills shortages by setting up vast, dedicated training centers. Tata Consultancy Services... has a large training center in Trivandrum... its nearest rival, Infosys Technologies, has a training campus in Mysore.... “At any given point in time, there are 4,000 people in the pipeline at Infosys’s training center,” Mr. Krishnan said.

Many companies believe the skills deficit will only grow. “We are in the people business, and the situation will become more challenging in five years,” said Amitabh Ray, director of global delivery, IBM Global Services India....

The situation is much the same in the back-office and call center jobs: of 100 college graduates applying, only 8 are immediately employable. Another 20 require considerable training to be hired, according to Nasscom data...

Comments

[me]

I like this backlash as well, just not sure why he writes from Ohio. Even Bangalore has to be better than Ohio:

Note to whining CEOs in Bangalore: go somewhere else - please
By Rajagopal Ramachandra
Published: February 17 2006 02:00 | Last updated: February 17 2006 02:00

From Dr Rajagopal Ramachandra.

Sir, This is in response to your Comment & Analysis article "Uphill struggle" (February 13), in which Bob Hoekstra of Philips Innovation Campus is quoted as referring to the elected officials of my state, Karnataka, as "totally incompetent agricultural idiots". This reference is totally outrageous and insults the farming community.

Mr Hoekstra and the other

chief excutives of information technology companies are the

root cause of the strain on my beautiful city in all respects, by bringing in thousands of IT workers.

Why cannot he, and other whining IT chief executives, move their shops elsewhere and leave my city Bangalore to the natives?

Rajagopal Ramachandra,

Lancaster, OH 43130, US

http://news.ft.com/cms/s/68466c6a-9f59-11da-ba48-0000779e2340.html

[Matthew Saroff]

You miss the big point.

The point is that in our globalized society, if the free trade actually starts creating a rising tide that lifts all boats, they leafe and head to China and Romania.

Race to the bottom.

[Jim Dandy]

Isn’t that how the factor price equalization theorem is supposed to work out in practice, with supply and demand driving the convergence in factor prices?

The problem is that, in that process, some win and some lose. And there is no mechanism to compensate the losers.

[NinjaPlease]

There is no bottom to cheapest labor.

Understand this and you'll understand why companies LOVE free trade. They aren't expanding markets, they're dropping the cost of goods produced, while selling them at the same price.

Imported goods made by foreign labor by foreign companies are the ones who sell goods at cheap prices

[orionATL]

brad deL

this is off topic but

there is a very interesting post on the left coaster dated 2/16 by "pessismist" citing a speech by congressman paul about the inevitability of dollar devaluation and some of its consequences.

paul's comments sound sensible to me and remarkably free of political bullshit but i'd love to hear a second opinion.

care to tackle that issue (the likelihood that dollar will be devaluated, never mind the exact timing)for us interested amateur economists?

[save_the_rustbelt]

Interesting side effect.

As jobs are lost tax revenues flatten and it is harder for states to fund higher education.

Fewer jobs for tenured economics professors - now that may be a good idea.

Seriously folks, our ready-fire-aim trade policy of the past 15 years or so will come back to haunt us, despite what the economists keep preaching.

[prosperous romanian]

"You miss the big point.

The point is that in our globalized society, if the free trade actually starts creating a rising tide that lifts all boats, they leafe[sic] and head to China and Romania."

Yes, poverty for billions is clearly superior.

I love the 21st century.

[Telli Savalas]

It's important when draining the seas to sink all boats, to ask the sampans what's really happening on the fishing grounds, instead of polling the lolly-gaggers and
pundits idling around on Princess Lines.

In other words, while the value of the fish harvest may have increased, if the value of currency has declined by half, there's now fewer fish to go around for more fishermen.

Here we have robust GDP reports, obscured inflation reports, no-longer-reported M3, against devaluation of US$, a declining industrial productivity (labor per *price*, not labor per unit) and growing bureaucracy.

What does that say about outsourcing? If we are outsourcing skilled trades for 1/3 labor cost, US productivity should be soaring. If not, then the aggregate drain of fiat money, government deficit spending and debt service and the sheer bureaucratic incompetence must be dragging America's gunwales under water.

What you hear when you ask the fishermen:

India is asking $14 an hour ... and falling. They are growing their service centers at a faster clip than the demand for services, with M's of new graduates a year to hire.
China is asking 40c an hour ... and falling. They are growing their production centers at a faster clip than the demand for products,
with M's of rural peasants a year to hire.
And the Middle East? Down to $2 ... a day, with 10M's of idled workers out of business.
The US doesn't, of course, outsource there.

US wages and benefits are falling. In real terms, they're falling fast. Only the upper half of the highest 20%-ile of wage earners are holding their ground, and even they are finding less and less work to go around.

But there are jobs everywhere! The stock market is at a four-year high! Did you see the new Apple V-Pod! We won Olympic gold!

The best we can do now is do our best, cut back on purchases, re-insulate our houses, buy smaller used cars and eat far, far less.
(and write an amicus to the Enron judge. : )

[liberal]

slink,

Why write comments about trade theory in free verse?

