The Indian BPO Industry

The Zenta Group story

The Philadelphia Inquirer has profiled US and India-based Business Process Outsourcing (BPO) firm Zenta Group. The article provides some hitherto unknown facts about Zenta as well as some good PR for the company's offshore operations.

Zenta was founded as a subsidiary of Mumbai-based real estate development firm The Hiranandani Group. Zenta is led by its CEO Priya Hiranandani (Age: 27). Intrepid Capital Partners LLC, a venture capital firm founded by Warren "Pete" Musser (who earlier founded Safeguard Scientifics Inc.) and Non-Resident Indian Cyrus K. Vandrevala, acquired a 50% stake in Zenta in September 2002 for an undisclosed amount. Hiranandani and Vandrevala married in February 2003, the Philadelphia Inquirer article says. US-based debt collection firm NCO Group (formerly known as National Collection Office) is one of Zenta's largest customers. The company, which currently employs 1,900 (and recruits about 120 each week) expects to go public by year end.

Click Here to read the Philadelphia Inquirer article.

Click Here to visit the Zenta Group web site.

We’re not moving jobs offshore; we’re adding jobs worldwide: Dell

Here is what Michael Dell had to say, in his interview to Always-On Network, when asked whether his company was sending jobs offshore in order to cut costs:

We’re not really moving jobs offshore; we’re adding jobs all over the world. We added a couple thousand jobs in the US this past quarter on a year-over-year basis. We added jobs all over to support our growing business. My own view is that the bogeyman of offshoring is a lot worse than the reality. I think jobs have been moving from one country to another as long as there have been electricity and telephones and transportation.

Click Here to read the full interview.

How to get a call center job

Business Standard sent three of its younger correspondents posing as job seekers to call centers (or rather, placement agents for call centers).

Here are some extract from "their findings":

After the test I was given a detailed form that asked about my education and family background. I was puzzled by one part that inquired about relatives in the United States and their phone numbers. This, I discovered later is to prevent people calling relatives in America.

I struck up a conversation with an industry veteran (she must have been all of 22) who had quit her last job after being refused two-weeks leave. “I had a genuine reason, yaar,” she insisted.

Industry of the year it may be but the HR manager didn’t try to paint a rosy portrait. “It can be very frustrating if for eight hours everyday, all you have to do is to answer the queries of irate customers. Continuing to be polite while the person on the other end may become abusive is pretty difficult,” she warned....

Mr HR’s speech omits nothing, painting a dark picture of late nights spent doing nothing but answering calls, with one 30-minute and two 15-minute breaks. There will be two days off a week but it won’t necessarily be a Saturday and Sunday. Your social life will probably disappear, he says pleasantly.

Click Here to read the full article.

Private Equity Week features heated debate on offshore outsourcing

Though it isn't clear why the social implications of offshore outsourcing is a fit concern for a magazine focussed on Private Equity, PE Week's Editor-At-Large Dan Primack has triggered off an interesting debate with his column on the topic.

According to Primack, US-based businesses should examine every possible avenue of hiring locally before going overseas. "It should be one of the most difficult decisions of your professional career. If it isn't, then it's generally safe to say that you are a fairly self-centered and callous person," he says in his column. "For those companies who do wind up with operations in Beijing or Mumbai, it is your responsibility to retrain the workers you are leaving behind and/or to help them find new jobs," he adds.

The column has received feedback from several PE Week readers. Some extracts from the feedback that I found interesting:

The Sentimental

It is "callous and self-centered" to move jobs overseas? Have you traveled recently to these countries and seen the overwhelming poverty? Provided that you are willing to enact socially responsible business practices in your new locations, the only egocentrism I see is those nationalistic isolationists who don't recognize our universal humanity: foreign people are no less "worthy" of decent jobs than Americans are.

-- Jed W

How about the jobs being created overseas - don't those count? The US is pretty much the most prosperous country in the world and even though we complain that unemployment levels are high, they are one of the lowest levels globally. We learn in Economics that countries should engage in what they do best and that seems to have served the US very well for many years, but now that companies are moving operations to countries where labor is a comparative advantage - complaints abound.

