“Going Global” An insight into outsourcing and the changing nature

Transcription

“Going Global”
An insight into outsourcing
and the changing nature of the global economy.
Michael Magee
B.A. in European Business Studies and Languages
Declaration of Authorship
I declare that this dissertation represents my own work in all respects, and that no part of it has been
previously submitted to any University, College or Institution of learning in respect of any degree or
other academic qualification.
Name: / 1iuJr*cddy
Date:
£ b /0*2/0 £'/
•2
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Acknowledgements
I would firstly like to thank my dissertation supervisor, Dr. Ian McLeod for his guidance and
motivation without whom none of this would have been possible. I would also like to thank my
family for their support throughout my dissertation.
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Abstract
This dissertation will analyse the change in the global economy and will ask the topical question of
whether or not Globalisation is redistributing wealth from the richest to the poorest countries.
Never before in history has the world witnessed such a rapid change in the global capital market.
-j
Although I would like to explore many areas concerning.this topic I realise that due to time
constraints I will have to narrow my focus to one specific element of this process. Some readers
might ask why I focus on the process of outsourcing? I feel that the only way to find an answer to
this question is by examining the ground level of globalisation and explore the specifics. As
outsourcing is the most important part of global business I deemed it a good place to start.
-n
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Table of Contents
1
Introduction............................................................................................................................................ 7
2
Chapter 2 Globalisation........................................................................................................................ 8
2.1
The concept....................................................................................................................... .............8
2.2
Globalisation and National Sovereignty....................................................................................10
2.3
Globalisation and Marginalisation........................................ .....................................................11
2.4
Redistribution of w ealth.............................................................................................................12
2.5
The W TO..... ............................................................................................................................... 14
2.6
Arguments against Globalisation............................................................................................... 15
2.7
Arguments for globalisation...................................................................................................... 16
2.8
Summary..................................................................................................................................... 18
3
Multinationals (MNC’s ) ......................................................................... .“....................................... 19
3.1
Introduction..................................................................................................................................19
3.2
Geographical distribution of the world’s largest companies.................................................. 20
3.3
Concentration of wealth............................................................................................................. 20
3.4
Multinationals and Governments....... ....................................................................................... 21
3.5
Social responsibility....................................................................................................................22
3.5.1
Case Study: Shell.............................................................................................................. 23
3.5.2
Case Study: Levi’s ............................................................................................................ 24
3.6
Summary.....................................................................................................................................24
4
Outsourcing.......................................................................................................................................... 26
4.1
Introduction......................................................... .......................................... .......................... 26
4.2
Effects of Outsourcing................................................................................................................28
4.3
Information Technology (IT).....................................................................................................28
4.4
Advantages of Outsourcing.......................................................................................................29
4.4.1
Concentrating on Core Business....................................................................................... 29
4.4.2
Cost Control.......................................................................................................................30
4.4.3
Flexibility.............................................................................................................................31
4.5
Disadvantages o f outsourcing.................................................................................................... 31
4.6
Summary.....................................................................................................................................32
5
Literature Review ................................................................................................................................33
5.1
Market unbound.......................................................................................................................... 33
5.2 .............................................................................................................................................................33
5.3
Empire................................................................................................................... ;...................34
5.4
Open world the truth about globalisation................................................................................. 35
6
Research Methodology.......................................................................................................................36
7
Industry analysis: Outsourcing service industries to India..............................................................37
7.1
India: A land of Opportunity.....................................................................................................37
7.2
Case Study: HSBC......................................................................................................................38
7.2.1
Company Overview........................................................................................................... 38
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7.2.2
Operations in India............................................................;............................................ 39
7.3
Case Study: General Electric (GE).......................................................................................... 40
7.3.1
Company Overview.......................................................................................................... 40
7.3.2
Operations in India......................................................................................................... 40
7.4
Case Study: DELL........... ......................................................................................................... 41
7.4.1
Company Overview........................................................................... ;............ .............. 41
7.4.2
Operations in India............................................................................................................41
7.5
Case Study: British Airways............................................................................................. ......42
7.5.1
Company Overview................................................................................. !.....................42
7.5.2
Operations in India........................................................................................................... 42
7.6
Advantages of outsourcing to India.................................................. ...................................... 43
7.7
Disadvantages o f outsourcing to India............................................. ...................................... 44
8
Conclusion................................................................................................................................... ......45
9
Bibliography......................................................................................................................... ............ 47
9.1
Internet References................... :.............................................................................................50
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1
Introduction
Global Capitalism Is in crisis - it has parted company from its classical legitimation of
“Democracy”, as evidenced by the dissemination of the labour market in its traditional heartland
countries, a process that we have come to know by the term outsourcing!
Global capitalism is finally starting to work. Capitalism will benefit everybody but it will take time.
As more markets open up wealth will be distributed more evenly through the process of outsourcing
and the developed worlds ideals of capitalism will change. It does not just benefit the rich.
Developing nations that have benefited from previous outsourcing efforts will fight hard to keep
business from leaving for. even cheaper emerging nations and in one great paradox, the very success
of this global outsourcing may prove to be its inevitable undoing
The aim o f this dissertation is to find the right answer.
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2
Chapter 2 Globalisation
Although globalisation is a new buzzword it is by no means a new concept. Many theorists believe
globalisation is just the new face of colonialism and that large transnational firms indigenous to
countries with a history of imperialism are the mediums that are responsible for inequality in the
world.
Globalisation has existed for hundreds o f years but has only really come into its own in the last
century after World War 2. Many nations engaged in efforts to liberalise trade. Free markets and
free trade were the curators of globalisation. International institutions such as the World Bank, the
IMF and GATT were established. The aim of these institutions was to provide financial stability
and assist in global economic development. These institutions aimed to reduce barriers between
nations and by the 1980’s many of these barriers had disappeared but only between developed
countries. The founding of the many trade blocks of the world such as the NAFTA and the EU were
also drivers of globalisation. Globalisation started to make waves from the period after 1980, which
saw a large number of developing countries starting to supply international markets. The percentage
of manufactures included in developing country exports rose from 25% in 1980 to 80% in 1998.
This was due to increased transport economics, increased participation in international supply
chains and information technology1.
2.1 The concept
Every day you hear about it in the news, you read about it in the papers, you overhear people
talking about it and in every single instance it seems to have a different meaning. So what actually
is Globalisation?
Globalisation flows through the regions of economics and culture. At a top political and economic
level globalisation is the process of decentralisation of markets, politics and legal systems i.e. the
rise of the global economy. Some critics say that globalisation is only a process of intense
1(McEvoy, 2003, p.5)
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2
internationalisation . However this is not completely true because globalisation deals not only with
economic relations but also with cultural, political, social and environmental issues3.
At a business level, we think of globalisation when a company decides to take part in the emerging
global economy and Every day you hear about it in the news, you read about it in the papers, you
overhear people talking about it and in every single instance it seems to have a different meaning.
So what actually is Globalisation?
Globalisation flows through the regions of economics and culture. At a top political and economic
level globalisation is the process of decentralisation of markets, politics and legal systems i.e. the
rise of the global economy.
Globalisation concerns worldwide economic activity. It influences markets; competition and the
free flow of goods and services, capital and knowledge4. It benefits everybody in terms of faster,
quicker access to new technology, cheaper imports and more competition. It has stimulated the
world economy and has aided in the creation of millions of jobs especially in developing countries.
“The year 2000 serves as an appropriate marking point for the emergence of a truly global
economy. The increasing mobility of capital unleashed a wave of global capitalism that rapidly
accelerated the globalisation of the world’s entire economy for goods, services and labour. Not
surprisingly, the years surrounding the transition were extraordinarily turbulent as national
governments struggled with how to work in harmony with an overwhelmingly powerful global
capital market, and faced the difficulties of curtailing popular entitlement programmes. However,
through the collective leadership of the major nations of the time, such as Germany, Japan and the
United States, working with international agencies calamity was avoided and the stage was set for
several decades of economic growth unparalled in human history”5.
However the right
balance needs to be found between the rules of freedom if the global economy is to realise its full
potential.
