Sustainable Development and the
Globalization of Services:
A focus on Business Process Outsourcing (BPO)
and
Information Technology Enabled Services (ITES)
Scoping and Consultation Presentation
February 2007
Oshani Perera
International Institute for Sustainable Development
Part 1
Globalization of Services
In 2004, Jagdish N. Bhagwati commented that :
‘Off-shoring and outsourcing are not destroying
jobs in the rich world. These jobs are going
anyway, because otherwise the services would be
too expensive to produce and the companies that
make them would no longer be competitive” .
Today, globalising service functions has moved
well beyond a cost cutting strategy.
It is a critical business model to competitively
operate increasingly complex and globally
dispersed value chains. As commented in the
Times UK, in June 2007 ‘Outsourcing payroll and
HR – can you afford not to?’.
Why are outsourcing and off-shoring critical business models?
The globalization of services reflects increasing modularity in value
chains and the need for specialisation therein.
To compete in global markets, companies need to internalise, on a
global scale, a range of specialised competencies which include
asset management, production, organizational and managerial knowhow, supplier and customer networks management and market
intelligence.
But no company, not even market leaders, can effectively build all
these capacities internally while also managing them at the global
level.
Hence businesses need to concentrate on their core competencies
and outsource and/or offshore other functions, including valueadded functions which are more effectively delivered by others.
The Rise of the Global Service Providers
The globalization of services given rise the growth of large multinational firms:

System Integrators (SI)
SI are firms that specialize in building complete computer systems by putting
together components from different vendors. Unlike software developers,
systems integrators typically do not produce any original code. Instead they
enable a company to use off-the-shelf hardware and software packages to
meet its needs. For example, a system integrator may build an IT solution
integrating an Oracle-based inventory tracking system, a document
management system, a Microsoft CRM system, a group of Panasonic
scanners, and a Rimage storage system to produce an overall solution for the
customer.
SI reporting on corporate sustainability include Satyam, Wipro, Infosys, Tata
Consultancy Services, Cap Gemeni, Congnizant, CISCO Systems. These
companies have recorded over 120% growth since 2004.
 IT product/software developers
Examples including un Micro Systems, Wipro, Google, Adobe, SAP
The changing business models of SI and IT Product/Software Developers
Service functions being outsourced have sifted from repetitive, routine functions (which represent 10% to 20% of a
firms workforce), to specialized and more expert tasks. (see notes page for additional details).
- Schools and universities are turning to teachers and lecturers in India to provide support with tutorials and thesis
supervision.
- consumer product firms are outsourcing accounting, marketing, design and R&D functions.
- Legal firms are off-shoring litigation and IPR research.
- The insurance and investment industries are off-shoring analysis and actuarial functions.
- Hospitals are off-shoring medical transcription, diagnosis and even decisions on surgical intervention.
According to a worldwide survey of 104 senior executives conducted by the Economist Intelligence Unit in 2006,
70% of respondents reported that their company already employed R&D personnel overseas, and 52% of executives
plan to increase their investments in overseas research in the next three years. When asked where they would
spend the most on R&D in the next three years, 39% said China, 29% the US, 28% said India, 24% referred to the UK,
and 19% mentioned Germany .
In tandem, SI and IT product/software are offering a diverse array of more integrated and sophisticated, IT-enabled
business solutions, which can be executed through a balance of off-shore, near shoring and on-shore strategies.
‘Today we are an information technology company, delivering consulting, systems integration, and outsourcing
solutions. We leverage deep industry and functional expertise, leading technology practices, and an advanced,
global delivery model to help clients transform their highest-value business processes and improve their business
performance. We have operations in over 20 countries.
Senior VP Technology, Satyam
Our clients are operating globally and their operations are more and more sophisticated. To meet their demands we
are offering an array of wholistic and integrated business solutions. This is the way to go in the future – the
buzzword is ‘right shoring’. We hence need to globalize to be closer to our clients in their different locations. We
now have campuses in 20 geographies, with near and on shore operations in many more’
VP for the Americas, Tata Consulting Services.