If we say we are part of a global economy we can't expect to just get all the benefits with none of the disadvantages. I'm a dual citizen (American and Nigerian). America benefits from the fact that it can import many of its products to Nigeria since Nigerians do not have the technology to produce these products. But Nigerians (and other agricultural economies) do not experience the same benefits in terms of importing some of its produce to the US because American farmers are subsidized and thus price imports out of the market. Is that fair?

Many of the workers who lose their jobs when basic operations move overseas can get retraining on their own or by the company that laid them off - for example, most employment agencies offer free basic computer training if you sign up with them. We are so lucky in this country but we just don't realize it. Even in the worst-case scenarios where people end up jobless there are welfare benefits which are non-existent in most of the countries where the jobs move to.

I understand that you are trying to make the point that the executives who are moving operations are doing so for purely financial reasons, however, I think there is a broader point here and it is that we should care about those that are less fortunate than us and not just our fellow Americans. There are so many impoverished people the world over that are benefiting from these overseas moves. The overseas moves benefit the people it creates jobs for more than it hurts those who lose their jobs in the US.

--Feyi B

India is a poor country with a billion people. George Bernard Shaw said once, "there is no greater sin that poverty" and when you see that India's teeming millions may have a chance to 'catch up' (well, in another thirty years) in terms of standard of living, etc. the outsourcing story will not sound entirely evil.

Poverty begets many things Dan, and as we've learnt so painfully, Sept 11 was a result of some people's poverty that some greedy but cowardly thugs sitting in mountains managed to exploit. For a more equitable world, the ironing out process will have to come with pain for many....If corporations can somehow be more humane about the outsourcing story, identify opportunities that they say are available in the US and UK for displaced workers, enable job training, reconcile themselves to slower profit ramp up, I guess we can still live in a world where we don't need to start new hatreds.

From my one trip to the US a few years ago, I was touched and moved by the acceptance in the hearts and minds of Americans, from loving Indian food to clothes, to the people, I would hate for all that to be reversed due to the onset of globalization that is unstoppable but something that definitely ..can be handled with more finesse and class.

-- Parvati P

The Practical

What you are proposing here is effectively a "social tariff" on labor (e.g. the "cost" of offshore labor should be considered higher because of exogenous effects on local labor). If a producer can purchase comparable labor at lower prices, then free markets demand that advantage be capitalized upon. To do otherwise, exposes a firm to competitors that do not face such a social tariff. The evidence on the destructive nature of tariffs on markets is immutable. Tariffs protect markets from competition reducing the need (or capacity) to innovate ultimately causing obsolesce. The steel industry in the US is dead because the federal government tried to "protect" it through tariffs. The business was nevertheless captured by the Japanese and others who innovated.

The risk to labor in increasingly technical and skilled areas is absolutely clear. The wage arbitrage opportunity is compelling. But arbitrage is a brilliant equalizing force driving two factors that come into play (1) as the wage differential continues to be exploited, over time, labor prices in the US will go down, and labor prices in India and China will go up reducing the incentive to move offshore, (2) US labor will have to innovate, provide comparative advantage exclusive of price through creativity, imagination, and new skills. This labor rate pressure will demand innovation of labor and lead the US economy into the next growth phase.

The social equity question of who pays for this retooling of American Labor is a difficult one. You can rely absolutely on the fact that people will do what's in there own best interest. Unfortunately, there is no return incentive for companies to simply retrain workers unless it is to improve returns for their shareholders. Unfortunately, the switching or training costs are often out of reach for the average computer programmer with a mortgage, two kids, and a dog. This gap is a credit constraint not unlike that faced by a high school graduate who is desirous of the income effects of acquiring a college degree. Perhaps, the a student loan program designed to fill such a gap is the answer.

Not necessarily an elegant solutions, but competitive markets are harsh In terms of individual outcomes and optimal in terms of overall result.

-- Brian F

One thing to contemplate is why third world countries can compete so easily with US based firms. We spend more money on education per student than any country in the world, but India, China, Romania and myriad other less developed countries beat us not just on price but on quality. I work with a telesales outsourcing company with a call center in India. These people speak better English than most university educated people in the US and with virtually no detectable accent. Furthermore, they appear more motivated.