2 (Held et all, 1999: p. 155-171)
3 (Lash & Urry, 1994: p. 279-312)
4 (Lash & Urry, 1994: p. 279-312)
5 (Lau, 2000; p. 4).
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The dictionary definition of globalisation is the "process enabling financial and investment markets
to operate internationally, largely as a result of deregulation and improved communications"6 or from the US - to "make worldwide in scope or application"7 however understanding that a
comprehensive definition o f globalisation is so hard to find maybe the answer is to specify where
the process of globalisation will end and what a fully globalised world will look like, possibly a
world without boundaries or borders.
2.2 Globalisation and National Sovereignty
“As globalisation has opened up national economies and increased the mobility of the factors of
production, it has also reduced the power of the nation-state to independently manage its economic
affairs. The state has found it increasingly difficult to control and regulate the persons and bodies
under its jurisdiction and important instruments of macroeconomic management can no longer be
determined unilaterally” .
John Maynard Keynes was always grappling with a way of controlling global markets and not the
other away around. Keynes saw that an economy was human made artefact and that people acting
together with their government could have control over its course but the swooping phenomenon of
globalisation is making the notion of “intervention” more and more difficult for domestic
governments.
The global market is now realising its own ability and potential. Governments are also discovering
that they cannot put limitations on the world capital markets if anything the capital markets are
restricting government. Globalisation is like one big tidal wave that governments are powerless
against. It carries more weight now that any other time in human history. Its effects stretch from
small businesses to large corporations and individual workers to entire labour markets.
6 (Collins 2003)
7 (Webster 2004)
8 (Bryan & Farrell, 1996; p. 178)
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Since world war two national governments have been used to exercising control over most aspects
of their domestic economy. Governments usually used domestic financial institutions and markets
as tools to control their own economies, this always worked well but nowadays it is being
undermined by the growing power of global capitalism 9. National governments are naive if they
think they can control their own or influence other financial markets; the only way forward is by
embracing an open global system and improving the competitive and economic forces.
2.3 Globalisation and Marginalisation
It is clear the effect globalisation will have on the rate of growth of national economies, on the
distribution of wealth and on the incidence of poverty within them. Competition between cities is
now a reality. Shareholder profits have increased at the expense of the living conditions of the
working population in the developed and developing world. Public control of economies is under
pressure and competition is now greater between countries than companies. If wages or taxes are
too high or if local government policies are unfavourable then a firm can relocate their operations
too places with more favourable comparative advantages.
The consequences for developed countries is that white blue collar jobs are moved to developing
markets where workers are more flexible and willing to work for less. There are also cases where
some administration work has been moved to developing countries such as India.
This phenomenon creates jobs in underdeveloped countries but it also creates regional divides
within these countries. Globalisation is redistributing world income but only to favourable
developing countries. Sub-Saharan countries are not experiencing parallel benefits of the South
East Asian countries. An important issue for society is to put policies in place so that the losers
from globalisation are not disenfranchised, but rather can be active participants in the global village.
The manifestations of the globalisation in countries that do not benefit from it are increased
unemployment, widespread poverty, overpowering disease, deepening ignorance because o f poor
education, and lack of access to such basic necessities of life as in portable water, adequate and
balanced food and health facilities. Moreover, the HIV/aids epidemic, which has assumed global
9 (Bryan & Farrell, 1996: p. 168)
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proportions, is continuing to have devastating effects on the human resources of countries4.
Globalisation is an unstoppable and irreversible process, but within its dynamics there is a serious
threat of marginalisation and exclusion of developing countries, and negative impact on the
cultural diversity o f people and their civilizations. The challenge is how to harness the potential
benefit of globalisation ensure equitable prosperity for all countries.
2.4 Redistribution of wealth
Is there any evidence more generally that globalisation leads to growing global inequality, or of the
poor becoming poorer? It is important to be clear exactly what sort of inequality is being discussed.
There is a difference between within country, across country, and global inequality. For example, if
it were the case that globalisation led to a fall in unskilled wages in rich countries, and a rise in
unskilled wages in poor countries, then inequality within poor and rich countries might rise10.
However, this might also lead to less inequality between countries, and so it is not at all clear, what
the .overall implication for global inequality might be.
The world’s living standards have risen dramatically over the past twenty years. The percentage of
the world’s population living in complete poverty is decreasing. Income levels may be substantially
lower in developing countries but when comparing the differences in purchasing power between
industrialised and developing countries it is obvious that the gap in inequality is diminishing.
Globalisation is creating jobs and bringing more prosperity to developing countries, which have
joined the process. While labour standards are lower in developing countries they are rising. Also
companies employing a multi-domestic approach outside their indigenous markets are paying
higher wages then local firms.
Inequality between countries has fallen significantly since 1980. The poorest one-fifth of countries
in 1980 subsequently had 4% growth in per capita income between 1980 and 1997, while the richest
one-fifth of countries had growth of only 1.7%n . This very strong growth performance in poor
10 (Slaughter and Swagel, 1997)
11 (Dollar, 2002 “Global Economic Integration and Global Inequality”)
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countries (most notably India and China) has meant that there has been a noticeable fall in global
inequality over the last two decades. However, the other undeniable fact when looking at income
performance is that most of Africa has performed very poorly over this period, with income levels
actually declining in some countries. In addition, extreme poverty has risen in Africa since 1980.
During the twenty-year pre-globalisation period (1960-1980), per-capita incomes in the poor world
grew at 2 percent per annum compared with a growth rate of 3.4 percent in the rich industrialized
1*)
world . That is, the poor world grew at a considerably slower rate.
During these decades, as the rich were getting relatively richer, there was no anti-globalisation
movement. A person bom in 1960 in the United States watched their parent’s income double by
1980. A person bom in India in 1960 would have seen their parent’s income increase by 50
percent. However after 1980 the developing world started to speed up their economic development
and after twenty years the wealth started redistributing to emerging markets, this redistribution dug
into the assets o f the developed world. In this time 350 million people in India increased their
incomes by 175 percent13. One can debate how much of this increase in incomes of the poor was
caused by globalisation. The person living in America can see their income levels rise after twenty
years but not as much as their counterpart in India, their children also find it more difficult to find a
job leaving college because companies are moving to low wage economies with good education
systems. Now the Indian person’s children are taking the jobs of their American counter parts
children. So effectively globalisation is gradually redistributing jobs and wealth. It is easy to see
that the main opposition of globalisation comes from the developed word. It would not be a
frequent occurrence to turn on the news and see anti-globalisation rallies in China, India or
Malaysia.
12 (Surjit S. Bhalla 2004) The wealth distribution paradox, says report. The world paper)
13 (Surjit S. Bhalla 2004) The wealth distribution paradox, says report. The world paper)
13
2.5 The WTO
The World Trade Organisation (WTO) is the most important regulator of trade at international level
and also sets the guidelines within which regional agreements can be signed. It is the body
responsible for managing the internationalisation of markets at a global level. It was established in
1995 and replaced what was better known as General Agreements on Tariffs and Trade (GATT),
which was itself a far cry from the originally planned ITO (International Trade Organisation). The
ITO was created after World War 2 as the third pillar of the Bretton woods system and was meant
to take an integrated approach to many trade related matters: securing full employment, reducing
tariffs which stand in the way of economic growth, protecting workers rights, preventing
domination and Manipulation by large MNC’s, assisting weaker economies in gaining access to
capital and technology, and managing commodity trade14. However many of the grounding
principals seemed to be lost in the transition from the ITO to the WTO. As drafted in the ITO, the
WTO, World Bank and the IMF must cooperate with each other to achieve greater global economic
coherence. Although all these bodies agree to cooperate there is still no single world body that
specifically deals with debts, trade imbalances and budget deficits. All these problems are barriers
that prevent developing countries from benefiting from free trade.
The WTO has intensified competition and raised the standards of international trade by outlining
the rules for the integration o f more than 130 countries into the world economy. This competitive
globalisation is praised for creating more jobs in the export industry and stimulating economic
growth, for making products more affordable and enlarging consumer choice, and for alleviating
poverty by creating new opportunities in export-oriented sectors employing poor, unskilled
workers.
