Indian Call Centers Create New International Trade Sector - Assignment Example

Running Head: INDIAN CALL CENTERS CREAT E NEW INTERNATIONAL TRADE SECTOR Indian Call Centers Create New International Trade Sector in Harvard Style by Student's Name Course Name University I. Executive Summary This report desires to shed light on the current state of business process outsourcing. Specifically, it looks at the data processing and contact centers in the Indian economy, which provides services to European firms. The highlights of the report are as follow: Service is "any activity which or benefit that one party can offer to another which is essentially intangible and does not result in ownership of anything" (Kotler 2002). It is characterised by inseparability, intangibility, variability, and perishability. However, this definition of service is redefined by the new world system with the proliferation of business process outsourcing, which allows the separate production and consumption of services. The emergence of business process outsourcing can be best understood by employing a PEST analysis, which looks at the important aspects of the society that includes political, economic, social, and technological. The political sector has created a favorable arena in which business process outsourcing can proliferate. Policies which help promote globalization are instituted facilitating the elimination the geographical boundaries among nations and easing the exchange of products, capital, and services. The economy is evolving into a single global village which allows the free flow of goods and services by the elimination of trade barriers. Labor intensive products and services are channeled to developing economies where labor is relatively cheaper. In terms of social aspects, it is visible that there has been a wide social acceptance of foreign culture which allows the acquisition of foreign language especially English. Technological advancement specifically created a way to easily transfer data across geographical boundaries. A European based insurance company which opts to utilise Indian firm for its data processing and call handling gains benefits through: productivity improvements; access to expertise; operational cost control; cost savings; improved accountability; improved human resource; and the opportunity to focus on core business. However, business process outsourcing runs the risk of loosing managerial control, threatens security and confidentiality, and lowers the flexibility of the service consumer to react to the changes and trends in the business environment. Business process outsourcing is considered as a sunshine industry in India. Business process outsourcing generates jobs in the economy, brings in large revenues, and aids in economic development. However, the Indian economy should also recognise the risk associated in allowing foreign firms utilise their labor force. Business process outsourcing is hasardous to workers as they need to cope with the significant time difference in between their location and the location of the service consumer. II. Introduction According to Kotler (2002), service is "any activity which or benefit that one party can offer to another which is essentially intangible and does not result in ownership of anything." In comparison to goods which are produced by manufacturers, service is characterised by four distinct characteristics which are not present in tangible goods: inseparability, which signifies that the provider and the consumer of the service should be in the same location; intangibility, which implies that the service cannot be fully assessed using the senses; variability, which recognises that the quality of the services is not consistent using different customers' perception; and perishability, which implies the inability to store services (Palmer 2004). However, service has been redefined by the current global economy. A closer look at how large business organisations undertake their day-to-day operations reveals that services are now separable. The growing globalisation ushered a new trend called business process outsourcing where companies sub-contract or outsource their core and non-core operations. The most common BPOs are call-centers, human resources, accounting and payroll outsourcing. Managers argue that BPO is a "management tool" which "frees companies to build upon their core competencies by leaving the non-core stuff to providers" (Banham 2001). This report will examine how external changes and developments as well as internal pressures shape how services are produced, delivered, and consumed. Firstly, this paper will identify and analyse the significant factors, which led to the emergence and proliferation of data processing and call center handling in the world trade. In order to fully assess the impact of business process outsourcing to business organisations, this report will utilise the different viewpoints if the two major actors involved-outsourcer and provider. The next section will be examining how a European based insurance company can benefit from the employment of call center in India. To eliminate the partiality, the detriments of employing Indian customer service representatives will also be revealed. The impact of business process outsourcing in the point of view of the provider will also be looked into by taking into account the contributions and negative externalities brought by foreign business organisations in the Indian economy. II. The Emergence of Business Process Outsourcing The emergence and wide popularity of business process outsourcing in the world economy which is primarily constituted by data processing and call center handling can be best understood by looking at different which occurred in the external environment of global business organisations. A strategic management technique developed, the PEST analysis will be employed. PEST stands for political, economic, social, and technological which are important external aspects, being considered by firms (Thompson 2002). Political The emergence of business process outsourcing is partly due to a more favorable global political system. It should be noted that outsourcing between political boundaries is directly linked to the establishment of a single global village. Globalisation, in turn, is due to the rapid elimination of geographical boundaries because of political arguments. This is visible with the establishment of closer political ties and unions like NAFTA, European Union, ASEAN, and others. Though most of the policies and agreements covered on these alliances are economic in nature, the political ties facilitate the creation of more relaxed trade policies. The political sector has established an economy, which eliminates trade barriers among nations allowing the exchange of good, capital as well as services among economies (Schaeffer 2003). These political changes opened up the whole world economy into a hub where services are freely exchanged. It should be noted that the policies instituted by developing countries are also favorable for the trade in services. While developed countries are often wary of the entry of foreign businesses, developing nations welcome and highly encourage foreign direct investments from multinationals. In order to boost the level of investment, these countries gives financial incentives to foreign firms such as tax perks, tax holidays, and access to local raw materials and natural resources (Blomstrom 2003). These factors draw the interest of large companies, which want to outsource their data processing and call center handling in other nations. The prospect of financial incentives due to governmental policies will reflect as higher profits in the income statement of business organisations. Economic As stated above, economic factors are closely intertwined with the political sector as the latter generally shapes and creates trends in the whole economy. With the favorable political agreements in place, the world economies are being transformed and integrated into a single global village. This new economic system allows division of labor and consequent specialisation