Outsourcing to India: Great opportunities and potential blockers for MNE's author ASHIM CHAKRABORTY....

8/4/2019 Outsourcing to India: Great opportunities and potential blockers for MNE's author ASHIM CHAKRABORTY. MBA, MSc

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Advantage and Disadvantage of Outsourc ing to Ind ia and

Recommendat ion .

In t roduc t ion :

Outsourcing can be described as part of an organizational operation to an external trader to achieve cost

leadership and potential market share. In the existing global economy, it is significant for Multinational

enterprises to locate ways to achieve the organisational vision by using less resource and cost.

India is one of the worlds most potential and emerging economies. Besides the booming economy, market

size, cost factor, governmental policy and other global corporate friendly environment have been inspired

Multinational enterprises ( MNE) to have their secure foot hold in India as a part of their global outsourcing

like British petroleum, Nokia, General motors, Ford motors, Samsung, LG, Microsoft, IBM etc.However, in spite of having a great possibility and prospects, the outsourcing performance of Multinational

enterprises (MNEs) in India have been apparently mixed. A lot of MNEs has succeeded noticeably and doing

pretty well, however a numerous MNEs those market access strategy and penetration strategy have been

succeeded in different countries are struggling to cope with Indian market, and produce appropriate products

and service as required. Why some MNEs are accomplishing their vision so well where as others has failure to

be succeeded? This paper is an initiative to provide an analytical explanation of external influential

determinants of Indian market to attract MNEs for outsourcing. Advantage and disadvantage of global

outsourcing for MNEs in India will be discussed by reviewing the previous studies and two case studies will be

analyzed in order to supporting different aspects and creating a set of recommendation to Indian market to

accelerate the success rate by reducing drawbacks.

Eva luat ing t he In f luent ia l fac t o rs assoc ia t ed w i th g loba l ou tsourc ing

in India v ia PESTLE analy sis:

According to (UNCTAD 1998) MNCs are highly searching sites where they can join their own portable resources

most effectively with the importable assets they require to come up with goods and services for their

expecting market. This paragraph of this report will explain different external factors act as primary issues that

MNEs always analyse before their foreign direct investment in India.


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It has been undeniably exposed that Multinational Enterprises (MNE) are considers the political situation as a

key influential issue for investment decision-making. India is worlds biggest democratic state with English

common law; judicial review of governmental act.

The governments activities to Foreign Direct Investment are playing a significant role to attract the

multinational enterprise in India. After the Indian financial liberalization at 1991, the government have been

more concentrated to attracting MNEs through their policies like free market economy, reoriented HRD

system, rearranged working culture, stringent quality control, allowing MNEs in all sectors apart from some

sensitive areas like defence and equal opportunities parallel with local companies (Sapara, 1995). As a result

FDI in India have increased from 129 to 2843 between years 1991 to 2009(Engardio, 2006).

However they key challenge of Indian political environment are terrorism, corruption, communal conflict and

bilateral relation with neighbour countries like china, Pakistan and Bangladesh (Datamonitor, 2008).

Enormous economic factors are continuously inspiring MNEs to select India for their successful outsourcing.

Today Indian economy is the worlds highest emerging economy, biggest market and lowest labour cost after

China. As a one of the fastest growing economy Indian GDP rate is 7.2%, interest rate is 3.75%, exchange rate

is 44.3659% and inflation rate is also continuously decreasing ( TradingEconomics 2010) . However the

instability of GDP with monsoon, unemployment problem, shortage of energy and over-dependence in oil

imports could be a great hindrance on the way of FDI in India (Datamonitor, 2008)

Figure 1.