The significance o f the WTO for globalisation is that more than 130 countries must open up their
economies to each other and embracing common rules makes it easier to trade and invest. The
WTO also brings a wide range of economic sectors into the arena of the global economy. It is
regarded also as an intrinsic part in pushing forward globalisation. The preamble of the WTO states
that trade relations should contribute to raising standards of living, ensuring full employment,
increasing income, and expanding production and trade while considering the environment and the
14 (WTO booklet, 2002 volume 2;29A August)
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different needs of the member countries at different levels of economic development15. However the
WTO has no instruments to advance, control or measure its contribution to these objectives.
Cooperation on this part only seems to occur at an operational and country level through sharing of
information.
2.6 Arguments against Globalisation
• Global corporations are responsible for global warming, the depletion of natural resources, the
production of harmful chemicals and the destruction of organic agriculture. Industrialisation is the
main cause of global warming. Some developing countries have been excluded from the Kyoto
Protocol, which provides a loophole for multinational companies.
• Global investment takes advantage of the lack of regulation in poorer developing countries.
Hence, global companies may locate polluting industries in poor countries, log tropical forests, or
develop mines with inadequate controls.
• Globalisation promotes trade in toxic chemicals, nuclear materials and other exploitative products
such as genetically modified foods, or endangered wildlife, including fish16.
• Jobs are being exported from high wage to low wage countries; this has a depressing effect on
wage rates in the home labour market.
• The World Trade Organisation's rules favour companies from wealthy countries — by making it
difficult for countries to protect their own industries with discriminatory tariffs, it is very hard for
poor countries to build domestic industries.
• Many companies in rich countries oppose globalisation because they fear that competition from
imports will cost them money. Such companies are typically found in industries such as textiles and
15 (Michie & Smith, 1995)
16 (Healy, 2001: p. 12)
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footwear. These are among the few industries in which poor countries can provide effective
competition.
• Globalisation exploits workers in underdeveloped countries by paying them much smaller salaries
and making them work longer hours. It also promotes child and prison labour. These cheaply
produced goods are dumped in more developed markets which undermines local competition.
• Capitalism only lines the pockets of a few billionaires and politicians and fails to supply the bulk
of humanity with the means for an adequate existence. In his book “The communist Manifesto”
Karl Marks described how inequality and poverty are part of the fundamental nature of capitalist
society.
2.7 Arguments for globalisation
• Globalisation is simply an extension of the tendency throughout human history towards increasing
specialisation and trade. It offers people access to a range of new ideas, technologies, information,
and resources and most importantly for developing countries access to markets. If globalisation is
handled properly it can lead to more jobs, more investment and, ultimately, stronger sustainable
■ 1 7 '
economic growth .
• The growth in trade between nations has contributed to lifting 3 billion people out of poverty over
the past 50 years. Reducing tariff barriers, which makes it easier for nations to trade with each
other, lifts the wealth of all nations by allowing them to concentrate on those where they have
greatest expertise18.
• It would be condemning less developed countries to even greater poverty to ban or restrict their
ability to compete in industries like textiles in rich markets.
17 (Healy 2001: p. 16)
18 (Healy, 2001:21)
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• In the absence of foreign direct investment what alternative employment would be provided to
employees in developing countries? Foreign direct investment provides jobs and the multiplier
effect of these jobs will increase spending and create more jobs.
• “The opponents of free trade argue in favour of fair as against free trade using the argument that
social conditions are unequal in different countries and that trade policy should take account of
these inequalities - it is not fair to trade if our trading partner enjoys lower wage rates, and lower
social security contributions. The case is made that trade policy should be used to right the
injustices of the found in certain countries with less developed social consciences than are to be
found in the west. If this point is conceded, we have grounds for further discrimination against the
world’s poorest countries. Are the anti globalisers saying we need to raise tariffs against imports
from those countries” 19?
• 40% of global GDP is made up of international trade; to stop it would stunt economic growth in
an unimaginable way.
• The new globailsers have experienced huge poverty reduction, “poor countries with around 3
billion people have broken into the global market for manufactures and services20. Whereas 20
years ago most exports from developing countries were of primary commodities, now manufactures
and services predominate. The new globalisers have experienced large-scale poverty reduction;
during the 1990’s the number of their people who were poor declined by 120 million21. Integration
would not have been feasible without a wide range of domestic reforms covering governance, the
investment climate and, and social service provision. But it also required international action,
which provided access to foreign markets, technology, and aid” .
19 (McEvoy, 2003: p. 11)
20 (World bank & Oxford University Press, 2002)
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2.8 Summary
Sweatshops, selling off state-owned industry to qualify for IMF and World Bank loans and the
increasing dominance of US and European corporations across the world and environmental
destruction have come to symbolise globalisation for some of its critics.
The anti-globalisation faction concerns people from all walks of life, including environmentalists,
anarchists, unionists, the hard left, some of the soft left, those campaigning for equality between
developed and developing countries and others who want to destroy the whole concept.
Not everyone agrees that globalisation is wrong, or that globalised corporations are more powerful
than nations. Some say that the spread free trade into the developing world is the best way to beat
poverty.
Globalisation can be seen as a positive, negative or even marginal process. And irrespective of the
fact that it contributes to good or evil, globalisation will continue to an issue of debate among those
who oppose, fear, support or simply observe it.
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3
Multinationals (MNC’s)
3.1 Introduction
Multinational or transnational corporations are considered to be the foremost distinguishing feature
of globalisation today. In its most basic sense a multinational is an organisation that through
foreign direct investment controls and manages operations in a number of countries outside its
domestic market. They become larger and operate in more than one country to maximise profit and
influence. Around 60,000 corporations produce a quarter of the world’s output, with growth of
worldwide sales by foreign affiliates from about 125% of exports in 1990 to over 200%, or $19
trillion, by 2001. In the last decade foreign direct investment grew at a rate of 12% per year
compared with 7% for world trade and 3% for world production .
Multinational Companies (MNC’s) have become very big and influential. Some, for example, are
worth more than the entire GDP of many countries combined. So where does it end? Will future
space exploration discoveries be named after multinationals like planet starbucks or Nike space
station?
Only 49 of the top 100 world economic "entities” are sovereign states, while 51 are multinational
corporations so MNC’s can have an enormous effect, for good and for bad, on the countries they do
business in, especially if those countries are very small and poor24.
So what is the role of multinationals as agents in the process of globalisation? Does the inexorable
spread of globalisation make them more powerful or is it the case that they are the catalyst for the
unprecedented spread of globalisation over the past twenty years.
Contemporary debates about the impact of multinationals are explored from the perspectives of
those who argue that their operations promote development and prosperity through the transfer of
capital and technology and in promoting freer trade.
23 ( Mcevoy, 2003: p. 5)
24 ( www.unece.org)
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However there is also the argument that multinationals exploit the workforce in developing
countries and remittances of multinational corporations from profits they make also impoverish
poor countries. In 2002 those remittances to the US equalled $55 billion25.
3.2 Geographical distribution of the world’s largest companies
Most of the largest companies, by revenue, are American or Japanese. In 1996, 162 of the 500
largest companies globally were from the United States, and 126 from Japan26. Only a few of the
largest companies are from developing countries, which is not surprising. China is an exception,
which has three entries in the top 500 largest companies.
Measured by foreign assets, the distribution of the largest companies looks very much the same.
Most of the top 100 companies with biggest foreign assets are from the US, Japan, the UK,
Germany and France27. In 1995, the list of the top 100 transnational corporations (TNCs), measured
by foreign assets, included two companies from developing countries for the first time. These were
Daewoo and Venezuela (oil company)28. Total foreign assets of the top 100 TNCs in 1995
amounted to $1.7 trillion, while total foreign sales were $2 trillion, and total employment
5,800,00029.
