Examination of Witnesses (Questions 320-339)
NATIONAL ASSOCIATION
OF SOFTWARE
AND SERVICES
COMPANIES
9 MARCH 2004
Q320 Chairman: Good morning, gentlemen.
Can I welcome you here today. Perhaps, Mr Mehta, you can introduce
yourself and your colleague?
Mr Mehta: Good morning to you
all. Thank you for this opportunity to exchange our ideas with
you and share information. My name is Sunil Mehta. I work with
the National Association of Software and Services Companies of
India. We are a trade body, an industry association, of the entire
high tech industry within India. We have more than 850 member
companies and 150 of them are global companies in the US and the
UK. I have with me my colleague, Senthil Kumar. He is the Convenor
of our chapter within the United Kingdom. He is operating from
the UK. I am here to assist in addressing the Committee all the
way from New Delhi, India. Again, I thank you all for this opportunity.
Q321 Chairman: Thank you very much for
coming from New Delhi and, Mr Kumar, for coming from a little
closer. Perhaps you can tell us a little bit about your organisation
in the sense that we know that it is a not-for-profit trade association.
When we have trade associations in the UK who have out-stations,
as it were, located elsewhere it tends to be to promote British
exports and British expertise. Is that the same purpose as having
your chapter in the UK or is it to do with Indian-owned businesses
within the United Kingdom in the knowledge economy? Is it about
trying to attract out-sourcing to India from the United Kingdom?
Mr Mehta: I really think that
the objective of the chapter within the UK is to promote two-way
trade between India and the UK. For example, I think there are
about 220 Indian IT companies who have invested within the UK.
They have invested close to 100 million sterling. We also work
extensively with inward investment agencies within the UK, such
as the WDA and the British Midlands Initiative. I think the objective
is to promote two-way trade and investment between India and the
UK.
Q322 Chairman: We have a problem in the
UK which is fairly well-known but I would be interested to hear
your views on this. I think you consider that you can help us
with our skills shortages and act as what might be called a bridge
between the United Kingdom and India and India and the United
Kingdom in this area of skills shortage. Could you tell us how
you think this bridge could be established and how the two-way
traffic can flow, if I can put it that way?
Mr Mehta: I will try to answer
your question and I will also ask my colleague to elaborate. According
to this report which was prepared by e.skills UK in August 2003,
60% of the organisations whom they surveyed reported a shortage
of skills within the IT area. In part it is because IT is a constantly
evolving field of new technologies arising all the time and in
part because there is a demographic issue within the UK where
because of an ageing population internal projections within the
UK show that by the year 2008 there will be a shortage of about
800,000 people in the working age group. Do you want to add on
that?
Mr Kumar: No.
Mr Mehta: I really think it is
exacerbated within the area of IT because in the UK, as well as
in the US and the EU, young programmers do not want to learn about
old programming skills. There are so many organisations who even
today are continuing to use older programmes and obviously there
are not adequate people available within the United Kingdom. That
is the reason why we believe that industry in India could help
in that matter.
Q323 Mr Clapham: Good morning, Mr Mehta.
I am just looking in your submission at 5.3.4 and 5.3.7. You suggest
that the total benefit to the UK economy is around £46,000
for each customer contact centre job offshored and the direct
benefit to a UK company is £16,000, but the actual analysis
of how you arrive at that figure is a little unclear. Could you
tell us how those figures are arrived at?
Mr Mehta: If I could elaborate
on the methodology. If you are looking at it from an individual
company perspective, as and when they offshore a particular process
to a location like India or the Philippines, say, there is a direct
reduction in the costs which they experience, but the benefit
to the economy goes beyond the benefit to each individual company.
It really arises in three different streams. Stream number one
is as the industry grows in other parts of the world it offers
an opportunity for other British companies and it becomes a large
and growing resource base for them where they are able to export
their goods and services. For example, if the industry within
India is growing it also offers a larger and growing resource
base for British Telecommunications. Over and above this is the
benefit to the economy when the workers who are freed up from
those jobs move to other jobs after an adequate amount of re-skilling
which contributes to the economy as a whole. I think the economic
advantage is higher for the entire economy than for any individual
company that offshores.
Q324 Mr Clapham: Are there any costs
to UK employees, companies and the economy as a whole that you
feel have not been taken into consideration or do you feel that
your analysis has taken all of the costs into account that need
to be considered?
Mr Mehta: I believe that we have
taken into account all of the costs. The methodology that we have
employed has been ratified by economists within the UK.
Mr Kumar: I just want to add that
there is a very significant part about retraining employees within
the UK which has been added as a cost in that study too.
Q325 Mr Hoyle: We have heard from previous
witnesses that they have tried the offshore route but decided
it did not work for them. Do you know of any UK companies that
went out but had to return back to the UK because of their experience?
