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Saturday, February 15, 2003

The Reality of Global Services

Steven Roach, Brad Delong and others often speculate about the long term impact of the growing tendency towards globalisation in the services market. In this sense India and China can be seen as twins with China picking up a sizeable chunk of the planet's industrial needs and India offering the services, especially across the English speaking world. The issue may well turn on the question of relative factor endowments - both countries being extraordinarily rich in labour, although in each case with different characteristics - but it may also be a question of who can attain the required critical mass and realise the networking economies of accumulated expertise and concentration. In both cases the sheer magnitude of the labour force makes strategic concentration much more viable than in many of the other developing countries. Cultural factors will also undoubtedly play a part. But in any event, watch out because the supply lines that configure the global economy for the coming century may well be being laid right now. As an illustration, this piece from India brings out nicely what is actually happening on the ground in the global services area.

Voicing concern over potential job losses in the United Kingdon, Azim Premji chief of IT major Wipro said a number of large British corporations, including HSBC, Royal and SunAlliance, are heading to India and the Far-East to open call centres and in search of cheap skilled labour. Aviva, the world's seventh-largest insurance group, is just the latest company to announce plans to cut jobs in the UK in order to open a call centre in India (Mumbai). Premji said in an interview published on Friday that: "This is an irreversible trend. It's not a question of if it happens, but how fast, and how quickly the countries that are most exposed to the trend react to it. Those that don't adapt to reflect a competitive global cost model will suffer. I'm getting very worried about the potential job losses in the UK. But Britain is not the most vulnerable when you consider France and Germany, with their economies dominated by trade unions."

Fidelity Investments, UK's biggest retail fund manager, has also announced plans to move a chunk of its UK back-office operations to Delhi. The company said it would start expanding its Delhi office by "several hundred" staff in the middle of this year. Paul Kafka, executive director of Fidelity, estimated that the company would save about 50 per cent on overheads by shifting back-office and clerical tasks to India. Initially Delhi will service Fidelity's UK, continental European and Asian markets, although this will, in time, be expanded to include all of its worldwide markets. However, unions are proving the most resistant to change. Prudential's decision last year to shift 850 back-office jobs from Reading in the UK to Mumbai was described by Amicus, the private sector union, as a "despicable act." Premji, who is planning to take his company to the top echelon of the world's computer services industry, said: "However harsh it may seem, we all live in a very competitive world. It's like that in every industry. "It's reasonable to expect a 30 per cent cost discount if you move a function to India. Sometimes we stake a contract on that premise, and we can make that commitment up front." He said, "Possible areas for outsourcing are theoretically unlimited with Wipro already managing call centres, human resources, financial administration, accounting, credit card renewal and marketing. "Among its clients are Thames Water, Friends Provident, Deutsche Bank and the Scotish Parliament." Although cost is the main reason why companies head east, Premji said it was not what locks them in. One of his favourite mantras is "people come to India for cost, and they stay in India for quality." The 4,000 staff employed by Wipro's outsourcing division are graduates with commerce degrees. "Go to an American call centre and you'll find that many of the people there have never even finished high school," Premji said. "India produces 230,000 engineers every year, out of a total of 1.5 million college graduates. I can't see a situation where we will ever be short of skilled young labour."
Source: Rediff.com

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