3.3 Concentration of wealth
In 1996, the total revenues o f the 500 largest companies globally were $11.4 trillion, total profits
were $404 billion, total assets were $33.3 trillion, and the total number of employees was
25 (www.ipsnews.net/intema.asp)
26 ( www.fortune.com)
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35,517,69230. The top ten companies accounted for 11.7% of the total revenues of the top 500,
15% of profits, and 13.6% of employment. 31 of the 50 most profitable firms are indigenous to
America31. The most profitable, however, was Shell (the Netherlands) - with profits of $8.9
billion32. In 1996, the top 500 companies did not get bigger, they got richer. Their profits
increased by 25.1%, while revenues increased only by 0.5%, assets by 3.5%, and the number of
employees by 1.1 %3 3.
3.4 Multinationals and Governments
It is quite difficult for some governments to have active control over MNCs because they are so
large and powerful. One MNC may be the prevailing force in the local economy. Even large
countries such as Germany cannot always control big corporations effectively. They have a lot of
tricks up their sleeve to curtail government control, especially taxes. One preferred ploy of large
corporations is transfer pricing. They frequently purchase and sell between different local offices of
the same business because each is a separate profit centre34. For examlpe, one corporation has
separate offices in London and Rome and the London office makes a product but the office in Rome
sells the product. This means that the office in Rome must purchase the product from the London
office, but at what price? Legitimately the selling price must be the market price on the day, but
some markets don’t have prices every day, and governments have a difficulty in proving what is
going on. So, for example, if the Italian company taxes are higher than British company taxes, then
the office in Rome will pay too much for the product and make a loss. The London office however
makes a very large profit and pays tax on this profit at a much lower rate. When different
governments have entirely different tax systems, with lots of extensive rules of how tax is paid, and
deductions for this, and allowances for that, then all it takes is a couple of knowledgeable
accountants to fix the books
30 ( Unctad, world investment report 1997)
34 (Hirst & Thompson 1996)
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Who are multinational companies accountable to? By law they have to keep their shareholders and
investors satisfied. Economic power is shifting from the public to corporate boardrooms.
Companies have to act within the law but governments do not regulate them. They even use their
colossal economic power to extract ever-greater privileges from governments.
3.5 Social responsibility
There is little doubt that the commercial environmental and social responsibility agenda is
increasing and becoming ever more complex.
Standards and regulations are a different kind of cost to business, and MNC’s are always looking to
cut the fat off their business. So they always seek out the advantage of setting up operations in
countries with flexible regulations. Some poor countries such as Nigeria are rampant with
corruption and bribery, which means their few regulations are ineffective. India, for example, has
brilliant environmental protection laws, on paper. In truth though, the inspectors are so badly, paid it
only costs a couple of dollars to bribe them to look the other way. This opens the way for a slippage
of principle below the levels considered acceptable in the MNC’s home country and most MNC’s
have no scruples about exploiting this weakness. One famous example of this was in India in the
1980’s when an American chemical business Union Carbide disregarded safety policies at their
factory in Bhapol35. This negligence resulted in an explosion of toxic gases that killed thousands
and it took years for the company to pay compensation, this is not surprising considering the
influence these large corporations have over local governments.
Do companies balance their global financial interests with the concerns of the community?
35 (www.tutor2u.net)
22
3.5,1
Case Study: Shell
The petroleum company Shell has operations in more than 140 countries, and, through its vast chain
of petrol filling stations, claims to have the leading retail network in the world. It is one of the
largest companies.in the world.
When its main business is oil and petrol, the burning of which leads to high Carbon Dioxide
emissions thought to cause global warming, can Shell claim to be environmentally friendly.
Nowadays companies have to be socially and environmentally conscious and also strive to be
successful.
This business paradox is well highlighted by the opening up of shell’s new operations in Athabasca
in western Canada36. The discovery of oil here will secure fossil fuels as the dominant power
source for a long time but what are the implications of such as discovery? The exploitation of this
new source will increase shell’s emissions in Canada by nearly 50%, which will further contribute
to the green house effect. In efforts to adhere to their social responsibility shell has offered to slash
their future. The company’s president Tim Faithfull said “We have set a goal of reducing those
emissions by h a lf537. “The significance of that number is that at that level we will emit less
greenhouse gases on a full cycle basis, from the oil well to the other side of the refinery - going into
the customer’s tank if you like - we’ll emit less greenhouse gas with a barrel of our synthetic crude
oil than from the average barrel of crude that has been imported into North America” says Faithfull
Shell says it has cut it’s emissions of greenhouse gases by 10% since 1990. However this of course
takes no account of the emissions caused by Shell's customers burning products derived from newly
opened fossil fuel sources such as Athabasca38.
36 ( http://www.bbc.co.Uk/worIdservice/specials/l 5 l_globalgiants/page8.shtml)
37 ( http://www.bbc.co.uk/worldservice/specials/15 l_globalgiants/page8.shtml)
38 ( http://www.bbc.co.uk/worldservice/specials/15 l_globalgiants/page8.shtml)
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Shell is also investing in wind and power resources39. In 1997 it announced it would spend $500
million to develop them. However this is not a solution to the damage they have already done, if
anything this investment in renewable resources is a profitable venture because many countries pay
more for green energy, for example the German government pay 20% more for green energy than
fossil fuels. Shell illustrate it is possible to balance social responsibility and business strategy
business strategy.
3.5.2
Case Study: Levi’s
Levi’s, which was founded in the 60’s, is a family run business so they don’t have to answer to any
shareholders. So its interests are the interests of the family this makes Levi’s one of the more
ethical corporations of the world.
Nearly every large US Company has a corporate responsibility programme, which outlines the
ethical standards by which they operate. Levi’s was one of the first company’s to adopt this
standard. Levi’s aren’t exactly famous for supplying an equal wage to their employees in
developing countries but their responsibility programme is definitely about doing the right thing.
Here we can see the issue between the ethical interests o f public businesses and family businesses.
Does the hierarchy o f management and CEO’s of public companys make ethical decisions on behalf
of their shareholders? Should shareholders have an imput into the social responsibility of
companies?
It is a difficult task to maintain ethical standards and keep costs low but it is increasingly important
for companies in a time where consumers are ever more conscious about corporate malpractice.
3.6 Summary
Multinationals promote global economic growth. They create jobs and lowers prices for consumers.
They also provide developing countries, through infusions of foreign capital and technology the
chance to develop economically and also the chance to realise equal human rights. Disparaging
39 ( http://www.bbc.co.uk/worldservice/specials/! 5 l_globalgiants/page8.shtml)
Page of 51
multinationals or boycotting their products would be counterproductive to the progress of
developing nations and global economic growth as a whole
However the rights of workers and the obligations of business to the local area they operate in are
too important to be left to the voluntary concern of corporations. It is important to implement
socially responsible standards for multinationals, which needs to be backed up by effective
sanctions to motivate corporations to take such standards seriously, giving them real incentives to
detect and prevent misconduct throughout their global operations.
"25
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4
Outsourcing
4.1 Introduction
Global outsourcing is the quickest growing aspect of the world economy. It is one of the main tools
used by MNC’s to cut costs and increase profits. The word itself strikes fear into the hearts of
employees in the home markets.
Worldwide spending on outsourcing in 2003 was an estimate 5.1 trillion40. Researchers estimate that
over the next 12 years, 3.3 million jobs accounting for $136 billion in wages will move offshore41.
Outsourcing is a leading strategic tool available to companies, which decide to hand over a specific
activity normally carried out with in the company itself to a vendor. It can result in an activity
being performed at a higher standard and a lower cost than before. More importantly, if the
outsourced function is not a core competency, then the energy applied to it can be focused on more
important tasks. Companies also outsource non-critical areas where they don’t have a lot of
expertise or are lacking in staff. Outsourcing is essentially the transfer of control from the buyer to
the seller. It differentiates from other business relationships in the sense that the seller has complete
control. Many studies show the show the strategic benefits of global outsourcing for firms as a
means to reduce costs, improve asset efficiency, and increase profits42. Criticism of outsourcing has
arisen mainly in the areas of changing employment patterns, globalisation of the labour force, and
its effects on employees within organisations. Outsourcing has been called “one of the greatest
organisational and industrial structure shifts of the century” with the potential to transform the way
businesses operate43. Some theorists believe it will change firms from vertically integrated
structures into “virtual organisations” and transform existing fixed structures into variable-cost
structures where expenses can move up or down as the business climate allows44. Employees view
the trend in outsourcing as a loss in fixed employment opportunities because companies are
increasingly sourcing non-critical operations overseas to benefit from cheaper labour. As
outsourcing increases in the United States, the portion of the employed workforce made up of part
40 (Corbett, 2002)
41 ( Mccartney, 2003; forrester, 2003)
42 (Quinn, 1997)
43 (Drucker, 1998 p. 17)
44 (Garr, 2001 p.85)
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time, temporary, freelance or independent contractors is growing. If this trend continues it will
have a deep effect on culture in organisations and the way work is performed45.