The most active receiving geographies in the globalization of services
The Leaders
India, China, Canadá, México, South
África, Ireland, Rusia, The Phillippines
The Challengers
Brazil, The Caribbean, Eastern Europe,
Malaysia, Israel, Singapore, Vietnam,
Costa Rica, Chile
The Next Tier
Bangladesh, Ghana, Korea, Senegal, Sri
Lanka, Taiwan, Mauritius and Thailand
The hopefuls
Argentina, Botswana, Guatemala,
Panama,
Source:
updated from WTO/UNCTAD 2005
Share and types of processes being outsourced
Frequently used terms in the business of globalise services:
Outsourcing:
The World Trade Organisation definition reads as ‘the act of transferring some of a company’s recurring
and repetitive activities and decision rights to outside providers, as set in a contract’.
Off-shoring:
The OECD defines services off-shoring as ‘the transfer, through foreign direct investment or subcontracting, of all or part of the production of services to another country with the intention to re-import
them to the home country’.
Near-shoring/near-shore outsourcing:
Sourcing service activities to a foreign, lower-wage country that is relatively close in distance or time zone
(or both). The customer expects to benefit from one or more of the following constructs of proximity:
geographic, temporal, cultural, linguistic, economic, political, or historical linkages. For example, nearshoring destinations for US businesses will be Mexico, Central America and Canada, while for Western
Europe, they will be Ireland and Eastern Europe. Most organizations give preferences to near-shoring over
offshore outsourcing for a variety of reasons (both internal and external), including physical and time zone
proximity, cultural affinity and other ones.
Right Shoring:
Balancing outsourcing, off-shoring, near-shoring and on-shore options to leverage optimum value.
On-shore outsourcing:
Obtaining of services from someone outside a company but within the same country.
In-sourcing:
A practice in which work that would otherwise have been contracted out is performed in house. This
involves bringing in specialists to fill temporary needs onsite.
Enablers and drivers of the globalisation of services
(A broader discussion is provided in the notes page)
1.
The advancement and cost effectiveness of information and
communication technologies have removed the need for face-toface interaction and special proximity when managing value
chains.
2.
When managing increasing modular value chain, businesses need
to build on core competencies.
3.
The proliferation of standardised software platforms.
4.
Despite the 2006-07 hike in salaries in the service providing
geographies, outsourcing and off shoring offer lower labour costs.
Enablers and drivers of the globalization of services.. (continued)
4.
Access to large pools of educated and skilled labour enable the large scale
centralisation of functions in one location. One of the key attractions of
India and China, the leading geographies for service provision, is that SI
and IT product/software developers are able to tap into large pools of
skilled, western language speaking workers at a lower cost.
5.
Productivity gains by working across time zones and, in effect, realising a
24-hour working day.
6.
Additional benefits of economies of scale such as the pooling of clients and
services, cost-effective management peak loads, greater productivity
through a more effective division of labour.
7.
Before jobs are off-shored or outsourced, companies need to undertake a
detailed review of the daily operational procedures that are embedded
within them. Such reviews identify process inefficiencies and procedural
bottlenecks which can be corrected to further increase to productivity gains.
Enablers and drivers of the globalization of services.. (continued)
8.
Most products and services are characteristic of continuous
innovation with limited shelf and user life. Management strategies
for managing value chains are dynamic, based on flexible, just-intime, low-inventory strategies. This increases the need for a firm to
outsource both low and value-added functions which can be
effectively performed elsewhere.
9.
The redeployment of people from less productive to more productive
uses creates stimulates innovation, competition and growth. For
example, when back offices are outsourced or off shored, operating
capital can be freed for more productive, valued added uses such
as R&D or marketing. This drives innovation which further fuels the
trade in services.
How large is the market for globalized business services?
The discussion is continued in the notes page
The OECD (2005) reports the global market for outsourced IT and business process (BP) services to
be close to $260 billion in 2001, which is over 28% of the global IT market.