Does anyone think that working in a call center is a good job? For all our advances in technology and education shouldn't all or most US citizens be capable of far more? These jobs require no more than a 3rd grade education and training in how to use a computer.

Where can our people provide value? How can the US leverage our intellectual property development capacity? This is both a business issue and a societal issue, and we are at a cross road. Do we believe in free trade? How can we saddle businesses with job retraining costs? Can we expect them to pay more for a commodity than the rest of the world?

--Caleb W

Interesting comments. For info, it was quite difficult but we've done that with a startup we bought in the US, when revenues dropped we moved all software devt in Mumbay. It made it possible to build a great product (one of the most promising i have seen this year) and now they are recruiting again in the US. obviously these are not the same people. i am now working on a model where we don't have to make anyone redundant by proposing them jobs as consultants.

-- Herve H

The Critical

It is a debate between economics and politics.

As a VC, the economic rationale for outsourcing/job loss makes perfect sense. If capital flows to opportunities with highest returns; jobs will flow to locations with the lowest costs & highest quality; or labor will migrate to locations with highest wages. America will have to give up free-market capitalism at a global level and resort to protectionism to prevent such arbitrage opportunities from taking place.

The political issue you have raised is valid, but needs to be addressed in a political forum and not an economic forum such as a private equity newsletter.

-- Matthew V

6 years ago business and political leaders in this nation were painting themselves and having the media paint them as "genius" and " great leaders" for leading a wave of economic improvement and stabilization in a friendly nation of ours, India. Now, from all accounts, Indian companies and government economic officials would have to storm the offices of those "leaders" in order to get a meeting. Now they have to hire lobbying firms and play politics to preserve something that they were the beneficiaries of, but less than half a decade ago, we were tripping over ourselves claiming creation of, their economic empowerment and evolution to the table of growing nations.

Come on...quit playing politics with reality, and with historical evolution...

Companies here or anywhere else on earth are in business to "make money"!! That's their purpose, public or private. It's their obligation to do THAT in the most cost effective manner possible, and that has ALWAYS been the case... it's just sad that it's only when downturns hit and we seem to be feeling the consequences of our great, revolutionary leadership does anyone want to stand up and cry. I would have much more respect for those arguing if they had been standing proudly in defiance of all that this outsourcing trend is now producing, if they had done so during the height of the boom of the 90s, years in advance of the downturn and it's potentially having a personal impact on them.

I enjoy your columns and input, but personally, on this point of outsourcing, you've gotten too "political" which hasn't made reading your normally insightful, concise morning reports much different than reading the editorial pages of the WSJ or LA Times.

-- Rob R

Click Here to read the full version of Dan Primack's column and the feedback it generated.

Productivity is the real "villain" for job losses; not outsourcing

China lost 16 million manufacturing jobs, a decline of 15 percent, between 1995 and 2002, says The International Herald Tribune quoting a recent study by Alliance Capital Management. In that same time, U.S. factory employment shrank by 2 million, or 11 percent. That is, China--the so-called factory of the world--lost manufacturing jobs at a faster rate than the US!!

So where are these jobs going? "That place is called Silicon Valley, where engineers are producing machines that work cheaply and make businesses the world over run more efficiently," says Kevin Laws, Entrepreneur In Residence at Venture Capital firm Pacific Rim Partners, in his VentureBlog article. "Running more efficiently means you can produce more things with less capital --and less people," he adds.

Here is how the IHT article concludes:

As hard as expendability is on the workers themselves, increased productivity is the way progress is made. And the alternative is not so appealing.

"Our studies suggest that hunter-gatherer societies offer full employment for all, simply providing the basic necessities of food and shelter," Steve Wieting, senior economist at Citigroup, says.

Of course, with all of their resources devoted to providing food and shelter, hunter-gatherers tend to have little "income" left to consume anything else - made in China or otherwise.

Kevin Laws rephrases this from a tech industry perspective in his article:

Of course it would be possible to keep the jobs in America through measures to prevent corporations from outsourcing development, just as it would be possible to keep high buggy-whip industry salaries by banning autos.

