How Outsourcing Could Change the World

Two summers ago, I watched arguably the biggest movie of the year – Transformers. *Spoiler warning for those of you who haven’t watched it yet!* In the middle of a Qatari desert, what is left of a US Armed Forces base is ambushed by that ugly, but cool, scorpion thing. After reaching a nomadic village that is conveniently equipped with a cell phone, one of the soldiers is finally able to heroically ward off the scorpion monster and attempt to place a call to the Pentagon requesting an airstrike. But wait… just as bullets whiz by and shrapnel flies overhead, and thoughts of the imminent deaths of his fellow soldiers and, perhaps, his own cross his mind, his long-distance connection to the Pentagon is interrupted by an obnoxiously voiced, annoyingly indifferent, “Indian” operator who asks the soldier, with that American concoction of the Indian accent, if he would like to purchase options. Mind you, I’m very open to jokes on stereotypes, but that “Appu”-esque accent just bugs the hell out of me.

A few years ago, The 40 Year Old Virgin came out. I loved it instantly and have watched it countless times ever since. Steve Carell’s never been better! (Except maybe in The Office) An otherwise perfect movie, a similar sequence is played out when poor old Andy is having an impossible hard-on and calls the pill manufacturer’s customer service call centre. Not surprisingly, he is attended to by a man of South Asian decent. But wait… let alone that American-style Indian accent, this guy had an accent that seemed to be Arabian! Being an Indian who has lived in the Middle East for a decade, I can tell the difference.

Slumdog Millionaire is, and I know I will be hated by many for saying this, on my list of totally overrated movies. I shall discuss my problems with it in detail in another blog, but the theme it has in common with the above two films is – yup, you guessed it – a call centre! *You win Ten Million Rupees!* Anyway, what’s totally wrong is that a guy from the slums who hasn’t studied beyond the second grade, manages to speak perfect English, and what’s more, he sports a (somewhat) Scottish accent for when he is on the phone! Interesting… but sadly, neither Dev Patel’s Indian accent nor his Scottish accent were believable.

Why am I picking on movies with call-centre themes embedded in them? Well, one reason why is because I love movies; the other reason why is because there is some fact beneath all that fiction. I will have to be out of my mind to say that the extremely large portion of multinational corporations who outsource their call-centre operations to India are not good for the country. Outsourcing basically occurs when there IS an opportunity for improvement. In this case, the opportunity that India capitalized on is the millions of English-educated IT professionals who possess some sort of advantage over their in-house counterparts – either they have expertise at par, if not better, than available in the outsourced company, its home town or home country (in the case of offshore outsourcing), and/or they provide the services with a cost benefit to the company over an internal department.

Now that we have determined that, yes, outsourcing is good, what next? Does it continue like this? How good is it for both parties? What happens to the macroeconomy?

The good only lasts as long as both sides have something to look forward to. As soon as the costs to outsource a function surpass the costs of insourcing, that’s the company’s cue to end the contract and run back home. I don’t just mean accounting costs… I mean costs in all forms. From the view of the outsource provider, well, that’s a little complicated I think. Looking at it from an economic perspective, I believe that as soon as the provision of outsourcing begins, there will be a surge of enterprises looking to capitalize on the benefits right away, perhaps over the course of a few years; this leads to a high demand for the services. The high demand will naturally cause the service providers to increase their charges, thereby, returning the economy to square-one, in terms of  the competitive advantage they offer companies over insourcing. Realistically, there would be a geometric increase in the demanders of these “inexpensive” services and that will warrant an increasingly large diversion of resources to satisfy the demand. The purchase of economically successful outsourcing services by one company sparks the interest of ten other companies; six of those may decide to follow suit, thus, sparking off sixty other in the process. This becoming a vicious circle assumes a geometric pattern.

One of the drawbacks is that since this demand causes a higher per-capita income, it not only raises the standard-of-living, but ultimately also raises the cost-of-living! This, in a country like India, nurtures the blue-collar IT peeps, but it also widens that gaping chasm between them and the lower class. For those of you who don’t know, developing nations like India can have quite a lower class; watching Slumdog Millionaire should more or less be able to give you an idea.

I have a conflict in my head about the ultimate outcomes of this setting: firstly, the world could end up with outsourcing leaders and that means places like China, India, Brazil, and Indonesia could simply have to live on their outsourcing industry; however, this does not stay consistent with my “cost and benefit” analysis above – a change in income would lead to an increase in demand for products (i.e. higher affordability) which leads in turn to a higher price level. And in this way, the services would ultimately cost the same internationally as they would domestically. So, I think the outsourcing-leaders structure is unsustainable and will eventually lead to the second outcome.

The second outcome is a long-term state of eventual equilibrium where all countries will have equal costs and returns. Of course, these costs and returns may not necessarily be the same as in another location, but overall, they cancel each other out to yield zero overall benefit. It may be possible, that some country may suddenly tap some new resource that allows it to create yet another imbalance, giving rise to yet another competitive advantage. But ceteris paribus, this should only lengthen the time it would take to get to that state of equilibrium.

You never know… India’s fast growth may be a result of a cheap, yet, intelligent labour force which, if not diverted to the right task at a strategic point in time, the country, and every other country with a similar economy, may fall prey to economic and social upheaval… But, hey! Don’t let me get your spirits low. The smart minds who will help avoid that situation are probably reading this blog right now!

Until the next blog.