Implications of Business Support Services for Development: Lessons for the GATS negotiations by Rupa Chanda IIM Bangalore
Outline A Global Overview of Offshore Outsourcing of Services Overview of key Asian players in services outsourcing Development implications for delivery economies Issues for the GATS negotiations
A Global overview of BPO Businesses increasingly offshoring services horizontally and vertically increase efficiency lower costs focus on core services tap labour market and strengths of other markets ITES-BPO market estimated at $773 bn (2002), projected to rise to $1,079 bn by 2006 BPO segment estimated at $234 bn (2005), to rise to $310 bn by 2008 Rapid growth Annual CAGR of 32% between 1998-2003 (ITAA, 2004) Annual growth of 30-40% projected over next 5 years Process driven by demographic and competitive pressures, aided by technological advancements
Source: DB Research
Five tier classification of services offshoring by value and skill Backoffice functions not requiring domain knowledge or specialized expertise (data entry, digitization, conversion) Teleworking services involving rule based processing, simple voice and on-line customer relations support services based on rules set by client (reservations, billing) Problem solving and decision making (IT solutions) Teleworking services requiring direct interaction with customers, elaborate transactions with client beyond pure voice based support (technical help desk) Services involving domain knowledge, specialized skills (research and engineering services, product development and testing, analytical services, consulting and advisory services)
Figure 1: Five tier value chain in global outsourcing Cross border supply Global outsourcing Specialized services requiring domain knowledge and skills Complex multimedia support services Activities involving problem solving and decision making Rule based processing and simple support services Data entry, digitization, conversion, transcription services
Offshoring destinations Wide range of developing, developed, and transition economies India, Philippines, Ireland, Australia Emerging destinations- Eastern Europe, Vietnam Segment occupied by each country depends on inherent and acquired advantages Offshoring sources US business accounts for 60% of global offshoring of services Europe accounts for 25% Asia-Pacific region and Japan each account for 5% of world market Offshoring companies based in developed and developing countries 55% of Fortune 1000 companies outsource service activities to other countries Different organizational/contractual arrangements and modes of operation Independent service providers, joint ventures/other collaborative arrangement, captive subsidiaries Mixed delivery with complimentary onsite support often required
Source: AT Kearney
3.3mn jobs to go offshore from US by 2015, worth $136bn in wages, close to 500,000 in IT alone (Forrester) Number of US jobs to be offshored Area Number 2005 2010 2015 Life sciences 3,700 14,000 37,000 Legal 14,000 35,000 75,000 Art, design 6,000 14,000 30,000 Management 37,000 118,000 288,000 Business operations 61,000 162,000 348,000 Computer 109,000 277,000 473,000 Architecture 32,000 83,000 184,000 Sales 29,000 97,000 227,000 Office support 295,000 791,000 1,700,000 Source: Business Week (February 3, 2003).
Key Asian Players in Services Outsourcing Several countries in Asia important offshoring destinations Emerging Asian Offshore Locations
India Leading destination in offshore services outsourcing (around 55% share) Sixty percent of Fortune 500 companies contracting out IT and business processes to India India s BPO exports growing by 50-60% per year Exports of $2.3 bn in 2002-03, risen to $4.6 bn in 2004-05, $6.3bn in 2005-06 Projected to rise to $20bn by 2007, $30bn by 2010 BPO s share in India s IT exports at 25% (2002), to rise to 57% by 2007
Major segments driving BPO and ITES market in India are: customer care Finance and accounting human resource management payment and administrative services content development engineering logistics sales legal services Movement up the value chain, KPO (analytical work, R&D, risk management, consultancy) Employs workforce of around 300,000 across regional hubs, projected to reach 400,000 plus in 2005-06 and 1 mn by 2008 Work done across the value and skill chain by: captive subsidiaries domestic IT companies independent service providers Reverse outsourcing by Indian companies to other countries
India s BPO exports (2004-05)
Employment growth
Philippines BPO industry dominated by contact services segment and concentrated in Metro Manila area (Sykes Asia, Convergys, AOL Member services) Growth of over 50 percent per year recently US accounts for 90 percent of business Revenues from call centre services increased from $640 million (2004) to $960 million (2005). Number of seats up from 20,000 (2003) to 40,000 (2004), employed over 50,000 agents (2005), compared to less than 1,000 (2000) All types of customer interaction handled telemarketing, advisory, sales verification, collection, reactivation, reinstatement, loyalty programmes, order and entry, inquiries, technical help desk, payment authorization, complaints, disputes, transcription, electronic eligibility, support, billing, and on-line business to consumer support and on line business to business support, and customer relationship management. Other services outsourced include medical transcriptions, animation, finance and accounting, software development services.
