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Outsource magazine: thought-leadership and outsourcing strategy | March 27, 2017

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Economics is a great leveller

Economics is a great leveller
Ravichandran Venkataraman

“You are taking away jobs and making so many jobless in the US,” said a visitor to the Offshore Centre that I headed in my previous job, giving me a smirk.  I replied, “Before continuing, I would like to show you few things in this centre.”

I showed him around my room – the computer and printer came from the US, the lovely glass topped table from Singapore, the writing pad from Switzerland, the pen from the US, the shredder from Germany, the writing board from the US, the marker pen from Switzerland, the carpets from Malaysia and finally, the water was from the Coca-Cola Company, US!!!  I took him to the toilet….the paper was from Kimberly Clarke, US……probably, the only thing Indian in the centre were the staff!!!  Off-shoring is not about jobs being lost to an offshore centre but about balance of trade….about value addition….about building a global talent pool…..about being able to scale up…about getting best value for money.

There has been a debate going around in various countries on offshoring and outsourcing for many years now.  The noise has increased since the global financial crisis.  The President of the US stated few weeks ago that companies investing in the US and creating jobs in the US will get tax breaks while companies outsourcing will not get these tax breaks.  Economics will take jobs to the countries that can add value and get things done at a more competitive cost advantage.  It will take jobs to countries where companies can get the skill sets that they are looking for and be able to scale up.

Let us take the example of India-Australia bi-lateral trade.  This was valued at around Australian $ (AUD) 15.35 billion in 2008.  India imports around AUD 13.52 billion worth of gold, coal, wool and wheat from Australia while Australia imports AUD 1.83 billion worth of manufactured goods and services from India.  This bi-lateral trade is heavily tilted in favour of Australia.

While the India-US trade goods deficit was $4.7 billion in India’s favour in 2009, the point to be noted was that Indian companies invested over $4.5 billion in to the US in 2009 and this was a 60% increase over the previous year.

In growing economies, jobs are not lost…..they only take different forms.  For developed countries like the US or Australia, offshoring or outsourcing results in local jobs moving from being lower value added to the higher value added roles.  This means higher pay scales and, therefore, better standards of living in these developed countries.  It also means people must be willing to re-skill themselves to remain in the job market.  The low value-add roles move across to other countries like India and even here people must re-skill themselves to be able to handle these roles effectively.  Even here, there is large-scale job creation and a war for talent.

Offshoring/outsourcing is mistakenly seen only as a cost arbitrage play by most companies.  While cost is a critical factor and will be one, factors such as scalability, risk diversification, better customer experience, etc., are others that need to be considered.  An Australian company was able to double its top line of one product line by scaling up their workforce in India. This was because they did not get those specific skillset in enough numbers in Australia.  They could get the skillset in India.

Offshoring/outsourcing will increase as the various economies get intertwined. The need to be competitive is imperative as businesses struggle to survive.  In order to be globally competitive, managements move resources around the world to get the best value for shareholders’ money.  Offshoring/outsourcing gets into their agendas.

Yes, economics is a great leveller!!!

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