Outsourcing is not a new concept; it has been performed for hundreds of years as part of trade
between nations looking to profit from price differences for basic products. However global
outsourcing became very topical in the early 1980’s. Flanked by the strong dollar and increasing
foreign competition, American car companies found themselves in a desperate situation and were
forced to resort to a radical measure to reduce costs and increase profitability. In the mid 1980’s,
GM closed 10 factories in Flint Michigan and moved them to Mexico. This became the focal point
of Michael Moore’s controversial documentary “Roger and Me”. Other Industry’s started to take
notice of the trend started by the American car producers. In the 90’s the trend accelerated with the
signing of the NAFTA agreement between America, Canada and Mexico. Many firms looked to
Mexico as an area of significant cost advantage. Labour was also cheaper in Canada and they also
spoke English, which made it easier for American companies to conduct business.
As world markets opened up and with IT advances such as the Internet allowing instant
communication between businesses, the ability for companies to obtain and source products from
anywhere in the world increased substantially. Manufacturing, information technology enabled
services (ITES), marketing, accounting, human resources and customer support centres are some of
the most frequently outsourced departments.
Since the 1980’s outsourcing has caused a change in the nature, structure and culture of business.
Many theorists such as Michael Porter and Peter Drucker emphasised the need for corporations to
concentrate on their core competencies and move non-core activities to external vendors. In the
80’s organisations sought to increase shareholder value by outsourcing as many non-core activities
as possible and increase short-term profitability and this trend has followed through to business
today.
In the 90’s two new business strategic concepts emerged46. Business process reengineering (BPR)
was introduced to businesses looking to restructure themselves, “to achieve dramatic improvements
45 (Geiger, 1999; Neikirk, 2002)
46 (Hammer & Champy, 1993)
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in critical, contemporary measures of performance such as cost, quality, service and speed” 47.
Business reengineering is what one commonly knows as downsizing which involves the elimination
of a number of positions within companies that are also deemed non-critical areas such as middle
management. As there were less permanent workers available to firms in America companies were
forced to outsource large parts of their business to external vendors.
4.2 Effects of Outsourcing
Global outsourcing has substantially altered the nature o f work in companies. At the start o f its
evolution it only threatened blue collar jobs but now employees from operational level to middle
management are at risk from losing their positions to a counterpart in a developing country. Instead
of hiring one engineer in the United States for $70,000, it was now possible to hire 10 engineers for
the same amount o f money in a developing country48. With shareholders seeking more robust
earnings, CEO’s began to act ruthlessly to restrain costs.
While secondary services such as security, mail sorting or janitorial services are considered
peripheral functions; the growth of globalised outsourcing in previously core functions such as
HRM or customer service transforms the very nature of organisational structure. Jobs with firms
become more temporary and forces workers to be flexible as changing demand alters occupational
knowledge and does away with secure career paths49.
4.3 Information Technology (IT)
Information Technology is the Industry that has been most commonly linked with outsourcing. IT
functions have been outsourced since the 70’s because of expensive hardware and software required
for state of the art systems50. As large corporations shifted to data storage and relied more on
computers the demand for IT technicians who could operate these systems exceeded supply. There
47 (Hammer & Champy, 1993 reengineering the corporation: A manifesto for Business Revolution, Harvard Business School Press)
48 (See also: A brief history o f outsourcing, at http://forums.sudhian.com/messageview.cfm?catid=22&threadid=35184)
49 (Ansberry & Skapinker, 2003)
50 (Heywood, 2001)
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were also a variety o f skills that did not require a full time position for every employee51. Due to a
lack of specialists many firms started to look to firms in Europe and elsewhere much needed
specialists. Many American companies such as DELL and Intel moved to Ireland in the early
1980’s to take advantage o f the many IT graduates who specialised in the production of semi
conductors. Many Indian workers were also granted visas to work in the US in the late 1990’s to
fill the IT void. This was due to their knowledge of IT and engineering coupled with the fact that
they had a high fluency of English.
In the 1980’s the Indian economy deregulated and there was increased privatisation of state
firms. More money was invested into telecommunications and the computer Industry that made
India a very attractive place for foreign direct investment. Large American transnationals such as
General Electric, Ford and HSBC outsourced many of their functions there to take advantage of the
abundance o f IT graduates. The city of Bangalore was named the “new silicon valley”. Wages
started to rise in Bangalore, New Delhi and Hyderabad so companies outsourced their functions to
other cheaper cities within India; this is a case of how there is regional divides even within
developing countries and between developing countries.
4.4 Advantages of Outsourcing
After thorough research the author finds that the no of proponents of global outsourcing outweigh
the opponents but this does not consider the employees who are at the receiving end of the negative
aspects of outsourcing. The advantages can be broken down into three main areas; companies can
concentrate on core business, cut costs and add flexibility when responding to changes in demand.
4.4.1
Concentrating on Core Business
Theorists argue that companies must focus on parts of their operations where they are uniquely
positioned and have financial and human resources to excel52. For example the pharmaceutical
51 (See also:
http://members.tripod.eom/kingfishlim/OUTSOURCING_OF_INFORMATION_SYSTEM_AND_COMPUTERIZATI
ON.htm)
52 (Hammel & Prahalad, 1994)
Page o f 51
giant Pfizer has core competencies in the area of research and development so they concentrate on
product innovation and design. Companies such, as Coca Cola or Guinness that rely on brand
management should concentrate on market research and understanding their consumers53. Firms
involved in the processing o f information such as city bank, should concentrate on providing quality
and uniformity to their offerings54.
4.4.2
Cost Control
A major strategy considered by businesses in global outsourcing is the desire to reduce operating
costs55. Global outsourcing cuts administrative and supervisory expenses, lowers effective wage
rates through the use of cheaper offshore labour and also lowers payments for worker benefits such
as health insurance and compensation, which every US employee is eligible for56.
Firms that contract labour overseas shift the risk of overcapitalisation to the overseas vendor, this is
ensures a competitive labour market57. So firms that are not sourcing overseas are at a competitive
disadvantage because their competitors are able to price their products more aggressively because
they are realizing lower costs through outsourcing.
Although discrepancies in manufacturing wage rates have existed for a long time between
developing and developed countries many firms were not able to take advantage of these
opportunities because barriers to entry into overseas labour markets existed for a long time. Many
developing countries didn’t posses the minimum production or communication technology
necessary for some firms to exist. However the nature of the global communication technology has
changed dramatically making previously inaccessible areas attractive locations. It has also opened
up countries to all size firms that were in the past only accessible by large firms. Some company’s
facilities have been moved to from some developing countries to other developing countries with
even cheaper manufacturing costs.
53 (Hagel, 2002)
54 (Hagel, 2002)
55 (Corbett, 2003)
56 (Harrison, 1994)
57 (Kusel et al., 2000)
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This trend has crossed over into the service industry in the last decade; call centre wage rates are
around $1.50 an hour in India compared to wage rates of around $ 1 0 to $ 1 8 an hour in the US58.
4.4.3
Flexibility
Outsourcing enables companies to respond to new challenges in unpredictable markets by
redeploying labour where needed. External vendors can provide internal production stability and
promote workforce stability59. The number of employees can be adjusted quickly in response to
fluctuating demand and this can be achieved without related costs of employee reduction or
increased hiring internally. Companies can also look for performance-based pay incentives in their
contract with the vendor.
4.5 Disadvantages of outsourcing
The labour and ethical issues are one big effect of outsourcing; this concerns the effects on an
organisations culture and also the macroeconomic effects of outsourcing as a form of globalisation.