Recent and projected trends in contact centre positions in the Philippines, 2004-09 Source: DataMonitor, Future of Contact Centre Outsourcing, pp.45-46
Demand for contact centre outsourcing in the Philippines by source country, 2004 Composition of the Philippines contact services industry by activity, 2004 DataMonitor, Future of Contact Centre Outsourcing, pp.49-50
China Rapid growth in recent years $490 mn (2002) to $977 mn (2005), projected to grow to $1.4 Billion (2007) Growth rate of 17% in 2002-2007 period Main market is Japan Mostly IT services, limited voice based services Voice based business caters to Japan and Korea Main limitation is lack of English language capabilities but advantage due to scalability Very fragmented industry, no industry association presence
Offshore outsourcing revenue by verticals (2004) 47% 26% BFSI 9% Retail media/comm/utilites 5% Manufacturing 11% Others IT Telecom 6%
Offshore outsourcing revenue by geography (2004) 15% 2% 15% 13% 53% Taiwan Others US Japan Hong Kong
Main facilitators cheap literate labour force English language capabilities availability of skilled manpower (scalability) low cost bandwidth, good telecom infrastructure availability and applicability of net based tools ability to standardize business applications existence of a well established, relatively mature domestic IT sector government policies (infrastructure, investment, taxes, training, creation of special zones) IP legislation Active industry association Survey results indicate development of domestic infrastructure, liberal investment regulations, incentives important for BPO industry
Domestic Physical Infrastructure Factors (facilitators) (% of firms) Philippines India China Telecom Quality and Availability 80 100 92 Network Bandwidth 80 99 96 Connectivity Costs 72 99 86 Power Supply 63 100 90 Real Estate Availability 31 92 82 Availability of Dedicated Zones 32 90 84 Technology 55 100 84 Internet Provision Arrangements 38 100 84 Office Equipment Supplies 76 100 84 Domestic Industry 70 95 74
Domestic Regulatory and Policy Framework Factors (facilitators) (% of firms) Philippines India China FDI Policies 59 91 80 Tax Policies 53 95 86 Subsidies 42 93.5 86 Export Incentives 38 94 82 Export Orientation of the IT Sector 53 90 78 Import Duties/Tariffs 29 91 80 Intellectual Property Rights (IPR) Legislation 30 90 84 Infrastructure Related Policies in Telecom 44 95 82 Infrastructure Related Policies in Internet Provision 49 92 78 Infrastructure Related Policies in Setting Up Tele-establishments 32 95 78 Infrastructure Related Policies in Power 21 92 70 Infrastructure Related Policies in Real Estate 17 54 70
Main constraints Lack of adequate and good quality physical infrastructure (telecom, power, transport) Lack of skilled and quality manpower Absence of English speaking capabilities Real estate and office capacity Absence of requisite legal and regulatory frameworks data protection, privacy, consumer protection, on-line payments Legislation and anti-outsourcing sentiment in client countries Tightening of immigration regulations for categories of service providers that support offshore work Survey results indicate both infrastructural and regulatory constraints, domestic and external, to BPO industry growth
Common Constraints (% of firms) Philippines India China Human Resource Factors Cost 33-20 Turnover Rate 28 56.5 22 Domestic Physical Infrastructure Factors Connectivity Costs 24 20.5 - Power Supply 27 23 - Telecom Quality and Availability - 15.5 16 Domestic Regulatory and Policy Framework Factors FDI Policies - 24.5 14 Tax Policies - 23 32 External Regulatory and Policy Environment Factors Cost Factors - 11.5 12 Government Bans on Outsourcing or Volume/Nature of Outsourcing 64 17 20 Intellectual Property Rights (IPR) Laws or Laws on Data Protection/Privacy 73 11.5 - Presence/Emergence of Other Countries as Outsourcing Destinations 19-14
Development Implications for Delivery Economies Outsourcing of services impacts delivery economies through direct and indirect channels, externalities, tangible and intangible Scope for win-win relationship between host and delivery economies Client countries McKinsey study shows for every US $1 offshored, net gain to host economy $1.12 increased profits, efficiency, expanded trade, investment flows Job loss in host economies overstated, more in normal course of job destruction and creation Delivery countries Primary survey based evidence and secondary sources indicate positive effects in various development dimensions
(i) Employment creation BPO creates direct and indirect employment opportunities across wide range of services Better working environment and compensation than in jobs requiring similar skill and educational levels Greater labour force participation by different groups in society Employment opportunities beyond mainstream graduates Less advantaged and minority groups (women, retirees, disabled) Companies experimenting with flexible work hours, work from home Diversification of employment opportunities Faster upward mobility and improvement in living standards Demand created for wide range of ancillary services Transport, catering, housekeeping, security, computer equipment provision and maintenance, training, real estate Incentives created for entrepreneurial activity and small supporting scale businesses in ancillary services
