A revolution in the making

Bangalore is literally bursting at its seams. The infrastructure is creaking and the traffic tailbacks get longer by the day. The state government has little money to spare for the infrastructure development to keep up with the pace of growth. Ironically, despite the boom, the Karnataka government gains little from this burgeoning industry. The businesses in IT & ITES all enjoy tax holiday till 2008. And so the inner city infrastructure is left in a mess. The new government came to power on the back of a mandate from rural India, all the more reason to ignore the city.

The best part however is its pleasant weather throughout the year. The city being perched on a plateau about a thousand meter high, its inhabitants enjoy in the height of summer a temperature ranging from nineteen to twenty seven degrees centigrade -- a natural air-conditioned ambience that makes working 24 X 7 more acceptable.

The IT & ITES action is on the outskirts of the city. As you drive out of the city, you see low lying, sprawling campus style modern buildings, smartly advertising their company names and logos. Most of these names are not of Indian origin but come from the list of Fortune five hundred. Names like SAP, GE, Perot Systems, HP and many more. The roads here are better paved and the island between the two-way lanes is inlaid with seasonal flowers and manicured lawn. The money presumably comes from both the foreign and local corporate occupants of these areas, who have vested interest in making their surroundings salubrious and comfortable.

What started a few years back as simple captive call centres for multinationals facilitated by the development in IT, telecommunications and internet infrastructure, has now progressed to a growing IT based process industry managing business areas ranging from human resources, accounting to handling issuance of sophisticated international debt instruments or closing out billions of dollar worth of foreign exchange transactions in a day.

The ITES-BPO is an offshoot of the IT services industry, and India which has done remarkably in software services is well placed for the ITES-BPO boom. Through writing software code for sophisticated business operations the Indian IT services industry understood business processes well. Having written the software and helping automate the process at the client organisations, it was a no brainer to take the next step and transition of the entire back end processes over to India. It is now an industry, which is growing by leaps and bound both through participation by captive units of multinationals and third part providers of Indian origin. Some of them are the big home-grown IT Services companies like Infosys Wipro & Tata Consultancy. The annual growth is estimated to be in the region of 30-40 per cent already earning over US$ 2billion approximately from export.

It is not difficult to envisage a future when the western economies will no longer need to have any back end operations within their offices. It can be based thousands of miles away in India or anywhere else that provide the cost and talent arbitrage.

There are signs of taking this BPO concept even further, encroaching into the activities of front office. There are now several entities based in India, some captives linked directly to the parent companies and other third party, have set up captive units staffed by a bevy of analysts to do a range of research functions starting from the low end process driven data entry and financial modelling to producing fundamental global sector analysis and credit analysis products that are ready for client distribution. This is not just about cost arbitrage any more. It is effectively talent arbitrage that often beats the client's own capabilities and productivity.

It is no wonder that there is a lot of noise generated in the West against this migration of jobs to places like India. The war cry against hollowing out of the service sector jobs in the US reverberates throughout western economies. There is now an apprehension about John Kerry coming to power and how the tax structure would change by doing away with the tax breaks granted to US companies for outsourcing.

Predictably, the law of free trade based on comparative advantage does not apply for the US, as it is politically unpalatable. But surely, the laws of comparative advantage in economics would ensure that the American consumer would gain more from outsourcing than the loss of jobs due to it. Unfortunately these are times when politics rule not economics.

India has seen this before. There was an extreme reluctance at the start of the IT revolution for US and Europe to ride on the cost advantage of offshoring in India. Gradually the confidence grew and more and more of the software development went over to India. However, the penny eventually dropped when after the bubble burst of 2000, fears of recession ensued in the corporate world which forced them to cut cost, and software offshoring became de rigueur. Similarly the cost advantage and productivity gains in ITES-BPO offshore outsourcing will eventually rule under the trumpeting banners of the same western politicians announcing the benefits it brings to the consumers.

Ghalib Chaudhuri, a former investment banker, is currently managing partner of Octavian Associates, an independent consulting practice based in Singapore.