Clearly, as the authors of this piece from Rediff conclude, the party is only just beginning, and, oh yes, everyone is invited.
Stories about US infotech professions losing their jobs to Indians on the worldwide web are mushrooming by the hour. Anti-outsourcing websites, some of which claim to have been constructed purely by American labour, are choc-a-bloc with the financial and emotional distress outsourcing has caused in the US. And with presidential elections round the corner, the heartburn is all set to snowball into a national issue. Is it the beginning of the end of outsourcing? Far from it. A string of recent studies suggest that the phenomenon will not only get deeper with more MNCs outsourcing their infotech requirements to India but will also spread to new areas like automobile components and clinical research.
Consider this: Big Pharma can pare the cost of developing a new drug, currently estimated at between $600 million and $900 million, by as much as $200 million if development work is outsourced to India, according to consultancy firm McKinsey & Co. "The overall cost advantage in bringing a drug to the market by leveraging India aggressively could be as high as $200 million," McKinsey associate principal Peter Pfeiffer said at the inaugural session of a two-day conference on "Clinical Research: Roadmap for India" organised recently by the Confederation of Indian Industry. According to Pfeiffer, pharmaceutical companies in the US and Europe will be pushed to offshore development (clinical trials) of new chemical entities on account of the declining productivity of R&D in those countries.
McKinsey analysis shows that overall R&D productivity has declined by 24 per cent between 1991-95 and 1996-2000. "While R&D spending has increased five-fold between 1986 and 2001, filing for new molecules have increased modestly and development of new chemical entities has remained flat during the period," he said. The decline in R&D productivity, according to Pfeiffer, has happened because of rising development costs, tightening of the regulatory environment and the emergence of complex organisational designs because of the mergers and acquisitions in the sector. At the same time, development is accounting for more and more of the total investment in a new chemical entity. According to McKinsey, while development was 42 per cent of the total cost in 1976, it has risen to as high as 60 per cent by 2000.
"India clearly provides an opportunity for western pharmaceutical companies as a catalyst in addressing the productivity challenge because of the availability of large patient populations, access to highly-educated talent and lower cost of operations," Pfeiffer said adding: "The potential opportunity for savings is $120 million to $200 million on a drug development base of $550 million to $900 million." Pfeiffer says that barriers to outsourcing still exist. These include a lack of real cost pressures as there are still too much "low-hanging fruit" to be picked. For a start, there are existing systems in western pharmaceutical companies and emerging public policy concerns about outsourcing to India. Besides that there's the threat posed by India's generic drug companies.
It isn't only pharmaceuticals where India could score in a big way. The prospects appear equally bright for the automobile component companies -- nine out of ten automotive manufacturers and suppliers surveyed in North America say they intend to move certain non-manufacturing business processes to low-cost offshore locations, according to a recent survey of 40 senior automotive executives conducted by the Global Automotive Practice of management consulting firm A T Kearney. Drivers for the growing momentum in this migration of labour includes fierce competition in domestic and foreign markets; continuing cost reduction pressures; and an industry-wide strategy calling for local presence by automakers seeking growth in emerging markets, such as Asia and South America, and by suppliers in support of their customers.
A T Kearney estimates that the North American automotive industry, including manufacturers and suppliers, spends approximately $9 billion annually on business processes with the potential to be offshored, representing an enormous opportunity for cost reduction and profitability improvement. "Done right, offshoring for select engineering, information technology and other support functions to India, for instance, can reduce automakers' and suppliers' costs by nearly 50 per cent compared with doing the same functions in the US," said Richard Spitzer, vice president in A T Kearney's Global Automotive Practice and co-author of the study.
India emerged as the most popular destination for the migration of business processing activities, according to automotive executives responding to the survey. While 24 per cent of the respondents put India on top, 15 per cent voted for China, 13 per cent for Mexico, 10 per cent for Brazil and 8 per cent for the Czech republic. "India is clearly the destination of choice for business processing services across all industries," said Nagi Palle, co-author of the research and a principal at A T Kearney.
At the same time, IT offshoring is taking deeper roots in the country. Leading IT companies like IBM Global Systems and EDS and consulting majors like PricewaterhouseCoopers, Cap Gemini, Ernst & Young and Accenture have decided to add substantially to their numbers in India. "At the moment, outsourcing accounts for 23 per cent of Accenture's turnover in India. We plan to raise it to more than 40 per cent in the next three years," Accenture country managing director Sanjay Jain told Business Standard. Even the IT-enabled services companies are growing by leaps and bounds in India. For example, GE's original target for its IT enabled services operation in India was 10,000 people by 2005 -- it has now been revised to 20,000 by 2003 end.
"Savings to the US economy by offshoring to India could be $10 billion to $11 billion in 2003-04. In fact the total benefits to the US economy including savings, hi-tech imports from the US to India and contribution by Indian IT professionals to the US social security is projected to be about $16.8 billion, " a recent Nasscom study has pointed out. Outsourcing to India has helped US companies to save as much as $8 billion in the last four years, said the leading market research firm Inductis in a recent study.
So far as the proposed bills banning outsourcing to India by certain states in the US are concerned, Nasscom president Kiran Karnik says there will be no immediate impact as these outsourcing bills have just been introduced and will need to pass through various stages in order to become laws. In fact, outsourcing is now at the heart of all business organisations, says a new book called Rebuilding the Corporate Genome, authored by three top A T Kearney functionaries Johan C Aurik, Gillis J Jonk and Robert E Willen. As a result, business organisations will become smaller in scope, though not in size, as outsourcing occupies centrestage. This, the authors say, is the next stage in the evolution of business.
Corporates the world over are evolving from being organised around strategic business units to organisations driven by their business capabilities, focused on functions, which are crucial and in the discharge of which they have high capabilities, while outsourcing the rest. "These changes are driven by digitisation and connectivity," said Aurik, who was in India along with Willen in the last leg of their tour of Asia to promote the book. While Aurik leads A T Kearney's Benelux unit, Jonk and Willen are principals at the consultancy firm.
The authors have developed a matrix on which a company can plot its functions on the X-axis according to their criticality and its capabilities on the Y-axis. "The criticality of functions could range from necessary to beneficial and crucial, while capabilities could range from laggard to world class performance," Aurik said adding: "A company should stick to what is crucial and where it has world class capabilities and outsource what is necessary but where it does not have high capabilities." Clearly, the party has just begun.
Source: Bhupesh Bhandari and Bipin Chandran, Rediff.com