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 industryoffering
high quality, value for money and a plentiful and highly educated
English-speaking workforcewas 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 outsourcingor global sourcingon 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 costsfrom 1993-2002 UK wages
increased more than real Gross Domestic Product (GDP) and productivityand
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 1998about 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-houseie
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 earningsabout
£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:
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 Costs | 203,028 |
66,479 |
Travel Costs | |
2,400 |
Additional Ownership Cost |
| 30,454 |
Total Cost | 203,028 | 99,333
|
| | |
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 costie 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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