Case Study No.

Adapted from Outsourcing: Jobs in Jeopardy

Workers at a Kettering health insurance call center did not understand why their office was
closing. Weeks after the announcement was made, a message posted on an internal website
said company trainers would be teaching new hires in Bombay, India, for 10 to 13 weeks.
“Please congratulate the trainers on this global assignment; it will be a great opportunity to
support the company initiatives,” the announcement said. Offshoring—serving American
customers with overseas labor—is disrupting workers’ lives as more and more companies
trim jobs, cut pay and require those who remain to work efficiently with people they have
never seen in countries they know next to nothing about. Moreover, there is a fear felt by
those who witness the rain of lay off notices: Will I be next?

No one knows exactly how many white-collar jobs that serve the American market are done
outside the United States. Nevertheless, most estimate that 2 to 4 per cent of computer jobs
and 5 per cent of call center work is done in India, where about 80 per cent of the overseas
white-collar jobs go. The numbers will undoubtedly increase if smaller employers start
moving office jobs to the developing world. A Dayton Daily News survey of Ohio’s 30 largest
employers found more than half are offshoring. In addition, that may not be the full
measure of the trend.

The topic is so radioactive that an information technology employee at Kroger said he could
not talk about how Kroger offshores, because he would lose his job. Companies have
reasons for their reticence. Nearly one-third of consumers say they would stop buying from
a company if they knew it was sending calls to another country, according to a survey by
Convergys (NYSE: CVG), a Cincinnati-based call-center provider that has 10,000 employees
in India and 1,000 in the Philippines.

Call center work in India is growing fast—a 100 per cent growth rate last year alone,
according to Rafiq Dossani, a senior research scholar at Stanford University’s Asia–Pacific
Research Center. In July, Dossani met in India with executives of companies that provide
call centers for US companies. They told him that their American clients have started to ask
them to keep their contracts secret. “They don’t want their company in the news,” Dossani
said. “Especially in sensitive states like Ohio, where job losses are a key elective issue.”

Offshoring took off in the 1990s, but the seeds were planted more than a century ago
through American and British colonization. The most popular offshoring sites are in former
English or American colonies because they have many fluent English speakers.

Seventeen companies in the Dayton Daily News survey of Ohio’s 30 largest employers said
they send work for the American market overseas—and every one that disclosed where the
work goes uses India.

Smaller companies are also getting into the game. Last year, Mridhul Prakash, 32, and Doug
Dodson, 45, founded Strategix, a Dayton firm whose motto is “The India Advantage–
Delivered.” The consultants started the business to help mid-sized companies save money
by automating and offshoring their back-office work.

So far, Strategix has not dislocated any American workers—they moved a small
telemarketing center for a Florida client from Chennai, India, to the suburbs of New Delhi.
But Dodson said his dad asked him, “So, you’re going to take jobs offshore?” “This is going
to happen, I might as well participate,” Dodson replied. “Once you open up borders,
figuratively and literally, you can’t stop the flow.”

The labor rate differences are dramatic. The salary for a computer call-center worker is $200
a month, compared to about $2,000 in the United States. However, added electricity,
transportation, and management costs make offshoring more expensive than the difference
in labor costs would suggest, and some companies have not realized any savings. Still,
LexisNexis Chief Technical Officer Allan McLaughlin said the savings for getting computer
work done in India is about 50 per cent.

When offshoring began, no one worried much about it because the job market was strong.
That changed when IT unemployment began to rise, though the increase was due mostly to
the recession and the bust of the dot.com bubble. During the mid- to late-1990s, companies
imported computer workers on temporary visas— two-thirds of them from India—because of
the huge demand for programmers. Arun Mehta, 30, came to LexisNexis in June 2000 on
one of those visas to manage one of its computer systems.

Mehta, who spent four years in Dayton as a contractor from HCL Technologies, just returned
to New Delhi, India, where he hopes to manage computer work for LexisNexis. When Mehta
arrived in Dayton, he took over a job that had been done by a LexisNexis employee. That
man, who trained Mehta, was initially given more creative work, and then lost his job after
the recession hit. “Suddenly, when 9/11 happened, future projects didn’t have enough
budgets,” Mehta said. Between 100 and 200 employees were laid off in December 2001, he
said—including the man he replaced as system owner.

Every time Procter & Gamble’s Damon Jones files for reimbursement for business travel, he
fills out the expense report, sticks it in an envelope, and sends it to San Jose, Costa Rica,
where clerks process his check at a fraction of the cost of Cincinnati salaries.

That one small economy is just one of thousands that has enabled P&G to save $500 million
in four years. P&G streamlined its global operations by consolidating administrative work in
three regional offices—Costa Rica, England and the Philippines. Cheap labor, automation,
and software standardization helped the company meet its cost-cutting goals a year early.
Jones, a company spokesman, said the corporation then asked itself, “How do we take
shared services to the next level?”