Impact on Direct Employment (% of firms) Philippines India China Not Significant 20-2 Moderately Significant 35 14 48 Highly Significant 45 86 50 Impact on Indirect Employment (% of firms) Philippines India China Not Significant 23 2.5 14 Moderately Significant 48 32 64 Highly Significant 28 65.5 22 Source: Computed based on survey data obtained from firms
Share of Females Among Various Employee Categories ( 2004) (share of employees by category) Philippines India China All In-House Employees 56.5 31.5 32 In-House BPO Employees 61 32 31 CEOs 37 71 33.5 Senior Managers 37 22 26 Middle Managers 43 26 33.5 BPO Project Employees 48 31 18 Source: Computed based on survey data obtained from firms Very gender friendly industry
(ii) Skill and knowledge transfer Specific and generic skills acquired in delivery economies Specific skill transfer and acquisition in high end, specialized support services Development of capabilities to undertake prototype designs for testing for mass production (drug testing, engineering design, research) Exposure to cutting edge technology, practices (inventory and supply chain management, GAAP) and related upgrading of skills, technology, infrastructure Productivity gains from specialization and adoption of new technologies and processes Help develop indigenous capabilities for production, R&D, technical analysis without necessarily doing core processes Potential diffusion of technology to other sectors
Generic skills developed in delivering business support services Knowledge acquisition and transfer in migration phase of outsourced project Learn about client s functional, technical, maintenance, management processes, technical applications, products, marketing techniques Hands on experience through supporting on-site presence Customer relationship management skills Exposure to global, demanding customers causes changes in approach, skills, attitudes Learn importance of efficiency, costs, optimal processes, performance metrics, quality, on-time delivery Improve work discipline, greater professionalism, accountability Help in improving organizational systems, adopting more globally oriented competitive strategies at firm level Generic skills portable to other sectors and activities Can help improve work and management practices in other parts of economy
General Skills Development (% of firms) Philippines India China No Effect 40 20.5 8 Mildly Positively 35 43.5 40 Very Positively 25 36 52 Specific Skills Development (% of firms) Philippines India China No Effect 48 28 18 Mildly Positively 35 38.5 54 Very Positively 17 33 28 Skills Development of Support Staff (% of firms) Philippines India China No Effect 73 1 0 Mildly Positively 2 60 24 Very Positively 25 39 76 Source: Computed based on survey data obtained from firms
Training for BPO Employees and Support Staff (% of firms) Philippines India China Process-Specific 85 97.5 66 General BPO-Related Skills 87 92 72 General Employee Training 87 90 64 In-House Support Staff 77 90 76 Contractual Support Staff 28 37 24 Training in general and specific skills provided by most BPO firms to business support and other employees
(iii) Creating resources Net value addition to outsourcing and delivery economies Export earnings, taxes, increased incomes and wages, productivity and efficiency gains Foreign investment strategic investments by MNCs, setting up of subsidiaries, R&D centres, JVs with local firms Survey results indicate over 60% and over 50% of firms in India and China perceive BPO industry has had very positive impact on FDI in BPO segment and in non-bpo sectors, respectively Confidence and image building attracts investments and further contracts Stimulus to government investments in related infrastructure Over 70% of firms surveyed in India, China, Philippines indicated BPO industry s growth stimulated government investment in physical infrastructure, esp. telecom, power Reinvestment of profits (around 40% according to survey results) Domestic investment establishment of small and mid size entrepreneurial firms, strategic acquisition of smaller players, ramping up of investment by larger companies
Effect of BPO Indsutry Growth on Domestic Investment (% of firms) BPO Sectors Philippines India China Negatively - - 2 No Impact 42 9 20 Positively 58 91 78 Non-BPO Sectors Philippines India China Negatively - - 4 No Impact 32 4 26 Positively 68 96 70 Strong positive impact perceived on domestic investment in BPO and non-bpo sectors
(iv) International Relations Strongly positive survey results Impact of BPO Industry on International Relations (% of firms) Philippines India China No Impact 33 31 12 Positively/Favorably 67 68 88 Aids assimilation into global workplace and culture Opens doors to foreign investors Creates more global awareness Increases scope for foreign collaboration and tie-ups