Adopted from tradingeconomics(2010)


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Figure 2. GDP growth rate fluctuating with monsoon in India

Source: datamonitor(2008)

India is one of the highest populous countries and a site of cultural inheritance of the world. They have a

remarkable history of general and vocational education in both public and private sector today. Although

English is not the first language in India, they have one of the highest English speaking work forces in the world

(Lou 2000). Indian cultural factors for example different religious philosophy, different local language mix,

different local traditions etc and sociological aspects such as urbanisation and educational level have a

enormous effect on FDI flows (Sathe & Handley-Schachler, 2006) However for healthcare, social security, rate

of literacy, and lower Human development is the key challenge for India to attracting MNEs (datamonitonr

2008)

Indian IT service sector has been growing up tremendously along with a larger number of engineering

graduates and cost advantage. As a result the maximum of bigger MNEs are considering to outsourcing their IT

support from India and desiring to gating touch of its high level IT expertness and high-tech power (Lou 2000).

Today Bangalore is the world famous high-tech city which providing approximately 40% of the total

international softwares and IT services and about 50% of the total global outsourcing (Lou, 2000). However

the lower gross expenditure on R&D and emphasised theoretical education then vocational training are the

major issue towards FDI expansion in India (datamonitor 2008)


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Figure : 3

Source: Morgan Stanley (2010)

Ecological situation is a significant aspect of global business today. India has the worlds 1% forest, 2.2% of land

mass and 16% of total worlds population. However the studied have shown that Indias ecological footprint

per person is comparatively lower than international standard. In order to establish environmental

equilibrium, India government has a great commitment to preserve the natural resources to repair the Indian

ecological damage therefore global natural equilibrium to establish natural sustainability for human being. As a

result ecological conservation, energy saving and sustainable living hood has been considered an effective and

compulsory strategy for any industry in India (WWF 2010)

Legal and legislative issues are very significant for successful corporate environment to attract MNEs in any

country. An inclusive legal system and corporate laws such as tax reforms, implementation of VAT has enabled

for business entities in India to develop their global business relationship.

Advantages of outsourc ing in Ind ia:

Outsourcing to India offers the key advantages of technological agility, quality, flexibility, cost saving, increased

production, competitive advantages, tax advantage, opportunity to concentration on core business, English

speaking workforce etc.

In India, MNEs have a great advantage to get world class technology, service and a great source of skilled

English speaking human resources at comparatively lower cost for example the average salary of software


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engineers in India is RS 319104 (4692) where as RS 2630178 ( 38781) (Pay scale, (2010); Oza & Hill (2007).

Apart from low labour cost, MNEs are also enjoying a huge cost saving advantage and lower responsibility in

different sections in India for example federal tax expense, recruitment, staffs training and development,

additional software cost (if require), employees insurance cost, health care cost and office infrastructure cost

etc because theses cost are paying by outsourcing provider(Schaaf, 2005) By recruiting expert work force in

higher numbers at lower costs MNEs can really enhance their productivity, which results in superior customer

satisfaction and enlarged profitability.

Figure: 3

Adopted from Schaaf (2005)

Back office activities of any MNEs have need of higher maintenance and expertise concentration, because

most of them are critical and expensive. By outsourcing these operations in India MNEs are not only save their

cost and time but also they are achieving a great opportunities to enhancing their core competencies

(Barthelemy & Adsit, 2003).

In today's rapid growing global economy a multinational company requires to offer high-quality services with

cheap prices for its customer to retain them. In this case, outsourcing in India can be consider as a facilitator

of MNCs to achieve cost leadership with enhanced service solutions, and to be more concentrate on core

business which results a better market share and more competitive advantage (Oza & Hill, 2007).


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Figure 4: Pie chart about cost saving advantage in India.

Source: Kochhar & co (2010)

Moreover, India is the place of outsourcing where MNEs becoming beneficial by getting services 24 hours a

day and 7 days in a week. For example, the time difference between USA and India is ten hours which provides

round the clock customer assistance for American companies (Schaaf, 2005)

Disadvantage of outso urc ing in Ind ia : Lack of quality control, management control and

commitment issues are the great disadvantages of outsourcing to India. According to Datamonitor (2006) if

any company is outsourcing its non core business or services to India, the trademark and packaging should has

to be identical and fraud proof in nature for coming across the counterfeit problem, moreover it is always

tough for the outsourced company to control service providers management in India as a result outsourced

project might be exposed to the rivals and quality control will be fragile also.

