OUTSOURCING

1

• OUTSOURCING
• Accessing Developing Countries Knowledge Pool
  and
• Creating a Global Thinking System
• Mina Mashayekhi
• Head, Trade Negotiations
• and Commercial Diplomacy Branch
• UNCTAD
• Geneva, 28-29 April 2005

2
The Data

• A new way to leverage skills and markets
• Win-win situation for DCs and ICs
  productivity, competitiveness, higher employment,
  faster economic growth
• every dollar of outsourcing creates 1-45-1-47 of
  value of which the US captures 1.12-1.15 while
  India gets only 33 cents
• Outsourcing industry to exceed 1 trillion by
  2006
• Total savings from global outsourcing
• to grow from 6.7 bn (2003) to 20.9 bn (2008)
• Developing countries gains 60 billion in ITES
  by 2008

3
The Data

• Outsourcing North-South issue? Hardly
• More North-North trade-68 of trade
• North America, largest market 60 of total
• Canada, largest exporter of private services to
  US
• Job displacement, unfounded
• Net creation of 22 million new jobs in the US
  (from 2000-2010) shortage of 10 million in 2010
• Estimates for outsourcing job creation 317,000
  net new jobs by 2008 in the US
• 2003 98 of total contract value for outsourced
  business process service delivery in the US is
  done domestically (only 2 off-shored)
• India accounted for only 1 of total US imports
  of private services (of which, 2 - business
  services)

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Worldwide ITES-BPO Spending by region 2002-2006
Region 2002 2006 2002-2006 (CAGR )
Americas 484,732 647,427 7.5
EMEA 171,303 237,390 8.5
Asia/Pacific 117,622 194,228 13
Worldwide 773,657 1.079.054 8.6
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The Benefits

• Contributes to the MDGs
• gender empowerment, poverty reduction, access to
  technology
• Has positive spill-over effects
• gains from additional consumption, skills and
  technology transfer, secondary employment
• Strengthens local capacity
• through ToT and technological developments
• could assist DCs in building their own industries
• Indian example TCS, Infosys, Wipro Technologies
• Expands markets
• through inter-modal linkages, especially with
  Mode 4
• could benefit late entrants, esp. if trend
  continues

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Gains for Outsourcing Companies

• Strategic decision / competitive necessity
• Lower labor costs
• Economies of scale
• Round the clock operations / time zone
• Access to skills (including language skills)
• Legal and regulatory framework
• Quality
• Structure of existing corporate network
• Global RD teams working in tandem

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The Activities

• Lower end customer contact centres, data entry
  operations, telemarketing, basic technical
  support
• Middle processing of financial transactions
  (credit-card billing, insurance claims)
• Higher end professional services such as
  research and development, accounting, engineering
  and architechtural design services, investment
  analysis, medical diagnostics

8
Developing Country Beneficiaries

• India a wide known success story
• 18 percent share of the global market
• Growth rate 54 in 2003-04
• Total export revenues to touch US 57 bn by 2008
  US 148 bn by 2012
• Employment to rise from 110,000 (2003) to 2.7 mn
  by 2012
• Philippines, China, Malaysia, Vietnam,
  Bangladesh, S.Africa, Ghana, Senegal, Kenya,
  Jamaica, Mauritius, Nicaragua, Barbados, Mexico,
  Brazil.
• Others
• Hungary, Czech Rep.

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Programmers Wages(Average Wage/year (US000)
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Vietnam Experience

• Nortel, Cisco, IBM, Hewlett-Packard, British
  Petroleum, Sony, Fuji, TCS, now in Vietnam
• IT training specialists (NIIT, Aptech, Oracle)
  and Royal Melbourne Institute of Technology,
  providing training
• Attractions
• cost advantage
• strong mathematical skills ( focus of educational
  system)
• knowledge of French and English
• Government providing incentives to IT sector
  (tax holidays, infrastructure development,
  education)
• Vietnamese diaspora key driver of IT industry

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Ghana Experience

• Government pro-active role campaign, promotion
  for major US BPO players to set-up presence
• Attractions
• stable political environment
• english-speaking workforce high literacy
• Role of diaspora population
• setting-up their own companies in Ghana some in
  partnership with foreign investors
• knowledge of foreign culture and their networks