Outsourcing transfers work to developing countries were labour is cheaper. Prevailing wages in
countries such as India provide the rationale to reduce labour forces in developed countries such as
the US. Theorists believe that this depresses wage rates for remaining employees, reduces job
opportunities, stability and can also mean a loss of worker benefits60. This is the reality in countries
such as the US but many states such as “Wisconsin and Indiana - have proposed legislation to ban
or limit foreign outsourcing from the states”61.
Critics believe that the overall macroeconomic benefits of outsourcing are usually at the expense of
the individual worker62. Outsourcing also falls disproportionately on the older worker who are
more highly paid but less mobile. Outsourcing intimidates labour forces in the home country and
58 (Kirkpatrick, 2003)
59 (Burt, 2003)
60 (Harrison, 1994)
61 (Weckler, A. 2004, Fears grow for Irish economy over jobs outsourced to India, says report. The Sunday Business post, 11th January, p. 5)
62 (Breslin, 1999)
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erodes the benefits o f unionising63. Theorists suggest situations, in which reducing costs as an end
to justify corporate strategy violates ethical norms and brings a high human cost with it.
4.6 Summary
In a hypothetical situation where the world economy will stay stable, the potential for global
outsourcing can be expected to grow for companies looking to reduce costs increase shareholder
value and remain competitive. The drive towards outsourcing is to free up non-critical activities so
companies can focus on their core competencies. This will also help companies realise economies
of scale. Firms that do not pursue policies of outsourcing will find it difficult to remain competitive
and perform efficiently. Workers in mature markets will correspondingly have to become more
flexible to remain competitive in the labour market.
63 (Boudette, 2004)
“32
5
Literature Review
5.1 Market unbound
Lowell, B. & Farrell, D. Market Unbound: Unleashing the global Economy
Market unbound highlights that profit opportunities available today in the global market are so large
and the capital seeking those opportunities is so vast and so highly mobile, that we are entering into
an entirely new era of capitalism.
Although the global economy has already undergone major -and irreversible changes, the
transformations yet to come promise the most significant economic developments since the
industrial revolution. In the uncertain future, one thing is clear: the global capital market is
increasingly dictating the actions and policies of governments, as opposed to governments dictating
the actions and policies o f the market64.
According to the author there is without question, the promise of great prosperity, as rapid growth
takes a hold in both the developed and underdeveloped world. However there is also potential for
disaster if economic evolution breeds turmoil and social unrest, as companies-nations-either
succumb or succeed in the new global, market place65.
5.2
64 Lowell, B. & Farrell, D. Market Unbound: Unleashing the global Economy, 2003, p. 7-178.iu
65 Lowell, B. & Farrell, D. Market Unbound: Unleashing the global Economy, 2003, p. 7-178.iu
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5.3
Empire
Hardt, M. & Negri, A: Empire, 2000.
Globalisation seems impossible to escape: it envelops us, dominating academic, media and policy
discourses. The literature analysing globalisation seems to be growing overwhelming. Empire sets
out to develop an innovative analysis o f the contemporary global order. Whilst the authors share the
radical political convictions o f those who claim that in globalisation we are witnessing a ‘new
imperialism’, they argue that instead of seeing a repeat of an old form of domination - with the US
assuming the place, for example, of nineteenth-century Britain - the contemporary global condition
represents a novel departure from that which went before. Indeed it signals a ‘paradigm shift’ in the
constitution of global political-economic order66.
The authors articulate a notion of a postmodern global Empire: ‘a decentred and deterrioralising
apparatus of rule that progressively incorporates the entire global realm within its open, expanding
frontiers’ P. 12.
‘The single and univocal pinnacle of world command is.. .articulated by the transnational
corporations and the organization of markets. The world market both homogenises and
differentiates territories, rewriting the geography of the globe’ p. 310. Moreover, and in line with
neo-liberals, the authors proclaim the transformation of conceptions of sovereignty, of the end of
the nation-state as power container and locus of politics67. ‘The end of colonialism and the declining
power of the nation are indicative of a general passage from the paradigm of modem sovereignty
towards the paradigm o f imperial sovereignty.’ p. 137.
Although there is no escape from Empire, the book is optimistic for the future, seeing contained
within Empire the resources to transform its modes of power and control68. Such a transformation
66 Hardt, M. & Negri, A: Empire, 2000.
67Hardt, M. & Negri, A: Empire, 2000.
68 Hardt, M. & Negri, A: Empire, 2000.
34
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can come about only through the power of the ‘multitude’- the ‘productive, creative subjectivities of
globalization’ (p. 60).
5.4
Open world the truth about globalisation
Philippe Legrain (2002)
This book depicts open markets and economic freedom (though capital markets are an exception, he
reckons). The author shows that economic integration is the only hope for many of the world's
poorest people. He reviews the economic evidence carefully, and shows it with well chosen
examples from Vietnam, South Korea, Mexico and many others. The book also explains a why it is
wrong to see trade as any more of a curse on rich country workers than a progress in technology and
a rise in living standards .
35
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6
Research Methodology
“Secondary data is information collected by others for the purpose which it can be different from
ours” 69.
Secondary research is information or data that someone else has collected and is available from an
abundance of resources. The author deemed secondary research as an appropriate means of
collecting data in light of the fact that there is a wealth of up to date information concerning the
topic.
“Secondary data collection can be advantageous because of the time and money saved as a result of
undertaking this source o f research. It can also be advantageous because the secondary data that
that has been collected can often offer guidance and suggestions to the researcher as regards how to
manage their own research problem” 70.
The research for this dissertation required an extensive literature search. During the course of the
dissertation numerous sources of data were reviewed including journals, books, databases and
newspapers.
69
( Ghauri, Gronhaug, Kristinland, 1995: p.54 )
70 ( Ghauri, Gronhaug, Kristinland, 1995: p.55)
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7
Industry analysis: Outsourcing service industries to
India
7.1 India: A land of Opportunity
India has become one o f the most attractive countries to outsource to. This year stands out for the
pace with which India, still very much a poverty ridden developing country, has emerged as a
partner of mature economies in a wide ranging area that covers information technology, business
processes and customer service. In the west, particularly in the US, there is a backlash against
outsourcing to countries like India, China, the Philippines and Russia, with India being the most
visible and so taking most of the rap.
Multinational companies are attracted to Indian hubs such as Bangalore, New Dehli, and Mumbai
by low employment costs and highly skilled workforce71. India produces 200,000 engineering .
students, 120,000 doctors and 40,000 management students each year. It is estimated to have an
English speaking population of about 50 million people, which makes it attractive to monolingual
American companies72.
The area experiencing the largest level of growth is the service sector. Analyst suggests that there
may be as many as 35,000 outsourcing call centres by 2005 in India alone73. More sophisticated
customer service work involving credit collection, benefits administration, pension administration,
insurance claims processing and computer-aided topography (CAT) are also being handled by firms
in India74. Ireland and Britain will be the biggest losers in Europe in lost or deflected white-collar
jobs to India because of their British base.
So why are India’s service providers so successful? Ironically, the advanced technologies meant to
increase customer satisfaction and decrease customer service cost- interactive voice response, skill
based routing and speech recognition often confuse and aggravate customers. Re-establishing the
71 (Weckler, A. (2004) Fears grow for Irish economy over jobs outsourced to India, says report. The Sunday Business post, 11th January, p.5.)
73 (Moran, 2003)
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human contact is becoming increasingly important to companies hoping to improve their customer
retention. Technological and financial services companies such as are increasingly moving their
customer service and help desk functions to India, realizing both cost savings and increased
customer satisfaction that technological tools rarely provide.
India has one o f the largest pools of low cost English speaking technical talent. This makes
India the obvious choice to outsource to. Companies such as ESBC, DELL and GE are leveraging
the cost advantage India has to offer while setting up call centres. India's call centre industry is
located around five cities: Delhi, Bangalore, Bombay, Madras and Hyderabad. Big call centre
operators include Customer Asset, Spectraminds, Global Telesystems and Air Infotech.