McKinsey (2004) reports that US companies off-shored IT and business process (BP) services worth
$26 billion to 12 major markets in 2003. The share of US companies in global off-shoring activities is
estimated at 70%.
Gartner (2004) claims that “outsourcing will account for 53% of the total worldwide IT services market
in 2004”. This would be equivalent to $322 billion.
At first glance these growth rates may appear impressive, but when viewed through the lenses of
balance of payment data from key out sourcing and off-shoring countries, the current levels of services
migration appear to be relatively small at the aggregate level. (The discussion is continued in the notes
page).
‘I’ve been Bangalored’…. public perceptions on globalizing services:
It was difficult not to miss the public outcry following the Y2K as larger numbers of professionals
were being made redundant and their jobs outsourced and/or transferred offshore. This prompted
a 1994 flurry of proposed legislation in 34 States in the USA which aimed at curbing off-shoring
activities. Most of these bills intended to restrict the off-shoring of functions related to government
services and to prohibit off-shoring on State contracts.
Several years on, the present mood in the silicon valley and the UK is more resigned to the fact
that professional services are mobile, and will move between geographies. In tandem,
outsourcing and off-shoring firms are re-examining their strategies on re-training, carrier change,
relocation and their integration into redundancy packages. In Western Europe, where services are
only just beginning to globalize, the debate remains in its very early day.
In the global media, despite the proven efficiency of the outsourcing model, concerns on the
delivery of the outsourced services are media favourite. Anecdotal evidence abounds on scriptfixed call centre operators, fault ridden software programmes, and other services, where corrective
action linked to poor quality outweighs the forecasted benefits that off-shoring was first predicted
to bring.
There is also still very unclear if there indeed sufficient jobs and re-skilling opportunities availed to
the processionals ‘being Bangalored’. While some sources suggest that the relatively low and
stable unemployment statistics are an indicator that such opportunities abound, others are quick to
point out that these figures do not indicate if high value and wage jobs are giving way to those
involving less skill and a lot less pay.
Part 2
Opportunities and challenges
for sustainable development
Opportunities for sustainable development
A way
out of low-value industries
Globalization of services is providing poorer geographies with a way out of low-value
industries and a way into developing high value niches and new industries. For example in
India (where data on services is most easily obtainable), business processing industries
accounted for 6% of GDP and 95% absolute growth between 2000-04. Direct employment
is estimated at 700,000 and indirect employment at 2.5 million
IT enabled services can provide the blueprints for a sustainable future
At the Stanford University 2007 Conference on the Globalization of Services,’ the ‘green
portfolio’ was considered as a key growth area by SI’s and IT product/software firms.
The Financial Times reported that compliance and regulation, mobility and green issues
featured 7th,10th and 11th respectively on CIO’s priority listings for 2008.
Examples of such it-enabled services that promote sustainable development include traffic
management and urban energy efficiency systems being developed by Cisco for the local
authority of Amsterdam. IBM has developed internet-enabled electronics that will allow
consumers to control applications via web browsers or mobile telephones. IBM is also
looking at ways to re-purpose scrap semi-conductor wafers into a form that can be used to
make PV panels.
‘Our greatest contribution to the environment is in the potential our services and solutions in Information
Technologies have to offer, in order to help our clients contribute to the improvement of environmental
management and thus benefit society in general.’
Tata Consulting Services, 2007 Sustainability Report
Opportunities for sustainable development (continued)
Can investment incentives be coupled with partnerships for sustainable
development?
Governments of service providing geographies are vying to provide investment
incentives for outsourcing and off-shoring. For example:
 The government of China has agreed to meet the recruitment costs and
wages of all graduates during their first 2 years of employment with the SI
Satyam.
 India is deregulating its higher education sector to encourage private sector
investment to meet the demand for skilled professionals in IT enables service
provision.
 Senegal and Mexico are providing capital investment tax breaks for
outsourcing campuses.