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Success Stories Summary

• Competitive cost
• Language, education, skills
• also enables moving up the value chain
• Ability to develop global networks
• Adequate and reliable infrastructure
• Government role infrastructure, education,
  various incentives, marketing, political
  stability, regulatory framework (e.g., security
  of data and IPR protection)
• relates to long-term prospects of doing business
• Role of diaspora population
• Cultural and relational proximity and trust

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The Challenges to Overcome

• Lack infrastructure, trained HR, local market-
  base
• Difficulty in gaining confidence of outsourcing
  companies
• regulatory framework still under development
• political instability and governance issues
• Lack of coverage for liability and risk
• putting in place a strong risk-control framework
• Potential erosion of competitive advantage
• through new laws and regulations (e.g.,
  restrictions on transfer of personal data)
• Growing protectionism in outsourcing countries

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Intermodal Linkages

• Mode 1-Mode 4
• need for professionals to travel for negotiating
  contracts, trouble shooting, maintenance,
  training, supervision, monitoring etc.
• Mode 1-Mode 3
• Indian companies benefiting from outsourcing now
  have established their own commercial presence in
  major markets
• 480 Indian companies in UK India, now 8th
  largest investor in the UK
• have also established operations in China,
  Philippines, etc. to leverage specific skills and
  take advantage of lower costs.

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Liberalization The Targeted Approach

• Full MA and NT commitments on positive list of
  service sectors at aggregate (2 digit) level
• ensures a reasonable degree of coverage to
  include large part of current IT BPO trade
• is focused on the sectors in question
• allows for gradual liberalization (bearing in
  mind regulatory and institution constraints in
  developing countries)
• allows for more predictability
• But
• may still miss out on a number of services
  currently being traded
• may not cover other new services to be traded in
  the future

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Liberalization The Horizontal Approach

• Full MA and NT to ALL services supplied on a
  cross-border basis (excl. certain financial and
  certain transport services)
• includes also those services not listed in
  schedule, and any new service that will be traded
  in the future
• reduces negotiating capital
• more accelerated market opening.
• But
• creates challenges for the basic structure and
  approach of the GATS (bottom-up)
• does not allow for targeted and focused
  liberalization
• does not easily account for development
  flexibilities
• makes it hard to anticipate impact.

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Domestic Regulation

• Specific commitments
• can potentially be undermined through
  protectionist domestic regulations.
• Challenges
• developing countries are still experimenting with
  their regulatory systems
• cross border delivery through new technological
  means gives rise to new regulatory issues
  (liability consumer protection etc.)
• new governance and institutional frameworks for
  cross-border delivery and outsourcing services
  are required.

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UNCTAD Expert MeetingProfessional Services New
and Dynamic Sectors

• Analyzing trade opportunities arising from global
  outsourcing
• Identifying best practices to strengthen domestic
  capacity and increase participation in
  international trade
• Exploiting existing frameworks for cooperation
  and coordination among international
  organisations
• For UNCTAD, to intensify its capacity-building
  efforts for developing countries, esp. LDCs
• For developing countries, to build necessary
  infrastructure and domestic capacity
• Effective implementation of Article IV, Telecom
  Annex
• For WTO Members, to address issues of market
  access in the ongoing GATS negotiations
• Cooperative measures through RTAs.

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Way Forward

• Proactive role for DC governments
• Identifying their natural advantage and
  taping/developing it to boost competitiveness
• Building and maintaining appropriate
  infrastructure
• Setting up appropriate regulatory frameworks,
  maintaining political stability
• Becoming responsive to private sector needs
• Tapping diaspora support to build domestic
  industries

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Way Forward

• Provide assistance to strengthen DC capacity
• support for skills and infrastructure
  development, e.g. through a digital fund
  (external financing)
• Curb protectionism
• through industry support measures (redeployment,
  placement support, training grants, etc.)
• through international trade negotiations (market
  access issues in the GATS)

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To Sum Up.

• Outsourcing is an inevitable trend in the global
  economy
• with potentially huge gains (for both developed
  and developing countries).
• Benefits are not automatic
• but require targeted action
• at national level (policies to support
  outsourcing, e.g. create infrastructure and
  educational base)
• at international level (TA for national policies
  and negotiating outcomes to curb protectionism).

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Thank You