Datamonitor, a leading UK-based business information company, research indicates that 67-72% of
costs to call centres operating in the US/UK is directly linked to manpower costs. India on the other
hand spends only33-40% of costs on manpower75.
Even though FDI has fallen in India, Business Process Outsourcing (BPO) investment has increased
dramatically, generating revenues of $2.3 billion in 2002-200376. As of March 31, 2003, the sector
HI
employed 171,000 professionals . According to Gartner Dataquest, offshore BPO is expected to
reach $24 billion by 2007 and India is expected to take a %13 billion cut of this cake78. The Indian
call centre industry is expected to grow from $250 million to $17 billion by 200879.
7.2 Case Study: HSBC
7.2.1
Company Overview
HSBC is the first British company to set up a major operation to process work for its UK business
in Hyderabad, one of India's fastest growing centres for customer service and telecommunications .
Last year HSBC had a total of 8,000 people working in its global service centres, of which 4,500
75 (see also: http://www.datamonitor.com)
78.(see also: http://www3.gartner.com/Init)
19 (see also: http://www3.gartner.com/Init)
80 (Weckler, A. (2004) Fears grow for irish economy over jobs outsourced to India, says report. The Sunday Business
post, 11th January, p.5)
-38
Page of 51
were in India. It also has a presence in Guangzhou and Shanghai in China, and Kuala Lumpur in
• fil
Malaysia .
7.2.2
Operations in India
The bank first set up its data processing and call centre in Hyderabad in July 2001 and has been
taking on 240 employees a month. It will have 2,600 employees in the city by the end of this year82.
The average age of its recruits is 23 and the split between men and women is even. The staff man
call centres at a time when increasing numbers of customers prefer to carry out transactions over the
telephone rather than by going into a branch.
Like many other large companies, HSBC are facing a lot of criticism for moving call centre jobs to
cheap labour countries. HSBC chief executive Sir Keith Whitson argues that the Indian workforce
is highly educated and highly motivated83. He said shareholders would be ‘dismayed’ if the bank
did not hire low cost labour abroad84. Indian workers earn 15-20% of what a British worker would
earn. HSBC pays an employee in Hyderabad £2,500 a year, compared to the average wage o f
£18,750 for call-centre workers in Britain85. Indian employees also settle for longer working hours
and shorter holidays. Whitson said that Indian counterparts are better workers ‘they’re quicker at
answering phones, highly numerate and keen to come to work every day’.
Andrew Armishaw, who runs HSBC's service centres around the world, says "We are not trying to
say if you are a person who is affected it is good news. But this process will happen and at HSBC
we do not think we can stand by and not take part"86 Companies are obviously going to jump a t the
chance to cut costs and concentrate on more important aspects of their business.
There is also a more laissez-faire attitude to time keeping among the Hyderabad workforce and
they don’t bother with a role-play dealing with a colleague who has come back drunk from lunch
because lunchtime drinking is not part of the country's culture.
Companies such as British Telecom, GE Capital are following HSBC's lead on the basis that they
can hire well-educated staff for about a sixth of the salaries they have to pay people in the UK.
81 (see
82 (see
83 (see
84 (see
85 (see
also:
also:
also:
also:
also:
http://www.hinduonnet.eom/2001/ll/28/stories/06280004.htm)
http://www.hinduonnet.com/2001/ll/28/stories/06280004.htm)
http://www.hsbc.com)
http://www.hsbc.co.in/in/aboutus/abt_ind.htm)
http://www.hsbc.co.in/in/aboutus/abt_ind.htm)
86 (see also: http://www.hinduonnet.coTn/2001M l/28/stories/06280004.htm)
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7.3 Case Study: General Electric (GE)
7.3.1
Company Overview
GE is a diversified technology and Services Company that employs 315,000 people in more than
100 countries, by outsourcing its call centres, it can focus on its core competencies87.
7.3.2
Operations in India
GE triggered the trend o f outsourcing call centre services to India, when it established a call centre
near New Delhi in 1998 . GE already had offshore call centres in 15 countries, including Japan,
Ireland, Austria, and China. GE Capital already has four call centres in India operating out of the
cities of Gurgoon, Jaipur, Hyderabad and Chandigarh. The GECIS Call Centre offers a vast range o f
services, which include telecollections, customer service and telemarketing for businesses across
•
OQ
the globe and all time zones .
According to president o f GE Capital Pramod Bhasin the knowledge of English, a vast pool of
qualified manpower, cost competiveness and the workforce’s flexibility to work round-the-clock when at least half the world is asleep —were among the competitive advantages enjoyed by GE in
India90. Due to the success they have experienced in India GE are now ready to build a fifth call
centre. According to Bhasin, p. GE in India engages over 10,000 people and the new centre is
expected to add 1000 more onto the payroll. Bhasin said India had the potential to become a world
leader in the global IT-enables services (ITES) arena.
87 (see also: http://www.gecareers.com/GECAREERS/jsp/index.jsp)
88 (see also: http://www.ge.com/en)
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7.4 Case Study: DELL
7.4.1
Company Overview
Dell designs, develops, manufactures, markets and services a range of computer systems. The
company is a PC manufacturer and a direct-sale computer vendor. It also markets software,
peripherals and service & support programs. Dell is headquartered in Round Rock, Texas91.
7.4.2
Operations in India
Dell is one of a number o f high-tech companies that has in recent years moved jobs offshore to
India and other developing nations to take advantage of cheaper labour and time-zone differences,
which in DELL's case helps keep down the cost of round-the-clock support92. They employ 2000
people in India and their major call centre operations are stationed in Bangalore93. DELL uses its
call centre’s to provide tech support but the company also uses it’s call centres to sell it’s products
which neatly matches the companies strategy to maintain direct relation with clients.
However Dell might move a handful of tasks from its call centres in India back to America. The
computer giant could be scaling down tech support calls to India because its corporate clients have
complained about ‘thick accents’ and poor service94. In spite of this, there will be no lay-offs and
jobs cuts in the India operation; some calls will simply be redistributed95. This incident has given
rise to fears that other companies like Dell will move their operations back to America and Britain
but it is outrageous to say that such small hiccups will damage the value proposition that India
continues to offer.
91 (Colley, A. (2003) Dells US support calls go back to India, says report. Net India News, 26th November, see also:
http://www.zdnetindia.com/news/national/stories/93684.html)
92 (Colley, A. 2003, Dells US support calls go back to India, says report. Net India News, 26thNovember, see also:
93 (Colley, A. 2003 Dells US support calls go back to India, says report. Net India News, 2&h November, see also:
94 (Forester, H. 2003, Accent on cutting costs,says report. Griplog, 12th June, see also: http://www.gripe2ed.cdm/scoop/section/Columns)
95 (Rajghatta, C. 2003, Accents get Dell into trouble, says report. India times,25th November)
Page o f 51
7.5 Case Study: British Airways
7.5.1
Company Overview
British airways are Europe’s leading airline. Airlines are increasingly viewing call centres as a tool
to save costs and improve customer and distribution services. For BA, it is another step under its
“Future Shape and Size” programme, a restructuring exercise designed to trim flab and cut costs
across the globe96.
7.5.2
Operations in India
British Airways has 2,400 employees in Mumbai who manage passenger accounting, error handling
and frequent flier miles tracking for BA and other airlines97. BA First established their back office
centre in India in 1994 and today has become an ambassador for the Indian outsourcing industry98.
It employs 2000 people across two locations99. It saves more than £20 million a year on staff costs
in the UK. It serves 23/7 customer service to customers worldwide, served partly through their
response centres in India100.
Its main operations exist in Mumbai and Pune. According to Shaunne Shaw, head of
accounting operations, BA chose India because of quality and quantity of staff. Mumbai and Pune
turn out 150,000 graduates a year.
In taking operations offshore BA were looking to achieve results cheaper better and faster.
The advice that Shaw would give anyone considering a move to India is “Go for it but beware of
the pitfalls” these include forgetting that the English that is spoken in India is not the same as
everywhere else and so additional training is required for staff who deal with customers. To also
remember that culturally they are better at following procedures than an American or British
employee but conversely if you want to maximise value you cannot assume that they will have the
flexibility to fill in the gaps.
