Select Committee on Trade and Industry Written Evidence


APPENDIX 16

National Association of Software and Service Companies

1.  ABOUT NASSCOM

  1.1  The National Association of Software and Service Companies (NASSCOM) is the trade association and "voice" of the Indian information technology (IT) industry. Formed in 1988, it is a not-for-profit organisation funded by subscriptions from its 850+ member companies that together account for more that 95% of revenues of the software industry in India. NASSCOM is based in New Delhi. Its membership includes both domestic Indian IT companies and multi-national companies that have set up operations in India.

  1.2  NASSCOM works with the Indian government to encourage the development of a statutory and regulatory framework that recognises and supports the needs of the country's software industry and its customers. NASSCOM has also consistently promoted the importance of developing India's infrastructure (eg telecommunications, transport), which has improved significantly in recent years and continues to do so.

  1.3  Overseas, NASSCOM promotes and markets the skills of the Indian software industry to current and potential inward investors. It seeks to operate as a "gatekeeper" for foreign companies to the Indian IT industry, helping them find the appropriate business partner. NASSCOM also encourages inward investment by foreign companies seeking to set up their own sites within India.

2.  THE INDIAN IT INDUSTRY

  2.1  The Indian IT market has grown from US$ 1.73 billion in 1994-95 to US$16.5 billion in 2002-03 and accounts for 3% of India's GDP. The IT industry created employment opportunities for over 700,000 professionals in India in 2002-03.

  2.2  The total revenues of the Indian software and services industry were approximately US$12 billion in 2002-03, comprising exports of US$9.5 billion (up from US$7.6 billion in 2001-02) and domestic revenues (excluding IT training) of US$2.5 billion.

  2.3  The growth in the Indian IT industry has largely been driven by exports. Software and services exports grew by 18.4% to US$ 7.2 billion in 2002-03, while the information technology enabled services (ITES)-business process outsourcing (BPO) segment grew by 59% to US$ 2.3 billion.

  2.4  The United States of America is India's number one destination for software exports, accounting for 71% of exports. The second largest export market is the UK (14%), followed by the rest of Europe (9%) and the rest of the world (6%).

  2.5  Over 380 of NASSCOM's member companies have bases in the UK, employing approximately 3,000 UK citizens. In addition, between 8,000 and 10,000 Indian IT professionals are working in the UK, either for NASSCOM member companies or directly for UK customers of the Indian software industry.

3.  INDIA: A THREAT OR AN ASSET TO UK COMPETITIVENESS?

  3.1  India is the UK's 17th largest export market and in 2002 UK/India bilateral trade was worth about £5 billion. The UK has the largest market share of India's imports and is India's second largest trading partner in terms of share of India's total foreign trade.

  3.2  India is one of the world's fastest growing economies and home to the fastest growing IT industry on the planet. The Indian economy, which was virtually closed for many years, is moving away from its traditional dependence on agriculture towards knowledge-driven sectors such as information, communications and entertainment (ICE) and the pharmaceutical industry.

  3.3  The emergence of new technology in the 1990s allowed UK businesses the opportunity to consider working with suppliers and locations that were previously not feasible. India's rapidly developing software and services industry—offering high quality, value for money and a plentiful and highly educated English-speaking workforce—was well placed to provide a service to foreign companies demanding cost reductions and higher productivity.

  3.4  In 2002 IT offshoring by the UK increased by 27% from the previous year to $545 million and over 90% of that expenditure went to India. While India had just 3% of the global outsourcing market in 2002, the accelerating trend of outsourcing and offshoring to India has attracted increasing attention and scrutiny. Goldman Sachs, HSBC, Abbey, Norwich Union, Citigroup, JP Morgan and BT are just some of the companies whose partnerships with the Indian IT industry have attracted media comment in 2003.

  3.5  This paper is concerned with the impact of outsourcing—or global sourcing—on the competitiveness of the UK economy.

  3.6  NASSCOM is aware that within the UK there are some who believe that outsourcing is a vital contributor to competitiveness. In contrast, there are others who believe that outsourcing may lead to the erosion of the UK's domestic skills base, heralding a decline in the country's economic performance and its ability to compete in a global 21st century economy.

4.  OFFSHORE OUTSOURCING

4.1  Overview

  4.1.1  The 1990s was a period of rapid growth for the UK information and communications technology (ICT) sector and led to a 39% increase in the employment levels in the sector from 1.08 million in 1995 to 1.5 million in 2000. In comparison, overall employment in the UK increased by only 6.1% over the same period.

  4.1.2  The largest employment increase of 106% was recorded in computer services, due largely to the widespread adoption of IT as an enabler for a variety of business functions. The increased usage of IT led to a rising demand for IT skilled personnel in the UK during this period.

  4.1.3  The Employers' Skills Survey of 1999 found that 44% of IT employers had a vacancy, compared with the overall figure of 32% across all industries. About 24% of employers from the IT sector reported hard-to-fill vacancies, compared with 16% across all employers. Furthermore, among the hard-to-fill vacancies in the IT sector, 16% of them were due to skills shortages, in contrast to 8% across all industries. Skills related shortages in the IT sector were, therefore, twice the national average.