Figure: 5

Source: KPMG forensic India (2010)

From the Fraud issue about 31% of the MNCs accounted their losses between 1 to 10 million INR and Near

about 11% reported their losses between 10 to 100 million INR( KPMG Forensic India, 2010)


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Figure : 6

Source : KPMG forensic India (2010)

Higher lead time is the another significant disadvantage of outsourcing to India because of their inefficient

supply chain, increase port management problem and adverse weather, in this issue Kotabe and Mol (2004)

sated that the retail companies facing a great disadvantage to outsourcing to India is constancy of supply

chain. Maximum of Indian outsourcing provider companies for retail sector are suffering to manage just in

time delivery for comparatively ineffective supply chain. Indian poor communicational infrastructure, traffic

jam is still developing. Cities like Mumbai, Delhi, and Bangalore are full of traffic jam and overcrowded at rush

hour, even drivers ignore the traffic rules, lights and park their Vehicles illegally (Business week, 2007).

Shortage Power supply is another disadvantage of outsourcing in India. Stable supply of power and

dependency of different countries for oil supply still is a biggest problem for companies in India (BBC, 2008)

The rising disadvantage of outsourcing to India is the growing terrorism for example the high attack in the

economic city Mumbai which results a great reaction on stock exchange therefore in south Asian economy.

Bilateral instable relation between neighbours for example Pakistan, china also causing some disadvantages on

the way of outsourcing to India.

Some other growing disadvantage of outsourcing to India is their environmental issues like air pollution, water

pollution, rising population, rising costs, rate of illiteracy, political instability, national security, joint venture

problem and corruption which ranked 84 out of 180 nations (Guardian, 2009)

Tw o case s tud ies about ou tsourc ing t o India :

A Case study about BT Group plc outsourcing to India: BT Group plc is one of the biggest

telecommunication provider in the world was former state telecommunication and broadband internet service


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provider in the Great Britain established in 1846, its head office in the city of London. As a member of London

Stock Exchange BT Groups total revenue was 21,390 million, net profit 248 million and total employees

108,500 at 2009(British Telecom, 2010)

BT launched their first data service in India at 1987 as a part of their outsourcing in order to utilize Indian

English speaking work force, cost advantage, and Skilled IT specialists. They have started with 43% joint

venture with MBT in 1988, which is a leading IT service provider exclusively in telecommunication sector. By

keeping eye on their cost and benefit and continuous success at 1995 BT launched their international

customer relationship office in India which connects to BTs international MPLS (Multiprotocol Level Switching)

infrastructure at 2004. Today India is a significant market and a one of the main back office for BT which

concentrating on providing international services along with voice, customer relation management,

Asynchronous transfer mode communication(ATM), MPLS, to meet with the Multisite corporate consumers

across sectors.

March 2008 BT declared their new project in India is Global Operation centre which recruits 300 experts

professionals to execute this project. The current hired employees of BT in India is over 7000 and their

expected revenue from India is $250 million (British telecom, 2009)

The main success factor of BT in India is sustainable cost with world class service, experts engineers and IT

resources, and moreover BT call centre is highly successful in India only for skilled English speaking call centre

operators along with lower price (British telecom, 2005)

A case study about Dell lnc outsourcing to India: Dell lnc is a multinational corporation in IT SECTOR

established in USA during 1984 is a one of the successful technological companies in the world. It is a

multinational IT corporation which develop and sales computer and computer related accessorise. In 2009

Dells revenue was $61.101 billion, and employed 76,000 people worldwide. The main founder of this

company was Michele Dell and CEO is Michel S. Dell (Dell 2010).

In 2001 Dell had been entered in India in order to achieve the cost leadership strategy along with higher class

IT support via outsourcing, utilize available English speaking Human resources to run their call centre for

worldwide customer service and be more focused on core business(Dell, 2010).

In order to accomplish the vision Dell opened a customer contact centre at Bangalore at 2001 and at

Hyderabad at 2003. From Bangalore customer centre they started to providing customer service and technical

support to English speaking countries including IT outsourcing (Dell, 2010).

