Offshoring Threats to India

We're all familiar with the business practice of outsourcing work to another entity. It's been done for a long time and became popular in the U.S. back in 1962 when Ross Perot started Electronic Data Systems (EDS) to serve the expanding need for information technology services by companies that realized it could save a lot of money by having some of its electronic data processing activities, such as payroll processing, done by EDS. It made Ross Perot a millionaire. According to Forbes magazine, his wealth was estimated at $3.5 billion in 2009, the 85th richest person in the U.S. Perot's wealth helped fuel his independent campaign for the presidency in 1992 and some may say he has been an inspiration for the Tea Party.

Outsourcing expanded overseas in the 1990s and became offshoring, a practice whereby business processing outsourcing (BPO) services are conducted in countries such as India for companies in the U.S. It's quite easy to transmit financial information using the Internet to workers in another country who are paid much less than U.S. workers, receive no employee benefits, and generally welcome the opportunity to advance their careers and move up to the middle class. Most people think of India as being the country of choice in offshoring by U.S. companies. However, watch out India because along comes the Philippines and China.

According to recent reports, the BPO industry in the Philippines has grown 46% annually since 2006. This boom is led by demand for offshore call centers. Industry estimates from the Board of Investments, Business Process Association of the Philippines, and BPO Services Association put the number of people employed by the BPO sector in that country at the end of 2008 at a minimum of 435,000 (vs. 372,000 in 2007).  The BPO output for 2008 was US$ 6.1B (vs. US$ 4.5B in 2007), putting the Philippines as the 3rd largest BPO destination (15%) after India (37%) and Canada (27%). The 2009 numbers were approximately $7.5 to $8.0B. Philippine BPO was forecasted to earn between US $11 to $13 billion and to employ 900,000 additional people in 2010. 

In an effort to foster growth in its outsourcing industry, China announced that the government will not be levying operating taxes on offshore service outsourcing business in 21 cities until 2013. The policy covers firms specializing in IT outsourcing, business process outsourcing and knowledge process outsourcing. The initiative is expected to boost China’s already robust growth in the industry, where the country enjoyed a 21 percent year-on-year increase to $23.6 billion in 2009.

What does this all mean for the average U.S. citizen? Well, if the trend continues our unemployment rate may go to the double-digit range and stay there for quite awhile. I have a suggestion. Why doesn't the government work with U.S. businesses to train unemployed workers to perform the kinds of services that companies are offshoring? Wouldn't it be better to spend the money on training rather than unemployment benefits? The government can offer tax credits to companies that hire individuals who satisfactorily complete the training programs and keep the workers on for a period of time -- say 1-2 years. By then, each individual so hired should have been able to prove his/her worth to the company. It's the right thing to do!