Type of Business Alliance and Main Participating Countries (% of firms) Philippines India China Technology Transfer 25 15 16 Advisory Relationship - 11.5 12.5 Marketing Distribution Arrangement 18 29.5 16 Tie-up or Partnership 17 20.5 59.5 Many forms of international alliances in BPO industry with positive implications for international relations
(v) Retention and reversal of skilled persons Reduced incentives for migration by skilled persons with expanded job opportunities and attractive wages in offshore centres Reverse migration with relocation of expatriates by overseas companies Return migration by senior professionals and managers to set up own business, manage MNC subsidiaries Associated investment, knowledge, technology flows and contracts 50% of firms surveyed in India and similar share in China indicated that BPO industry is helping in retaining skilled people and reversing brain drain better income opportunities global character of industry greater expectations
(vi) Externalities New class of consumers created with large demand effect on other sectors Impact of demand on real estate, consumer durables, property and financial markets Contact services alone created income of $375 million (2001-02) in India Spread of education and training and incentives for human capital accumulation
Overall Impact of offshore outsourcing of services in the Philippines (computed based on survey data) Dimension of development All firms Tier 1 Tier 2 Tier 3 Domestic Firms Foreign Firms Direct employment ++ ++ + + ++ + Indirect employment in ancillaries and related sectors + + + + + ++ Benefits and welfare 1 + + + + + + Gender friendliness 2 ++ ++ ++ + ++ ++ General skills and knowledge + + + + + + Specific skills and knowledge + + + + + + Utilization of skills + + + + + + Ancillary skills + + + + + + Resource creation through reinvestment of profits + ++ + + + + Domestic entrepreneurial activity in outsourcing + + + + + ++ Domestic investment in other activities ++ ++ ++ + ++ ++ Government investment in the + + + + + + economy 5 International relations 6 + + ++ + + ++ Overall, very positive picture emerges of developmental impact on delivery economies
Issues for the GATS negotiations Coverage of business support services under GATS subject to many limitations Inadequacies of GATS classification to capture current and prospective business support services Many unbound entries (no commitment) in existing mode 1 entries and offers, wide divergence across sectors Few commitments at higher two digit level Problems due to fragmented nature of many BPO services and overlaps across sectors Services covered only if listed explicitly under specific services committedambiguities New category of business and production services added under revised version of CPC 1.1 Division: 85 - Support services 8512 - Supply of personnel services 859 - Other support services 8593 - Telephone based support services 85931 - Telephone call center services 8596 - Data processing services 8599 - Other support services n.e.c. But still some services not captured in revised version Web hosting services / application service providers (ASPs)
Legislation on government outsourcing cannot be addressed under GATS as carve out for government contracted services But need to prevent extension of restrictions to private domain, need to ensure more full commitments in mode 1 in ongoing GATS negotiations Two liberalization proposals had been made Horizontal formula for liberalizing mode 1 with full commitments across sectors except where prudential/regulatory concerns Positive list based liberalization of mode 1 of as comprehensive a set of services as possible, better classification of selected activities Difficulties in anticipating emerging BPO services, classification problems remain Latter approach taken in plurilateral request Intermodal and intersectoral linkages must be considered in GATS negotiations Mode 1 and 4 linkages as substitutes and complements and implications of cross cutting restrictions Mode 1 and 3 as facilitators Telecom (voice, email, data processing, etc.), computer and related services, and business services (legal, accounting, R&D, market research, consulting, etc.) Regulatory issues likely to be important in future consumer protection, liability, data privacy, jurisdiction, taxation, government procurement, mutual recognition
Conclusion BPO industry potentially important source of growth and economic and human development in delivery economies Spreads wealth by creating direct and indirect employment opportunities, income, demand Generates productivity and efficiency gains through acquisition and transfer of new skills, technologies, and processes Foreign, domestic, government investment stimulated Beneficial for international relations Requires openness to foreign investment in key services and supporting domestic regulatory reforms in delivery economies to realize growth opportunities Requires predictability of market access in outsourcing economies to develop this industry Mutually beneficial relationship Can the ongoing GATS negotiations help in shaping this win-win relationship?