Today Dell India has highest number of employees after USA, which is 23,000 and third important locations

after UK and USA where their all update products launched (Business week, 2010).

In spite of having a successful foothold in India Dell faced some disadvantage for example long delays in supply

chain, product recall, cost rising and middle management risk etc (Times India, 2006).


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However Dell tackled all of the challenges expertly and also changes some of their strategy to adopt with that

situation as a result the Indian wing of texas based successful this company have generated their revenue $600

million from India by the October 2009 which was increased by 50% at 2008 (Livement, 2010) and market

share was 13% in Indian market at 2009(economic times, 2010). Moreover, currently they are planning to

increase 50% of their employees in India by the next year and set up a new manufacturing plant which will

contribute to increase 4% of their market share also (BBC, 2010)

Dells executive in India Malhothra (2010) stated that besides the cost advantage some other advantages

achieved by Dell are huge IT resources, expert software engineers and skilled English speaking work force. In

addition by outsourcing their back office operations company becomes more concentrate on core business

which increases Dells competitive advantage also.

Recommendat ion about pub l ic po l icy in i t ia t ives to Reduce

Disadvantages of outsourc ing to Ind ia :

Though the topic of offshorring is a debatable and politically influenced one, it is very important for trade and

commerce of all countries to maintain collaboration between each other and outsourcing is a significant part

of it. Outsourcing can be a win-win position for the MNCs that send the back office activities abroad for more

benefits. Through the analytical aspects and literature review of influential factors of outsourcing to India and

its advantage and disadvantage it could be recommended that the Indian government could be more

concentrate for their infrastructural development for example road, railway, airport, ports, electric supply etc

which is highly related with global supply chain management and just in time delivery issues. To prevent the

fraud and corruption Indian corporate affaires should be much more aware and strict, might be they can

implement some new effective initiatives to preserve MNCs copy right, project security and quality control as

their expectation North (2010). Economic reform was a great step towards FDI in India, besides that they could

be more enthusiastic to retain their economic emerges by controlling economic inconsistency with monsoon,

unemployment problem, shortage of energy supply and over-dependence in oil imports. Indian large number

of population is their resource and significant aspects of their economy, in this case Indian government should

be more focused to increase public health standard, rate of education, HR development, quality of education

in both practical and theoretical and social security. Today terrorism and corruption is a great hindrance

towards FDI and globalization, as a significant part of Global trade and commerce Indian policy makers should

be much aware and have to play a great role regarding antiterrorism and corruption to remove this

disadvantage of global outsourcing to India.

Conclus ion:

India is a versatile place that has the capability to adjust itself to the customers requirements. Particularly IT

support and services and back office performance status of India is in up position on the directory of

outsourcing which is mostly due to the higher quantities of skilled and highly educated workforce.


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The cost leadership topic appears to be main grounds for outsourcing to India too. Salaries in India are still a

much lower than salaries remunerated for the similar job in the western countries.

There is another factor which makes India unconquerable as a global outsourcing provider country is their

qualified English speaking works force. Maximum people in India can speak English because English is the

second language and official language of India.

However, there are some reverse features which might put in danger Indias strength as a back office service

provider country. Spending in a reliable infrastructure would be able to preserve its position as sourcing

country in the world. India still has to put a lot concentrate and investment to improve their borders condition,

Poverty creates enormous internal difficulties which could be injurious for Indian economy if it does not

recover. In addition the intercontinental relations are a hazard for the economy also. The bilateral relation

between India and Pakistan could lead to terrorist activities like Mumbai in 2008.

The strength of Indian economy is the capability to face the economic downtown. It is one of short listed

countries in the world that can sustain a huge economic escalation. Now a days India is also contributing to

resolve global crisis which will perform enormously to increase their reliability and authenticity to outsourcing

to them.

References:


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Outsourcing to India: Great opportunities and potential blockers for MNE's author ASHIM CHAKRABORTY....

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