;-)

[s mehta]

The British Council has just published a long term look at the spread of english in the emerging markets, to be found at

www.britishcouncil.org/learning-research-englishnext.htm?mtklink=learnng-research-english-next

Th author, a demograper called Davis Graddol estimates 2 billion people will be starting to learn english over the next 10-15 years, and that 'As a result of the new policy, China now pro-
duces over 20 million new users of English
each year. It seems possible that within a
few years, there could be more English
speakers in China than in India.

[still working it out]

IBM recently fired several thousand employees in Europe and then hired approximately the same number of workers at a new centre in China. They could have moved the work to India, but they chose not to.

I deal with India quite a bit and I can tell you that companies that move IT work there have mixed results. I'll bet a lot of the movement away from India is as a result of disappointing outcomes from work already moved there rather than skills shortages.

There are two ways to move work to India.

a)You can setup an office in Bangalore and hire indian workers directly.

b)You can hire an Indian owned and based company such as Tata Consulting or Infosys and contract out work to them.

I can tell you from experience that option a) usually does not work very well. We deal with IBM India and they are useless.

However if you go for option b) then things work pretty well. In my opinion the staff at Infosys and Tata are better, person for person, than people from America. But you end up being very dependent on the service providing company as its extremely difficult to change vendors because it takes years for a vendor to learn your IT systems properly.

I think the new emphasis on other countries aside from India is driven by the above two difficulties.

[Gregory]

" It seems possible that within a
few years, there could be more English
speakers in China than in India. "

There's another complication here, remember, and it's that outsourcing is no longer an (almost) exclusively Anglophone market. An enormous amount of business offshoring is now being conducted by companies from the EU based in French- and especially German-speaking countries, so there's huge demand to diversify the languages learned by people in India who are working the back offices and call centers.

Furthermore because of the glut, Indians who learn only English as their foreign (non-Indian) language are at a big disadvantage in hiring. The "It" language for outsourcing these days is increasingly becoming German, oddly enough. This is partly due to the size of Germany's economy, partly due to a longstanding fascination in East and South Asia with German culture (the scientists, philosophers and composers, among others). However, I suspect that the main driver of the German-popularity phenomenon is Germany's labor laws, which many employers argue are outdated and annoying for doing business efficiently. German companies find it very difficult to move around even highly competent German workers (the vast majority, to be fair) into positions where they can contribute the most, due to Germany's 1950's-era labor laws, so in response to this problem, German companies in general are preferring to hire abroad.

Thus far countries like the Czech Republic, Poland, Hungary, the Ukraine and Russia have been big beneficiaries, since German is sort of an Eastern European lingua franca, but now German companies are increasingly hiring in India due to the even lower labor costs. So Indian students are in a race to master German and, to an extent, French as well, to capitalize. In Bangalore and Mumbai, there are apparently entire networks of schools and shops where people spend every day conversing in German, to become fluent. Spanish, too, is becoming extremely popular for study in India-- in no small part because a large amount of the outsourcing from the USA is done to meet the needs of the country's rising Spanish-speaking population, rather than English-speakers. Japanese and Mandarin also have a smaller but significant following.

As for China, if you scratch the surface you'll see that English is hardly the only foreign language that students in China are mastering. The Chinese are language phenoms, and it's not unusual to encounter a Chinese professional who's fluent in 5 or even more foreign languages besides Mandarin Chinese. Japanese is obviously important and a critical language learned by Chinese-speakers in China and Taiwan, and in fact the lesser-known but significant Japanese outsourcing industry has pumped billions of dollars into China as a result. However, Chinese also have had a longstanding fascination with German culture (Kant, Bach, Beethoven, Daimler and Benz of course) plus increasing trade with the EU, so an enormous number of Chinese entrepreneurs are fluent in German, which in turn also helps China to gain business from Germany and Austria.

The upshot of all this? Although outsourcing has hit the Anglophone countries (particularly the US and UK) very hard, it's now becoming a global phenomenon that will also affect EU economies and Japan. If it is allowed to run rampant, it's going to depress wages across the industrialized world, at least until wages in China and India rise and find some level of parity. Problem is, the central banks of China and India continue to send their savings into the US (via T-bill purchases) that in turn help to maintain low wages at home, which perpetuates the wage depression cycle.

The most pernicious effect of outsourcing IMHO, in the US at least, is that it's convincing bright, promising young students to turn away from engineering in droves. Who wants to get trained as an engineer or computer scientist if you suspect that your job is always merely one quarter away from being dispatched to Bangalore, without warning, no matter how much training you've gained (and how much educational debt you've racked up)? I just don't think that the US-driven model of business outsourcing is realistically sustainable without making massive changes at home and cushioning the effects. We're already suffering a major dearth of trained engineers, and that's going to exacerbate in the next decade since nobody wants to enter the field, with good reason. We may be on the brink of losing our academic and technical excellence for good, as our mantle of mastery in engineering is seized by East and South Asia.