  4.1.4  According to "An Assessment of Skill Needs in Information and Communication Technology", published by the Department for Education and Skills in 2001, the vacancy rate was the highest for software development professionals, systems support professionals and IT operations managers.

  4.1.5  Skills shortages can have a negative effect on the competitiveness of companies in a number of ways. These include increased product development time and difficulties in introducing technological upgrades and customer service objectives.

  4.1.6  In addition, skills shortages drive up wages, as companies seek to attract from a relatively shallow talent pool. This can drive up costs—from 1993-2002 UK wages increased more than real Gross Domestic Product (GDP) and productivity—and result in companies becoming less competitive.

  4.1.7  The absence of sufficiently skilled workers has led companies to explore immigration and offshore outsourcing as a means to access highly skilled talent pools.

4.2  IT

  4.2.1  For much of the 1990s, offshore strategies by companies were characterised by the outsourcing of relatively low skill work to the offshore location. The economic downturn of the last few years has led to the cost base of IT services companies in the UK coming under more extreme pressure. The main drivers for offshoring to India are now cost, quality and access to a plentiful, highly qualified and English-speaking workforce.

  4.2.2  Although the offshore sector is growing rapidly, in 2002 it still had only a 2.4% share of the total £550 million UK IT market. The offshore sector is expected to grow to £1.15 billion by 2006, but will still account for just 4.5% of the overall UK IT market.

4.3  Financial and Professional Services

  4.3.1  The financial and professional services industry is one of the largest employers in the UK, employing more than 2.4 million people in 1998—about 9% of the national workforce. The sector in the UK faces a labour shortfall, especially in the ICT and call centre functions.

  4.3.2  Traditionally, the financial and professional and services sector has addressed skills shortage issues by paying higher wages. Growth in weekly earnings in the sector increased by 78% between 1989 and 1999, compared with a national average increase of 67%.

  4.3.3  The deregulation of the UK financial services sector and globalisation have increased competition and led to pressure on margins and the need to reduce costs. Offshoring has emerged as an attractive option to reduce costs.

  4.3.4  Employee costs are far lower locations such as India. Wage levels for a call centre operation in India can be typically six times lower than in the UK. It should be noted that over 80% of call centre workers in India are graduates. Furthermore, the starting wage is five to seven times the national average Indian wage and higher than the earnings of a newly qualified doctor.

  4.3.5  Alongside cost savings, offshoring helps companies improve competitiveness through improved operational efficiency and upgrade delivery quality. Offshore locations such as India offer a well educated and productive labour pool and good technology infrastructure. Staff turnover rates are lower in India than the UK, enabling better training of employees and a higher quality of service.

5.  THE BENEFITS OF OFFSHORING FOR THE UK ECONOMY

5.1  Meeting Skills Shortages

  5.1.1  In the IT industry over 44% of employees reported a shortage of personnel in 1999, compared with an average of 32%. IT firms in the UK have used immigration and offshore outsourcing to overcome this skill shortage. The shortage of IT workers has made it increasingly difficult to retain all development, integration and maintenance functions internally. As a result, UK firms have increasingly relied on offshore services providers from countries like India who can provide a skilled workforce enabling them to improve productivity and greater value for money.

5.2  Changes in Skill Profile of UK Workforce

  5.2.1  Offshoring has led to the movement of UK IT workers from low skill to higher skill jobs. In 1995 the proportion of low level IT occupations (computer engineer and operators) was 30%, but this had dropped to 22.6% in 2000. High level occupations (professional and ICT manager) increased accordingly.

5.3  Offshore Call Centres

  5.3.1  A number of UK firms are setting up call centres in low-cost destinations like India. In this section, a scenario of a UK firm setting up a captive call centre in India is illustrated to highlight the benefits to the UK economy.

  5.3.2  Evalueserve estimates that the total annual loaded cost for a call centre agent in the UK to be about £37,000. This includes expenses on infrastructure as well as human resources. For a similar call centre in India, the total annual loaded cost per agent is about £10,800 of which about 52% is the cost of human resources.

  5.3.3  Evalueserve estimates that the additional cost of ownership is about 15% of carrying out the work in-house—ie about £5,555 for every agent position offshored. The offshore centre profit margin is about 20% on sales (based on industry averages) or £2,694. A part of this profit is repatriated to the parent company.

  5.3.4  Cost saving is the most significant driver for offshore outsourcing in the call centre industry. A UK firm which incurred an annual cost of £37,033 per agent, now incurs a cost of £20,414 at the offshore location. Thus, the direct savings to the UK firm annually, is £16,620 per agent. Profit repatriation redirects about £3,062 to the UK firm. Further, the additional cost incurred is a contribution to the UK economy, as all these expenditures are incurred in the UK. This is an additional annual contribution of £5,555 per agent.