Can these incentives be coupled with breakthrough public/private partnerships
on e-waste, energy efficiency, urban/export zone design, and social
sustainability aspects such as higher and adult education, work environment
improvement, and wage differentials (especially important when dealing with
skilled labour)? Such partnerships are critical ensure that the benefits of
‘world-sourced’ services are distributed across the economy.
Opportunities for sustainable development (continued)
Energy and greenhouse gases
Public-private partnerships on energy would be particularly valuable as China emerges as the
worlds foremost carbon dioxide emitter, with India 7th place. Even as we question if the
industrialized world is off-shoring a generous slice of its environment footprint, the 2007 Bali
roadmap, which will lead to the post-2012 international agreement on climate change, is likely to
include emissions reduction targets for emerging economies.
One of the prerequisites for services outsourcing and off shoring is the roll-out of the enabling ICT
infrastructure, underwritten by reliable power grids, both of which pose notable challenges on the
environmental bottom lines of the receiving geographies. Coal accounts for largest energy source
in most service providing countries - 69% in China, 70% in India, and 65% in the Philippines.
The urban infrastructure challenge
The prerequisite need to upgrade service provision infrastructure provide important opportunities
to master plan sustainable development. The 2006 Nasscom McKinsey Report on India’s
Leadership in the Global Business Process and IT Service sector states: “India needs to deliver on
both basic (e.g., power, public transport, international connectivity) as well as business
infrastructure (office and retail space, security services, etc.). Between today and 2010 we
estimate that the IT and BPO industries will have to employ an additional workforce of
approximately 1 million workers near five Tier I cities (New Delhi, Bangalore, Hyderabad, Chennai
and Mumbai), and approximately 600,000 workers across other towns in India. Thus the IT and
BPO industries need at least five new “Gurgaon-plus” and five to seven new 'Pune-plus‘
integrated townships. The resulting burden on urban infrastructure is likely to be substantial. For
example, over 1 million international airline trips a year will be required for these industries in
2010, constituting around 20% of total international airline trips undertaken by Indians in 2010’.
Opportunities for sustainable development (continued)
 Supplying large pools of talent
NASSCOM reports that India will need a 2.3 million-strong IT and BPO
workforce by 2010 to maintain its current market share and a by 2010, a
potential shortfall is project for nearly 0.5 million qualified employees–
nearly 70 per cent of which will be concentrated in the Business
Processing Industries. Geographies that will win as services go global will
be those that will continue to supply large pools of educated labour, and
this will require substantial rethinking of education, urban infrastructure,
legislation on wages and benefits, and the overall social and cultural
infrastructure in both the outsourcing and service providing geographies.
Opportunities for sustainable development (continued)
 Social protection policies
The debate on Aid for Trade has highlighted the value of social protection. Training and
retraining is critical for both workers who lose their jobs in off-shoring regions and for
workers who gain new employment in receiving geographies. Workers on both sides may
also be required to relocate and live through periods on unemployment. Labour market
policies that provide for such employment shifts include passive income support during
unemployment and active policies that meet the costs of retraining in order to facilitate reemployment. The globalization of services is triggering industrialized countries to
develop/reform labour policies social support systems to better suit the needs of global
markets. What support is available for policy makers in service providing geographies to
develop similar safeguards?
How do present policies on education need to be reformed to create more flexible
workforces? Education levels determine a country’s absorptive capacity, including the
ability to learn and improve on new technologies and new fields of knowledge. Education
also affects the flexibility of people and their ability to live and work with change. Global
markets require that workers remain flexible and mobile to adapt to new situations and to
relocate to new hubs. At the company level, skills that improve coordination,
collaboration, teambuilding, and cultural sensitivity are the buzzwords. Are educational
systems been reformed to research and responded to these requirements?