Mr Mehta: I have heard of at least
two companies, Shop Direct and Littlewoods, who have moved their
operations back to the UK. However, this issue has to be understood
in its proper perspective. Together these two firms accounted
for probably 300, 350 jobs. At the same time, companies like HSBC,
Prudential and Standard Chartered have experienced huge successes
in their Indian operations.
Q326 Mr Hoyle: You have got a lot of
benefits out there that people are not aware of. When you say
that, do you feel that companies that went out there really did
not grasp what was available to them?
Mr Kumar: What I would like to
place before the Committee is that there is a certain level of
processing and maturity that needs to be thought through and put
in place within the company before they go offshore. That also
needs to be at a higher level in terms of their business process
and they can take part of it, use the telecommunications advantage
and place it somewhere else in another geography. There are very
successful examples of international companies doing that: for
example, Microsoft runs a support centre which has about 3,000
people and there is GE and Siemens which runs a help desk and
other facilities. Sunil mentioned the British companies but there
are a lot of other companies, Fortune 500, and what really points
to that direction is the processing and maturity within that organisation.
Q327 Mr Hoyle: So what you are saying
is take more time to understand what benefits are out there, do
not cut and run, do not come in expecting it all to be rosy now?
Mr Kumar: It will not work if
you have not thought through the processing and maturity issues.
Q328 Linda Perham: It is considered that
the reason that most companies go out to offshore to other countries,
particularly India as the main location at the moment, is the
lower cost base for employees. Are there any other benefits for
companies to offshore, other than obviously the low cost base
per employee?
Mr Mehta: Absolutely. There are
four main advantages of offshoring to India or any other country
around the world. I think one is the higher quality level. To
give you an example, HSBC reported a 20% reduction in their error
rate after they moved their operations to India. The first is
that you do get a 15 to 20% increase in the quality of operations.
Two is that you get higher productivity. To just explain it in
a crude manner: the total numbers of transactions you can process
in one hour are higher in India than in the US, UK or the EU.
Three is as an employer it gives you more flexibility in your
operations. Our anecdotal evidence suggests that in 2004 most
British financial services firms are going to increase their total
employment within the UK as well as increase operations within
India. It gives you flexibility to see which processes you will
do in which geography around the world. The fourth advantage is
if you have to be speedy and more competitive in a global economy
you need to be able to scale up your operations as quickly as
you can. Because India offers a large pool of English speaking
graduates you are able to scale up pretty quickly in India. These
are the advantages over and above the lower cost. They might be
attracted to India because of the lower cost but they stay there
for the high quality, the higher productivity and flexibility.
Mr Kumar: In terms of quality,
India has the best certification processes and affiliations to
the international quality organisations. A large number of them
are in India for different types of business, not just for call
centres but also for software centres, core research, lots of
those areas.
Q329 Linda Perham: You have outlined
the extra benefits but, given that the employee cost is the main
driver, have you got any evidence that companies are preparing
to outsource or, indeed, are doing that to countries with an even
lower cost base, such as China?
Mr Mehta: Yes, it is beginning
to happen. Even though India remains a premier offshore destination
there are other countries around the world who are also leveraging
this advantage. As you correctly pointed out, there is China,
the Philippines, Ireland, Israel and Eastern Europe. I think there
is a trend of offshoring to Eastern Europe that will accelerate
after they are integrated within the EU. However, demographically
speaking I think India has an advantage that will last at least
another eight to 10 years because India will be the only country
in the world even in the year 2020 which will have a surplus of
people in the working age population because India has a fairly
young population. It will have a cost advantage which will be
there until at least 2020.
Q330 Linda Perham: There are also the
English language skills.
Mr Mehta: True.
Q331 Chairman: In the context of the
Indian sub-continent, we also have Bangladesh and Pakistan and
Sri Lanka which all have the same language advantage, as it were.
Mr Mehta: True.
Q332 Chairman: I realise that the population
sizes are different but do they have similar academic achievements?
Is education and higher education available in these countries,
because it could be argued that the people you employ to do the
jobs are perhaps overqualified in some areas by UK standards,
not in all but certainly in a number of the more basic office
and call centre functions?
Mr Mehta: True. Countries like
Sri Lanka, Bangladesh and West Pakistan are making increasing
efforts to increase the presence of industry within their countries,
you are absolutely right.
Q333 Mr Clapham: In relation to what
you were saying earlier about the costs, Mr Mehta, about one of
the factors being the growing resource base, if you are saying,
as you just have, that India will be able to offer services until
2020 because of the surplus of people available, do you also see
India developing within that period higher quality services as
well, so not only are we talking in terms of the service that
is provided now in terms of the call centre bases in India but
that is likely to be an improved service as well?
Mr Mehta: I would agree with you.