But we won't, because technological progress makes us all wealthier. Our bargain with each other is that we can't stop the technology that hurts our own jobs as long as others can't stop us from producing the technology that hurts theirs. In the end, we'll do better living in a society that is advancing rather than one that protects all our current positions by preventing innovation.

Roundtable discussion on the winners and losers in offshore outsourcing

Here are some interesting extracts from a report in the New York Times about a roundtable discussion held in New York on the topic of job migration.

Stephen S. Roach (managing director and chief economist of Morgan Stanley):

Over the September to November period, employment has turned up, but many of those jobs came from the temporary hiring industry. These are service jobs, contingent workers without benefits and significantly lower pay scales. We're getting the G.D.P. growth, and by now any recovery in the past would be flashing green on the hiring front. This one isn't.... This is a profoundly different relationship between hiring and the business cycle. And I think these jobs are, by in large, lost forever....

...This is classic election-year posturing by a Congress that is basically responsible for the problem itself and doesn't want to admit it. We have trade deficits with China and Japan because Washington is running the most reckless fiscal policy we've seen in the United States since the late 1960's. They are the problem. It's not the Chinas and Japans and Indias of the world. Moreover, there are a lot of assumptions being made, especially by political leaders, that the rapid growth of Chinese exports and production is the smoking gun of the threat to traditional sources of job creation. About two-thirds of the export growth China has realized over the last 10 years has come from Chinese subsidiaries of multinational corporations headquartered in Japan, the U.S. and Europe and their joint venture partners. These are our companies. It's us; it's not necessarily them....

...In the future there are two roads. One is to look backward and hang on to what we think we're entitled to. The other is to recognize what has made America. Our virtues lie in a flexible and open, technology friendly, risk-taking, entrepreneurial, market-driven system. This is exactly the same type of challenge farmers went through in the late 1800's, sweatshop workers went through in the early 1900's, and manufacturing workers did in the first half of the 80's. We've got to focus on setting in motion a debate that pushes us into new sources of job creation rather than bemoaning the loss. There are Republicans and Democrats alike who are involved in this protectionist backlash. They're very vocal right now, and they need to be challenged.

Diana Farrell (Director of the McKinsey Global Institute, McKinsey & Company's internal economics research group):

There is an assumption by protectionists that these jobs are going somewhere else, and all this money has been pocketed by C.E.O.'s who take it home. A little more sophisticated version is: It's being pocketed by companies in the form of profits. One step further and you say those profits are either going to go as returns to the investors in those companies, or they're going to go into new investment by those companies. Those savings enable me, if I am an investor, to consume more and therefore contribute to job recreation, and if I am a company, to re-invest and create jobs. That's important because I agree that we are migrating jobs away, some of which will never return, nor should they....

...We will require different services, medical devices, all kinds of things to support an aging population. Fifteen years ago, you would not have been able to fathom many of the jobs that exist today.

M. Eric Johnson (Director of the Center for Digital Strategies at the Tuck School of Business, Dartmouth College:

It's all about innovation and productivity. As long as we maintain those two engines, we'll continue to have a very high standard of living. Out in the Bay Area there are plenty of folks who would love to create a little bit of protectionism around their I.T. jobs, but we are far better off letting a lot of those jobs go. Low-skill jobs like coding are moving offshore and what's left in their place are more advanced project management jobs.

Click Here to read the full article titled "Who Wins and Who Loses as Jobs Move Overseas?"

Equity research outsourcing picks up steam

US brokerage firms are sending more and more of their equity research work to India says a recent report in Businessworld. The work being done out of India is not just increasing in terms of volume, but also in value. Quoting data from BPO firm Evalueserve, the report says that 34% of the 77,000 professionals currently involved in equity research activities worldwide, carry out "library functions"--i.e., data and information collection work. Some 25% of these functions would be done out of low-cost offshore locations by 2005. By that time, 10% of the jobs in the next higher rung--those of junior analysts--would also be offshored.

