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BPO is a win-win situation

November 20, 2003

With India facing growing ill will, and even some legislation, to stop millions of developed country jobs from migrating to low-cost operations in the country, perhaps it's poetic justice that the best defence is coming from a global research outfit, the McKinsey Global Institute.

A series of well-argued and fact-stacked research articles in the latest McKinsey Quarterly, provides just the kind of numbers needed to prove that offshoring to countries like India is actually in the interest of the US and EU.

Outsourcing and India: Complete Coverage

That this is something Indian bodies like Nasscom should have come up with as part of a strategy to build a PR offensive in countries like the US is, however, a different matter.

McKinsey begins at a well-known point, that for every dollar of work that is outsourced to countries like India, just 33 cents accrue to the country, and around 58 cents stay with the US company in terms of cost savings.

Another five cents come back to the US when the Indian company needs to buy computers, telecom equipment, etc, to be able to do the job assigned to it, and import these from the US. A slightly smaller amount accrues from the repatriation of profits by US firms that have located themselves in countries like India to do the offshoring work. And then, the clincher.

On the basis of historical data, on the value created by redeploying US labour in higher value-added jobs than those lost through imports of manufactured products, the McKinsey Global Institute calculates that the US could earn another 45 to 47 cents on each dollar of work outsourced to countries like India.

So, for every dollar lost, the US economy gains $1.12 to $1.14. The colour television industry, the argument goes, has seen real costs go down 40 per cent over the past quarter century, with increased production in cheaper overseas locations, but with a lot more US households owning televisions as a result, this has given rise to an industry that provides over $30 billion of television content and TV-based games annually.

There's more. One McKinsey article builds upon an insurance proposal developed by academics at the University of California and the Brookings Institution, and argues that for as little as 4-5 per cent of the savings companies make out of offshoring jobs, they could insure all full-time workers who could lose their jobs -- this programme could compensate workers for 70 per cent of the wages they stand to lose till they are re-employed, as well as offer related benefits of healthcare for up to two years.

In any case, the data shows that the US economy created on an average 3.5 million private sector jobs a year in the past decade -- so anyone who has been laid off usually finds a new job within six months. In the past, from 1979 to 1999, the University of California research showed, 69 per cent of even those who had lost their jobs as a result of cheap imports in sectors other than manufacturing were re-employed, and at over 96 per cent of their old salaries.

What are we waiting for? Let an education campaign begin. And if anyone, like the US House of Representatives' Committee on Small Business that held a hearing on outsourcing in June, challenges the numbers as just so much blah, well, put the McKinsey staffers on the stand!

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