Case Study No.

1
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 programers. 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? Besides lower wages, what factors make
India especially attractive as a country to which a company should outsource
their activities?
Answer:
The work or activities that firms outsource to lower-wage countries are:
 Computer works
 Call Center
 Research
 Manufacturing
Besides lower wager, the factors that make India attractive are:
 Skilled Workforce: India is a desirable destination for outsourcing a range
of services due to its sizable pool of competent IT professionals, software
developers, and customer service agents.
  English Proficiency: Businesses looking to outsource business processes to
Europe and North America should look no farther than India, home to the
second-largest English-speaking population in the world (BPO).
 India boasts a robust technology infrastructure that facilitates outsourcing
and guarantees effective service delivery.
 Cost-Effective Services: India is a cost-effective outsourcing destination
because of its low average salary, low cost of living, and large pool of skilled
labor.
Education System: The emphasis on science and technology in India's higher
education system results in a sizable number of STEM graduates each year,
which is advantageous for software development outsourcing.

2. What do other countries offer that is fundamentally different from the US

when it comes to outsourcing? What new twist is the company giving to
outsourcing strategies, and why?
Answer:
When it comes to outsourcing, foreign nations have a few significant
advantages over the United States:
 Lower labor expenses: By outsourcing to developing nations like Vietnam,
the Philippines, and India, where average salaries are substantially lower than
in the US, businesses can cut labor expenditures.
 Talent pools with a lot of experience: Malaysia and India are popular
destinations for the outsourcing of these kinds of services because of their
sizable populations of educated and experienced professionals, especially in
IT, software development, and engineering.
 Government policies that are favorable: Some nations, like Malaysia and
India, have put laws and incentives in place to draw in and assist the
outsourcing sector. These include tax breaks and infrastructural
improvements.
 Advantages of geographic closeness and time zone: For US-based
businesses, being in a comparable time zone, such as Mexico, can help with
improved collaboration and communication with the outsourced team.

The key reason driving this approach are:

 Cost Savings: Businesses can lower labor expenses and increase overall
profitability by outsourcing to nations with cheaper wages.
 Access to competent talent: Companies can get the specialized expertise
they require for a variety of business operations in particular countries due to
the availability of educated and skilled personnel in certain nations.
 Operational efficiency: Businesses can benefit from outsourcing by being
able to work around the clock and take advantage of time zone differences to
finish jobs faster.
 Concentrate on core competencies: Businesses can allocate more
resources and time to their major areas of competence by outsourcing non-
essential business operations.

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

sign up for such job assignments in foreign countries? If you did it yourself,
what would be the benefits to you and your resume or CV?
Answer:
 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 I were to consider such a job assignment myself, the potential benefits

could be:
 Gaining international work experience and exposure to different
cultures
 Developing language skills if the job is in a non-English speaking
country
 Potentially higher pay compared to local wages, even if lower than US
standards
 Opportunity to travel and live abroad for a period of time.
Working abroad will help me improve both professionally and personally, thus
including an international project or job on my resume could increase my
employability in the future. My time spent working overseas will demonstrate
my adaptability and independence and make my resume stand out.

4. Can you think of other industries and other low-wage countries where
outsourcing could be applied?
Answer:
Industries:
 Manufacturing: Countries like Cambodia, Ethiopia, and Vietnam have large
pools of low-cost labor and could be attractive destinations for outsourcing
manufacturing processes.
 Information Technology (IT) and Software Development: The
Philippines, Indonesia, and Ukraine have skilled IT professionals and could be
viable options for outsourcing software development, tech support, and other
IT services.
 Healthcare Services: India, the Philippines, and Costa Rica have strong
healthcare infrastructure and medical professionals, making them suitable for
outsourcing medical transcription, telemedicine, and other healthcare
services.
 Tourism and Hospitality: Thailand, Vietnam, and the Dominican Republic
could be attractive for outsourcing customer service, reservations, and other
hospitality-related functions due to their tourism-friendly environments and
lower labor costs.
 Financial Services: Countries like Poland, Bulgaria, and Malaysia have been
emerging as destinations for outsourcing financial services like accounting,
bookkeeping, and financial analysis due to their skilled workforce and cost
advantages.
Low-wage countries:
  Mexico: Mexico is a popular nearshoring destination for US companies due to
its geographic proximity, similar time zones, and high employee retention
rates.
 Malaysia: Malaysia is a rising outsourcing market with a thriving IT sector
and a highly proficient English-speaking workforce.
 Turkey: Turkey has a large, cost-effective workforce and is becoming an
attractive outsourcing destination, particularly for manufacturing and IT
services.
 The Philippines: The Philippines is known for its skilled, English-proficient
workforce and is a popular destination for outsourcing customer support, call
centers, and business process outsourcing (BPO) services.
 Vietnam: Vietnam's growing economy, low labor costs, and improving
infrastructure make it a compelling option for outsourcing manufacturing, IT,
and other business functions.

Submitted by:

Florissa Isabel F. Citacion

MBA Student