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Outsourcing from US to grow by 40%
January 24, 2004 12:33 IST
Amidst the furore over outsourcing of jobs to countries like India, a study has said that the offshoring industry in the US is still in its nascent stage and is expected to grow 31 to 40 per cent annually in the next five years.
The McKinsey Global Institute said that business-process offshoring, which was valued between $32 to $35 billion in 2002, was just one per cent of the $3 trillion worth business functions that could be performed remotely.
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Due to the significant benefits already being realised through offshoring, the market is projected to grow by 31 to 40 per cent annually, it said, adding that this may cause consternation over job losses but will make it an industry with well over $100 billion in annual revenue by 2008.
The study found that companies are leaving behind billions of dollars in savings when they offshore back-office functions and service jobs. They merely replicate what they do at home -- where labour is expensive and capital is relatively cheap -- in countries in which the reverse is true.
The way to reduce cost of offshore operations even further, it said, is to re-organise and re-engineer operations to take full advantage of these differences. In a low-wage country, the capital infrastructure -- including office space, telecommunications lines and computer hardware and software -- should be used as intensively as possible.
Companies can boost their capital productivity in low-wage environments in three ways: round the clock shifts, cheaper capital equipment and reduced automation, the study published in the Forbes Magazine said.
McKinsey estimates that just by increasing the number of shifts, companies can reduce their operating costs by 30 to 44 per cent for many types of offshore work, including accounting, procurement, call centers, transaction processing, and more complex functions such as knowledge services and research and development.
But in India, McKinsey found that even the most efficient third-party providers run only two shifts a day, and most of the captive operations set up by multinational corporations are running only one.
Cheaper capital equipment: Some service providers in India are using cheap local labour to develop their own software instead of purchasing more expensive branded products from the global software giants.
American Express, for instance, hired programmers to write software to reconcile accounts, and the software now reconciles over three-quarters of them -- or more than half a million every day. The company, which paid only $5,000 to develop this solution, estimates that licensing sophisticated database software would have cost several million dollars.
Reduced automation: Some companies have gone a step further and used workers for tasks that would normally be automated at home. A payments processor, for example, might employ people to input checks manually into a computer system instead of using expensive imaging software. Manufacturers, too, can use this approach. Certain carmakers in China use robots for only 30 pc of the welding in car assembly, as compared with 90 pc or more in US or European operations.