Among the captive units, JP Morgan and Morgan Stanley have hired over 1,000 people each over the last year to staff their Indian centers. Other captive operations listed in the article include those of Citigroup (in Mumbai), Lehman Brothers, and HSBC. The report lists Evalueserve (in Gurgaon), OfficeTiger (in Chennai), WNS Global (in Mumbai), Smart Analyst (in Gurgaon) and Irevna (in Chennai) among the significant thirdy-part units in this space.

Click Here to read the full article.

US CEOs can't afford to ignore India: Businessweek

In its cover story titled "The Rise Of India", Businessweek magazine says, whether Americans regard the outsourcing of services jobs to India as disruptive or beneficial, one thing is clear: Corporate America no longer feels it can afford to ignore India.

Some extracts:

"If India can turn into a fast-growth economy, it will be the first developing nation that used its brainpower, not natural resources or the raw muscle of factory labor, as the catalyst. And this huge country desperately needs China-style growth. For all its R&D labs, India remains visibly Third World."

" Still, this deep source of low-cost, high-IQ, English-speaking brainpower may soon have a more far-reaching impact on the U.S. than China. Manufacturing -- China's strength -- accounts for just 14% of U.S. output and 11% of jobs. India's forte is services -- which make up 60% of the U.S. economy and employ two-thirds of its workers. "

"We can barely imagine investing in a company without at least asking what their plans are for India," says Sequoia Capital partner Michael Moritz, who nurtured Google, Flextronics (FLEX ), and Agile Software (AGIL ). "India has seeped into the marrow of the Valley."

This year, the tax returns of some 20,000 Americans were prepared by $500-a-month CPAs such as Sandhya Iyer, 24, in the Bombay office of Bangalore's MphasiS. After reading scanned seed and fertilizer invoices, soybean sales receipts, W2 forms, and investment records from a farmer in Kansas, Iyer fills in the farmer's 82-page return. "He needs to amortize these," she types next to an entry for new machinery and a barn. A U.S. CPA reviews and signs the finished return. Next year, up to 200,000 U.S. returns will be done in India, says CCH Inc. in Riverwoods, Ill., a supplier of accounting software. And it's not only Big Four firms that are outsourcing. "We are seeing lots of firms with 30 to 200 CPAs -- even single practitioners," says CCH Sales Vice-President Mike Sabbatis.

Adapting to the India effect will be traumatic, but there's no sign Corporate America is turning back. Yet the India challenge also presents an enormous opportunity for the U.S. If America can handle the transition right, the end result could be a brain gain that accelerates productivity and innovation. India and the U.S., nations that barely interacted 15 years ago, could turn out to be the ideal economic partners for the new century.

Click Here to read the full article.

Why captive BPOs are feeling the heat

There have been a string of announcements from captive BPOs--including the pioneer, GE Capital--that they will start pitching for business from companies outside of their parent. Obviously, these companies have to make very fundamental changes--including setting up marketing teams, re-align their cost structures, etc.--to cater to external clients. So, what is making them take this step?

Businessworld magazine recently carried an interesting article titled "Crunch Time For Captives" answering this question.

"In the last couple of years most of the captive units have begun to hit saturation point. That's when their parent organisations in the US, like GE, took the decision to derisk the India business by setting up alternative bases in Mexico, China, Hungary and the Philippines....By then, most of them had hired people in anticipation of more work moving to India. So when the events of 9/11 took place and concepts like disaster planning became common, they suddenly put a ceiling on how much a captive unit could grow," the article says. "With not enough new work on offer in the last two years, they have struggled to devise new, more meaningful roles for middle and senior managers. The result: attrition rates as high as 35%, with maximum erosion in the middle and senior management levels," it adds.

The article has an Gartner Group analyst predicting that several captive BPO units would be up for sale in 3-4 years time. In fact, the article (quoting unnamed industry analysts) says Infosys' BPO subsidiary, Progeon, has actually avoided scaling up since it expects to snap up such units at a good bargain! WNS President & CFO confirms that his company is waiting for such acquisition opportunities. "The trends globally throw up several instances of third-party vendors (like EDS and ACS) buying up in-house (captive) operations," he says in the article.

Click Here to read the full article.