  5.3.5  Not all offshored jobs result in displacement of UK workers, because some of the offshored jobs may be on account of expansion of operations and may not involve relocation of work from the UK to India. For workers who are displaced due to offshoring, empirical data has been used to estimate the extent of re-employment. OECD statistics indicate that in the UK, for about 60% of the unemployed, the duration of unemployment is less than a year.

  5.3.6  Re-employment after a spell of unemployment results in a wage loss, which varies within the workforce. Research by Prof. Wiji Arulampalam at the University of Warwick has shown that the typical wage loss is about 5.7%. Thus, the re-employment wages are calculated to be about 57% of the original earnings—about £20,954.


  5.3.7  Taking these factors into consideration, the overall annual benefits to the UK economy have been computed and are shown in the table above. Therefore, the total benefits to the UK economy will be £46,190 for every call centre position offshored to a lower cost destination.

5.4  Offshoring of IT Services

  5.4.1  The past few years have witnessed the emergence of the onshore-offshore model in the IT industry. In this model, a team with one member in the UK and three members in a low-cost destination like India substitutes an onsite team in the UK. This enables significant cost reduction.

  5.4.2  The costs incurred by the UK based client firm are on account of two factors:

    —  IT personnel cost

    —  Travel cost

    —  Additional ownership cost

Comparison of annual costs for a UK based IT firm with a offshore IT firm (in GBP)
Cost Head

UK based IT Firm
Offshore IT Firm
(25% Onsite and 75% Offshore)
Personnel Costs203,028 66,479
Travel Costs 2,400
Additional Ownership Cost30,454
Total Cost203,02899,333

Source: Evalueserve Analysis

  5.4.3  The IT personnel cost is the cost incurred on account of salaries as shown in the table above. The onsite-offshore model also requires travel by the client as well as the offshore personnel. As an approximation, it has been assumed that a six-month project would require one client supervisor to visit the offshore location and two members of the offshore team to travel to the client site. The travel expenses, therefore, come to about £2,400 per year. Further, the UK firm incurs additional costs for hiring consultants and lawyers, towards managing layoffs which might occur in the UK, and for appointing global managers to handle offshore operations. Evalueserve estimates these costs to be about 15% of the in-house cost—ie about £30,454.

  5.4.4  The differential in cost translates to a saving of about £103,695 per year for a team of four employees.

  5.4.5  In addition to cost saving, there are other benefits to the UK economy. A sales and marketing team is required to procure customers for the offshore firm. Assuming that the total expenses on this team, which would reside in the UK, is 20% of the total deal value, this translates to about £13,296 annually.

  5.4.6  At a 40% tax rate, the total tax paid by a worker in the UK comes to about £20,303 per year. Assuming that about 50% of the worker's available income (total income less tax) is spent in the UK, this is an additional contribution of £15,227 per year. Further, the additional offshoring cost is also spent in the UK and is, therefore, a contribution to the UK economy.

  5.4.7  Statistics indicate that about 60% of the unemployed workers in the UK are re-employed within six months. Considering that the IT industry is likely to experience a faster rate of re-employment, this average tenure of unemployment has been taken as three months. Therefore, the benefits on account of re-employment will be about £64,616.


  5.4.8  The total benefit to the UK economy is, therefore, £247,591, or an additional contribution of 22% as compared to the original output.

5.5  Development of New Markets for UK Firms

  5.5.1  Lower cost allows the parent firm to increase its competitiveness globally. This is likely to bring in more business for the firm, thereby increasing its revenues. In addition, the creation of jobs at the offshore location leads to an increase in the disposable income of the workers there. Consequently, these areas are likely to become attractive markets for UK firms.

  5.5.2  For example, Marks and Spencer, a renowned UK brand, entered the Indian market in December 2001 with an aim to target the growing Indian middle-class segment. There are many UK firms that operate in India (eg Glaxo SmithKline, HSBC, Standard Chartered, Royal Sun Alliance). The UK is the third largest overseas investor in India in terms of new investments approved since 1991, and the fourth largest in terms of new investments implemented.

6.  CONCLUSION

  6.1  Outsourcing reinforces UK competitiveness by helping businesses bridge the skills gap in the UK economy, which is particularly severe in IT related skill sand services

  6.2  In addition, outsourcing can offer major competitive advantage in the areas of cost, quality and productivity.

  6.3  As evolving economies, such as India, become more prosperous, their purchasing power increases. UK exports of goods and services to India are already worth around $2.5 million, securing thousands of UK jobs.

  6.4  The impact of outsourcing on UK employment needs to be kept in a realistic perspective. According to recent research from Phil Taylor of Stirling University and Peter Bain from Strathclyde University, "the 2002 forecast by Mitial, the call and contact centre specialists, of a reduction to 186 contact centres [in Scotland from the current level of 290] by late 2003 is profoundly mistaken. . . To date, outsourcing to India has had only the most marginal effect on "lost" contact centre jobs." Economic analysts, Business Strategies last year estimated that UK call centres currently employ the equivalent of 423,000 full-time employees and that this will grow to 665,000 by 2008.





 
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