Service Outsourcing in Indian economy…

iStock_MediumYeah, I am talking about Indian economy at this point. From recent times service outsourcing industries have gained more importance in Indian economy.

Outsourcing industries in Indian are gaining lot importance than the manufacturing plants, because of certain features of it.

Which type of business will be helping in exploitation of man power in India…?

The overview of Indian economy:

The economy of India is the fourth largest in the world by GDP measured on purchasing power parity (PPP) basis and the twelfth largest in the world by market exchange rates.

India’s per capita income (nominal) is $1016, ranked 142nd in the world, while its per capita (PPP) of US$2,762 is ranked 129th. In the late 2000s, India’s growth has averaged 7.5% a year, increases which will double the average income within a decade. Unemployment rate is 7% (2008 estimate). Previously a closed economy, India’s trade has grown fast.[8] India currently accounts for 1.5% of World trade as of 2007 according to the WTO. According to the World Trade Statistics of the WTO in 2006, India’s total merchandise trade (counting exports and imports) was valued at $294 billion in 2006 and India’s services trade inclusive of export and import was $143 billion. Thus, India’s global economic engagement in 2006 covering both merchandise and services trade was of the order of $437 billion, up by a record 72% from a level of $253 billion in 2004. India’s trade has reached a still relatively moderate share 24% of GDP in 2006, up from 6% in 1985.

Despite robust economic growth, India continues to face several major problems. The recent economic development has widened the economic inequality across the country.

Industry accounts for 27.6% of the GDP and employ 17% of the total workforce. Economic reforms brought foreign competition, led to privatization of certain public sector industries, opened up sectors hitherto reserved for the public sector and led to an expansion in the production of consumer goods.

Outsourcing is subcontracting a process, such as product design or manufacturing, to a third-party company. The decision to outsource is often made in the interest of lowering cost or making better use of time and energy costs, redirecting or conserving energy directed at the competencies of a particular business, or to make more efficient use of land, labor, capital, technology and resources. Outsourcing became part of the business lexicon during the 1980s. It is essentially a division of labour.

Reasons for the development of outsourcing industries:

* Cost savings. The lowering of the overall cost of the service to the business. This will involve reducing the scope, defining quality levels, re-pricing, re-negotiation, cost re-structuring. Access to lower cost economies through off shoring called “labor arbitrage” generated by the wage gap between industrialized and developing nations.
* Focus on Core Business. Resources (for example investment, people, and infrastructure) are focused on developing the core business. For example often organizations outsource their IT support to specialized IT services companies.
* Cost restructuring. Operating leverage is a measure that compares fixed costs to variable costs. Outsourcing changes the balance of this ratio by offering a move from fixed to variable cost and also by making variable costs more predictable.
* Improve quality. Achieve a step change in quality through contracting out the service with a new service level agreement.
* Knowledge. Access to intellectual property and wider experience and knowledge.[14]
* Contract. Services will be provided to a legally binding contract with financial penalties and legal redress. This is not the case with internal services.
* Operational expertise. Access to operational best practice that would be too difficult or time consuming to develop in-house.
* Access to talent. Access to a larger talent pool and a sustainable source of skills, in particular in science and engineering.
* Capacity management. An improved method of capacity management of services and technology where the risk in providing the excess capacity is borne by the supplier.
* Catalyst for change. An organization can use an outsourcing agreement as a catalyst for major step change that can not be achieved alone. The outsourcer becomes a Change agent in the process.
* Enhance capacity for innovation. Companies increasingly use external knowledge service providers to supplement limited in-house capacity for product innovation.
* Reduce time to market. The acceleration of the development or production of a product through the additional capability brought by the supplier.
* Commodification. The trend of standardizing business processes, IT Services and application services enabling businesses to intelligently buy at the right price. Allows a wide range of businesses access to services previously only available to large corporations.
* Risk management. An approach to risk management for some types of risks is to partner with an outsourcer who is better able to provide the mitigation.
* Venture Capital. Some countries match government funds venture capital with private venture capital for startups that start businesses in their country.
* Tax Benefit. Countries offer tax incentives to move manufacturing operations to counter high corporate taxes within another country.

Under outsourcing industries, Research & Development plays an important role…

The competitive pressures on firms to bring out new products at an ever rapid pace to meet market needs are increasing. As such, the pressures on the R&D department are increasing. In order to alleviate the pressure, firms have to either increase R&D budgets or find ways to utilize the resources in a more productive way. There are situations when a firm may consider outsourcing some of its R&D work to a contract research organizations or universities. Reasons why a firm could consider outsourcing are:

  • new product design does not work
  • project time and cost overruns
  • loss of key staff
  • competitive response
  • Problems of quality/yield.

Outsourcing2 (1)The key drivers for R&D outsourcing are emerging mass markets and availability of expertise in the field. In this context, the two most populous countries in the world, China and India, provide huge pools from which to find talent. Both countries produce over 200,000 engineers and science graduates each year. Moreover both countries are low cost outsourcing countries. Other strategic drivers for outsourcing R&D are access to expertise and intellectual property, filling gaps in the capabilities of the R&D function, managing risk better, reducing the time to market, and focusing on the core competence or activities of the firm.

M Vishakh

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About Drusti

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One Response to Service Outsourcing in Indian economy…

  1. seo says:

    Nice idea, please explain more!

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