Domestic outsourcing was their answer. For instance, 2,000 Cincinnati IT workers now work
for Hewlett Packard. IBM (NYSE: IBM) took over some HR duties. “Basically, 3,500 have
moved in the last year,” Jones said. They make the same wages at their new companies,
and even have the same benefits for the first two years. If their new employers lay them off
in the first couple of years, P&G will pay severance. “What you read about
outsourcing/offshoring is job loss,” Jones said. “We really wanted to do something
different.” The result—P&G has half as many employees as it did five years ago. It is not
just routine office and computer tasks that are sent abroad. Some companies have begun
scientific research in Asia. They say globalization brings a fresh perspective from countries
that could become lucrative future markets. GM Science Labs Executive Director Alan Taub
likes to call GM Research and Development “an idea factory.”

In September 2003, General Motors (NYSE: GM) decided to add to its arsenal of PhD
brainpower, concentrated in Michigan. However, it did not build an office park near MIT or
Princeton. It opened a Research and Development center in Bangalore, India. Taub gave a
PowerPoint presentation there that linked the India Science Lab all the way back to Charles
Kettering, the Dayton inventor who founded GM’s Research and Development division in
1920. The Indian researchers do all the sophisticated work that scientists in Michigan do—
from short-term projects for particular models, to exploratory programs, such as the
possibility of running engines on solar power. Some of the work in Bangalore will be for the
Indian market, but very few Indians can afford to buy cars. The vast majority of the work in
Bangalore will be collaborating with Michigan researchers. Eventually, almost every engineer
in Michigan will have a partner there, Taub said. In GM R&D, 46 per cent of employees have
PhDs, 20 per cent have master’s degrees, 14 per cent have bachelor’s degrees, and 19 per
cent have associate’s degrees. So far, GM has hired about 35 researchers in Bangalore, a
third of the way to its goal of 100. About a dozen of them were hired after they graduated
from American universities.

“We’re still the brain trust of the world,” Taub said.

Case Questions.

1. Based on your prior knowledge, what kinds of activities do firms outsource to lower-
wage countries like India?
 The work or activities that firms outsource to lower-wage countries are:
 Computer works
 Call center
 Research
Besides lower wages, what factors make India especially attractive as a country to
which a company should outsource their activities?
 The factors that make India attractive are:
 They have skilled or talented workforce that provides quality service
 No communication barriers since India is one of the largest English
speaking nation
 Advancement in Information Technology

2. What do other countries offer that is fundamentally different from the US when it
comes to outsourcing?
 Other countries offer a very much lower salaries compared to US. The salary
for a computer call-center worker is $200 a month, compared to about
$2,000 in the United States. Some companies who outsource can save 50%
of its operating expenses.

What new twist is the company giving to outsourcing strategies, and why?
 General motors opened a Research and Development center in India and
Indian researchers do all the sophisticated work that scientist in Michigan do.

3. Do you think a substantial number of young Americans might be willing to sign up

for such job assignments in foreign countries?
 Yes. A substantial number of young Americans might be willing to sign up for
such job assignments in foreign countries since US has the most percentage
of outsourced jobs in the world, hence it could affect the employment of its
 own citizens. Higher outsource jobs means a lesser opportunity for the young
Americans to get a job in their own country.
If you did it yourself, what would be the benefits to you and your resume or CV?
 Working abroad will undoubtedly lead me to learn new skills. Not only
learning new skills from new job but also learning new soft skills from
communication to networking. Working in foreign countries will help me
develop personally just as much as I grow professionally, hence having an
international work or assignment on my resume could boost my future
employability. My stint working abroad will prove that I’m flexible and
independent and will help my resume stand out from the crowd.

4. Can you think of other industries and other low-wage countries where outsourcing
could be applied?

1. Ukraine
 Ukraine is among the countries gaining outsourcing popularity in Eastern
Europe. Developers in Ukraine are currently around 165,000 and are
expected to increase up to 125% by 2025, hence the IT sector in the
country is expected to increase in the following years along with the
increase in outsourced job.
2. Poland
 Another Eastern European country that gains popularity in the
outsourcing industry is Poland. It is one of the biggest players in IT in
Eastern Europe. Aside from its multilingualism and cost reduction,
outsourcing companies in this country have secured regulatory
compliances from different institutions to ensure providing top data
security for their outsourcing partners.
3. South Africa
 South Africa is now the third-largest emerging BPO geography, competing
with India and the Philippines. South Africa specializes in contact center
and IT outsourcing, with most of its clients in banking and finance,
telecommunications, and the healthcare industry