96 ( IDS report, call centre employment expands both in UK and India, says report, May 2003)
97 (India defends outsourcing success, says report. Australian IT, December 2003)
98 (Karkahanis, T (2003), call centre market in for robust growth, says report. India Times, 22nd May)
99 (Rao, G 2004, British Airways plans call centre in Gurgoon, says report. Times News ,4th September)
100 (Rao, G 2004, British Airways plans call centre in Gurgoon, says report. Times News ,4th September)
-------------------------- :---------------------------------------------------------------------------------------------------------------- .---------------------- 42
Page of 51
7.6 Advantages of outsourcing to India
India’s edge in quality and cost benefit is what is drawing organizations towards her.
Companies such as ESBC can increase customer satisfaction and enjoy bigger returns by sending
customer service functions to India. The cost advantage arise from lower labour costs, an employee
in India receives a wage which is on average one sixth of that of his/her American or British
counterpart. Even taking future inflation and salary increases into account this cost advantage will
remain.
India is the top o f the arena for outsourcing in comparison to its competing countries such as China,
Malaysia and Ireland. However the level of excellence has not occurred over night. Government
policies, infrastructure, education and a high fluency of English are all vital factors that have
supported India’s success. Indian students are well equipped to take advantage of their current
international scenario; they have a good command over quantitative concepts and communication
skills. The Government have also taken very liberal initiatives to encourage companies to outsource
there. In line with its policy o f becoming “the back office of the world” the Indian Government
announced in January that it was abolishing tax for foreign companies with outsourced operations in
India101.
The level of English can be attributed to colonial times when India was under British rule. India
also has a sound infrastructure in comparison to other developing countries.
Outsourcing to a knowledgeable vendor in India can assist in supporting customers and
understanding their needs. The buyer can use the feedback in marketing and sales efforts they can
also benefit from tying this knowledge back into their product and process development cycles.
This will ultimately support the refinement of a company’s corporate strategy and ensure a strong
interaction with its customers.
Large companies can cut the fat of their business through outsourcing. Outsourcing here allows
companies to focus on their core business and strategic issues rather than on routine and time
consuming activities and this can be done without large capital investment; it also gives company
an edge to scale resources up and down as needed. They can accommodate any increase in inbound
call volume in the case o f a new product release or a market survey or sales campaign. Outsourcing
helps realize economies, of scale through division of labour and specialization.
101 (Weckler, A. (2004) Fears grow for Irish economy over jobs outsourced to India, says report. The Sunday Business post, 11th January, p. 5)
43
Page of 51
7.7 Disadvantages of outsourcing to India
When outsourcing to any developing country, companies are inevitably going to face problems.
The element of control is a huge factor to be considered when outsourcing. The relationship
between a company and a vendor can go sour if the expectations of performance differ between the
outsourcer and the client. Relationships with low levels of integration can mean weak
communication and result in targets not being achieved.
Another downside o f outsourcing service centres is that telecom charges are still quite high
especially in comparison to the US, a long distance phone call (anything over 300 miles) costs
around 10 cents per minute, and even more for longer distance. This could prove to be a major
obstacle for companies with a lot of outgoing calls, such as market research firms. The Internet
access charges, though became very competitive, are still nowhere near US. A dial-up Internet still
costs about 75 cents per hour or about US$ 5 per 10 hours.
Other infrastructure facility expenses such as electricity, petrol and water are also relatively
more, one gallon of petrol in India costs about $3. Power failures also occur frequently in India and’
therefore, it is essential to use backup generators.
Although the Indian employees have a good command of English many customers have
complained that they have thick accents, which make them difficult to understand. Companies such
as DELL have experienced this problem.
At the end of the day it is just a question of opportunity cost, when top management look at the
bigger picture, they have to ask themselves if they can overcome these disadvantages in order to
appreciate the benefits.
Page of 51
8
Conclusion
The potential for a shift in labour from industrialised to developing nations is great. These jobs will
no longer just be blue-collar jobs but higher paid skilled positions a. In the future there will be
increased pressure on governments to pass legislation to introduce new forms of market controls to
slow down or even stop the speedy changes to the labour market.
As the location of a firm or it production operations becomes less and less important then labour is
viewed increasingly as a commodity and companies go window shopping in the bargain basements
of developing countries. The shift of labour to developing countries will cause radical changes of
entire industries of developed countries such as the service industry and any workers left in these
industries will have4o be willing to accept lower wages or get out. It will cause labour forces in
developed countries to push towards more specialised knowledge based industries which can only
benefit consumers because of increased quality in the production of goods and services.
On the
other hand wages in developing countries will move up as a country becomes more industrialised
f
and developing countries with increasing incomes will also have to move up the value chain in
order to stay competitive102. One would be confident in presuming that global outsourcing will
create more jobs in poor countries and shorten the gap in inequality between the rich and the poor.
However there are many ways to look at this. Firstly the exclusively rich and shareholders will
remit the profits from cutting costs and the poor in underdeveloped nations will benefit because
they are receiving higher wages from MNC’s than they would from their local indigenous industries
and they only non beneficiaries are the middle income-classes in developed countries. The second
theory is that this is the nature of capitalism and the “creative destruction” of this process will
benefit everyone in the long run because in the short run the middle and working class in the
developed world will loose out but as the cycle continues they will have to specialise to compete
and will realise higher wages and this will cause companies in the developed world to be more
innovative.
The future will see more protectionism on globalisation in an effort to secure jobs in industrialised
countries. One solution would be to protect the jobs of high skilled workers in the developed
102 (McEvoy, 2003)
------------------------------------:------------------------------------------------------------------------------------------45
Page of 51
Western countries while simultaneous openings are made for investment and advancement in the
still-developing nations.
Developing countries that have already benefited from the globalisation will also do everything in
their power to stop business from leaving to even cheaper developing countries. Eventually as they
become more industrialised they will also have to implement means of protectionism. In the
authors opinion it these efforts will be in vain because as more markets open up in the developing
world this cyclical process will eventually reach every country as CEO’s seek to increase
shareholder value. This aspect of globalisation will bring with it prosperity to each region it
touches, eventually digging into the assets of the developed world and shorten the inequality gap.
The standard o f living in the US and other countries will continue to drop until an equilibrium point
is reached.
*F6
Page of 51
9
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Page of 51
9.1 Internet References
Caffentzis, George (1995). Variety of Bancocide. See also:
http://homepages.uel.ac.Uk/M.DeAngelis/bancocide,pdf
-Colley, A. (2003) Dells US support calls go back to India, says report. Net India News, 26th
November, see also: http://www.zdnetindia.com/news/national/stories/93684.html
Forester, E (2003) Accent on cutting costs,says report. Griplog, 12th June, see also:
httv://www. gripe 2ed com/scooy/section/Column
IDS report, call centre employment expands both in UK and India, May 2003, see also:
http://www.incomesdata.com/report/view881 .htm
India defends outsourcing success, says report,
December 2003. Australian IT, See also:
http://australianit.news.com.au/wireless/storv/0%2C8256%2C7-8028585%2C00.html
Inside global giants: Shell Green or Mean, see also
http://www.bbc.co.Uk/worldservice/specials/l 51 global giants/page 8. shtml
Karkahanis, T (2003),, call centre market in for robust growth, says report. India Times, 22nd May,
see also: http://www.transworks.com/news/pdfs/indiancalling.pdf
Rao, G 2004, British Airways plans call centre in Gurgoon, says report. Times News, 4th
September, see also: http://economictimes.indiatimes.com/articleshow/msid-164478.prtpage-l.cms?
http ://www. datamonitor.com
http://www.hinduonnet.com/2001/ll/28/stories/06280004.htm
http://www.hsbc.com
---------------------------------------------------------------------------------------------- :--------------------:----------------------------------------------------------------------— ------5P
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http://www.hsbc.co.in/in/aboutus/abt ind.htm
www.unece.org
www.ipsnews.net/intema.asp
www.fortune.com
www.fmancialtimes.com
www.harvardpress.com
www.tutor2u.com
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“Going Global” An insight into outsourcing and the changing nature

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