Challenges for sustainable development
/2
 E-waste
Shorter user-life and continuous upgrading is intrinsic in I-enabled functions, and as
services globalize, there has been a ‘corresponding explosion of electronic scrap ’. As
noted by UNEP, 20 to 50 million tones of e-waste is generated annually around the world,
with 2 million PCs being discard in China alone. Of this volume, only 10% to 12% can be
considered to be responsibly recycled. (The discussion is continued in the notes page).
IPR
Globalized service provision involves the transfer of critical operational and commercial
information to the vendors and offshore sites. This raises concerns over IP infringement
including patent protection, copyright and trademark protection and the compliance with
non-disclosure agreements.
Data security
“Data security and privacy concerns are now the largest barriers to BPO in India”, Sunil Mehta,
vice president of NASSCOM India.
A number of security breeches have caused outsourcing companies to question the security of
overseas operations. In one widely publicized incident in 2007, former call centre employees of a
leading vendor in India were accused of stealing $350,000 from U.S. consumers' bank
accounts. In response, NASSCOM has announced plans to create a self-regulating security
watchdog to oversee security issues surrounding outsourcing in India. NASSCOM has also
launched an national skills registry to track IT employees records on IT security.
Challenges for sustainable development
/2
 The ‘skills premium’
The globalization of services opens the debate on the ‘skills premium’, i.e. the
wage differential between low and high skilled jobs, which contributes directly to
larger income inequalities across and within geographies.
 Employment Standards
The Trade Union Advisory Committee (TUAC) to the OECD state that ‘The
international trade union movement has not called for national borders to be
closed to flows of labour. But trade unions cannot passively accept the working
of economists’ “relative price effect” in terms of labour, leading to a “race to
the bottom” in employment standards’. Rather unions have called for a “whole
of government” policy response to the employment consequences of off
shoring that also encompasses the international institutions. Governments
must guarantee core workers’ rights on a global basis’.
Hot issues in this context include minimizing compulsory lay-offs and
increasing firm-level redeployment as well as support for re-training and upskilling.
Part 3
About this Project
IISD is launching this project to further
explore the services outsourcing debate
and to establish partnerships to promote
sustainable development in the BPO and
ITES industries.
IISD is of the view that the globalization of services touches on
some of the key opportunities for contemporary globalization and
sustainable development.
•It recognizes the inextricable links between developed and developing countries.
•It focuses on geographically dispersed tasks, responsibilities and value chains the
challenges in building cohesion, trust, and common cultural values which are
needed to enable them to operate in a streamline process.
•It opens the debate on trade, equity and migratory labour, as not only are skilled
workers from OECD nations are required to temporary relocate to service providing
geographies, but that increased preferences for near shore and onshore outsourcing
as well as in sourcing are demanding that professionals from the service providing
geographies move to perform tasks in high and middle income geographies.
•It opens the debate on wages, benefits and their wider implications across both the
outsourcing and service providing economies.
Preliminary project ideas (continued)
1.
Addressing the multiplier environmental and social challenges of ITES
and BPO infrastructure in leading BPO Geographies
This project could explore the environmental and social challenges that have arise
due to BPO and ITEs infrastructure, including energy efficiency, green
building design, and mobility, which are growing challenges in leading BPO
geographies. IISD is further interested to investigate how the ‘green’
portfolios’ of software developers and solution providers can begin to provide
solutions to the above.
2.
Sustainability competitiveness/investment Index for BPO and ITES
geographies
The project envisages the development of sustainable development competitiveness
index’s for key prevailing and emerging geographies.
•
Preliminary project ideas (continued) :
3.
Can BPO and ITES industries can promote enterprise and access to
growth at the bottom of the pyramid?
The ITES and BPO industries are throwing new light into this debate. For
example, TATA in India is enabling engineers to work in their own
languages (as opposed to working in English) and this is increasing access
to sustainable growth. What are other opportunities offered by BPO and
ITES industries? How can they be scaled up and replicated as the industry
expands to other geographies. This project proposed to explore these
issues.
•
IISD welcomes expressions of interest on
these and other related ideas.