It is not only call centres, it is increasingly IT services, software
development, insurance claims processing, credit card processing,
airline reservations, all of these are also being offered.
Q334 Mr Hoyle: Just following on from
that—because I think there is a great worry that people
are talking about offshoring and offshoring that has taken place
over a long time saw the manufacturing jobs go first—this
was meant to replace manufacturing jobs but we now see those going.
It is that continuation of the erosion of services, but it could
be the wages that is a future set-back, whether it is having a
team of corporate lawyers on standby on the phone 24 hours a day,
there could be great savings. It is the continuation of that and
basically there is a worry in the UK that we will end up with
a nameplate on the door "Corporate Headquarters" and
everything else is around the world. Can you foresee that?
Mr Mehta: There is a fear that
all service centre jobs could eventually move offshore, however
there is enough independent research available to suggest that
is not the case. There has been research that we have done, including
some research by credible third party agencies within the US,
which has clearly suggested that only 11% of all service sector
jobs potentially can be offshore. If you are looking at the entire
spectrum of all service jobs, only 11% of them can be offshore.
The other 89% cannot be offshore. We are really talking about
a small proportion of all the service sector jobs.
Mr Kumar: Not all the location
specific services can be relocated across a phone line or a computer
to another geography. Higher value added services in design, research,
knowledge base, even the last announcement by Reuters on financial
research, could be in another geography, not necessarily within
the location where they are publishing or doing business.
Mr Mehta: We are very used to
the concept of a global delivery model in manufacturing. For example,
an automobile might be assembled here but the engine might be
from Brazil or the transmission from East Asia. Now, because of
improvements in our telecommunication infrastructure you can take
any process and break it up into smaller processes and have them
executed around the world. This will not mean that the entire
process will move out of the home country, it is not technologically
possible. Only 11% of our service sector jobs can be performed
remotely, the other 89% cannot be.
Q335 Mr Hoyle: Is one weakness a worry
about security of supply as well or not? Do people worry about
having it so far away from home and do they worry about whether
they will get that information in time or something might happen?
Have you come across any worries from that point of view?
Mr Mehta: I think it is a legitimate
fear if you have not ever offshored before so you may have hesitancy.
In our experience all our customers do thorough due diligence
on location as well as the independence of to whom they are offshoring
to say they will evaluate the regulatory as well as the legal
framework within the country. They will insist that anybody who
is actually executing offshore jobs, their employees have to undergo
a thorough background check and employees have to enter into a
non-disclosure agreement, our telecommunication networks are impregnable.
All of this due diligence is often insisted upon before the actual
offshoring begins.
Mr Kumar: That is very true. There
is a long checklist before any processes are offshored. In the
call centres employees are not allowed to take in any means of
communication equipment like a cell-phone and they cannot even
carry their own pencil or paper. All the paper within the call
centre is laminated so they cannot write on it. The network is
all segregated, you cannot move any file or information you see
from that computer to anywhere else within the network. It is
all client specific. It is very secure. With the technology today
it has been possible to implement a very high degree of secure
operations and the Chinese walls required between businesses,
although they might be two competing businesses within the same
premises.
Q336 Richard Burden: Just on that last
point, could you tell me who insists that those standards do apply
and who insists that those Chinese walls, as you call them, are
put in place? Is it required under Indian domestic law or is it
simply required by the companies considering offshoring, or a
combination?
Mr Kumar: It is the companies
considering offshoring which have the specifications on how information
will be kept, shared and used within any company.
Mr Mehta: I think that within
India you have a regulatory framework that is already in place
which is called the Information Technology Act 2000 which recognises
that any form of hacking is an offence. The initiatives now are
increasingly driven by global trading. For example, I think India
is actively engaged with the EU to enter into a safe harbour agreement.
All of these provisions that might initially be driven by the
customer are increasingly being adopted by global trading partners.
Q337 Richard Burden: There are fairly
stringent requirements in this country and specific legislation
in the Data Protection Act. Is there any equivalent trade legislation
in India?
Mr Mehta: Yes. I think the important
provisions of the Data Protection Act are already embedded within
the IT Act of India.
Q338 Richard Burden: I was interested
by your statistics of there being estimated only 11% of jobs that
could be offshored. Could you give us more information, in writing
if necessary, about what is estimated to be within the 11% and
what is estimated to be within the 89%?
Mr Mehta: Absolutely.
Q339 Richard Burden: In that context,
we have received evidence already that sometimes the image of,
in a sense, customer contact as being the main focus for offshoring
is actually incorrect, that the trend towards offshoring is much
more acute in practice in backroom jobs rather than customer contact
jobs. Would that be your impression?
Mr Mehta: That is absolutely true.
The UK call centre industry today employs about 600,000 people;
the industry within India employs about 40,000. Within India the
other operations of business process outsourcing are larger than
those for call centres.
| 