among countries according to their expertise. With these developments, products and services are channeled to where they can be produced more efficiently. This idea becomes the foundation and rationale for channeling data processing and call center handling in India and other developing nations. Typically, data processing and call center handling are performed in house. However, as companies realise that these back-end processes can be more efficiently undertaken at lower costs in other countries, they began to outsource these services to focus on their core competencies. It should be noted that developing economies have relatively lower wages but with almost the same skill and knowledge with their counterparts in the developed countries. Lower wages indicate cost savings and additional profit for outsourcers. Thus, services like data processing and call handling become the domain of developing economies while main operations are handled in-house (Palmer 2004). Social The social reasons for the proliferation of data processing and contact centers are not fully explored and expanded. However, it should be noted that social factors has a lot to do with the success of business process outsourcing. Language barrier is probably the greatest hindrance in outsourcing. It will very hard for employees to understand the data that they will be working on as well as the clients they will be interacting with if they do not share the same language. It can be seen that in the present society, the wide acceptance of the English language in non-native English speaking countries is warm. This signifies a social acceptance of foreign culture in developing economies. This factor makes it possible for data processing and contact centers to proliferate in India, Philippines, and other nations. Technological Advancement in technology has been one of the major drivers in the global business arena. The rapid technological revolution further helped in creating a more integrated world economy. It is visible how technological advancements efficiently eradicated geographical boundaries among economies. Data transmission and communication became possible with just a click of the mouse. Business process outsourcing companies highly benefit from the Internet technology. With this revolution, a company in any part of the world can easily transmit data and voice calls at very low costs and at the highest possible speed. This technology has bridged the large gap among industrialised nations and developing economies. Data processing and contact centers are significantly aided by the use of this technology. In fact, without this revolution, business process outsourcing companies cannot proliferate. III. The Advantages and Disadvantages of Business Process Outsourcing from the Point of View of a European Based Insurance Company Since t he past decade, European based companies are now heavily relying on Indian call and data processing centers. Pricewaterhouse Coopers estimates that the global market for business process outsourcing will grow to USD $310 billion in 2008 (Business Process Outsourcing 2006). In India, outsourced services are has been growing at double digit rates albeit at a decreasing pace. The business process outsourcing industry has become a sunshine industry for the developing economy as it brings it chunk of the local revenue. India is the favored destination for call centers as the annual cost of operations is significantly lower than the countries. Annual call center employee cost in India is estimated to be US$75,000, lower than the US$9,050 and US$17,000 in the Philippines and Australia, respectively (Business Process Outsourcing 2006). This paper will look at the specific case of a European based insurance company, which outsources its call handling and data processing from a local, firm in India. The European based company can benefit from this arrangement in seven ways: productivity improvements; access to expertise; operational cost control; cost savings; improved accountability; improved human resource; and the opportunity to focus on core business (BPO India, n.d.). Channeling back-end processes to business process outsourcers generally improved the productivity of the European based insurance company. As these non-core services are deployed in other business organisations, it expects to reap improvements in productivity since the time and resource, which are previously utilised in undertaking data processing, and call handling are now more efficiently used to fulfill core processes. The insurance company will now be able to focus on the improvement of its marketing and strategic approaches. Business process outsourcing allows division of labor and specialisation. It should be noted that Indian firms have specialised in providing data processing and call handling to foreign firms. With the length of time that they've been in the industry, they have acquired the expertise required for these tasks. Thus, the European based insurance company benefits from accessing this expertise and using it for its advantage. One of the greatest motivations of foreign firms in outsourcing is the prospects of huge financial savings. As stated above, data processing and call handling entails less cost if outsourced from India. The insurance company can benefit from the lower labor costs in India compared to that in Europe. This, together with the economies of scale acquired by business process outsourcing companies significantly lowers costs. Lower operations costs mean higher profits and aid in the maximisation of the shareholder value. It should also be noted that by utilising the service of a foreign firm, the insurance company could turn its previous fixed costs into variable ones giving the insurance company more control on its costs of operations. Business process outsourcing also gives the insurance company more reliable, more skilled, and more flexible labor force. The expertise acquired by each customer service representative and data processor can be efficiently harnessed by the European based business organisation. It should also be noted that employing Indian firms lessens the workforce being directly managed which leaves not only lessens company costs but frees up resources which can be utilised in other objectives. Putting together all the advantages and benefits previously discussed becomes visible that business process outsourcing helps business organisations to focus on their core competencies because it frees up the significant resources to be used for more important purposes. The employment of Indian data processing and call handling frees up time, financial, managerial, and other resources, which the insurance company can use to pursue its other goals. However, aside from its numerous advantages, the European insurance company also needs to take into account the possible disadvantages of employing an Indian firm. First, the company runs the risk of losing managerial control. This happens because it is often hard to monitor and direct other business entities than the company's own employees. It should be noted that business process outsourcing eliminates the factor of inseparability between the service provider and the consumer. This inseparability factor is very important as it allow the service consumer to directly monitor how the service should be provided. The distance between the two business entities cannot be fully mediated by presence of advanced technology. The insurance company should also look beyond the cost advantages of outsourcing services. It should be noted that outsourcing also has some hidden financial costs. The insurance company must not overlook the costs, which should be allocated in order to prepare the legal contracts. These contracts also demand time from managers who needs to coordinate with the outsourcers in order to draft an appropriate memorandum of agreement. Outsourcing services to other firms also poses risks in security and confidentiality. The transaction between the European insurance company and the Indian firm means that the former needs to divulge important information to the latter. However, it can be recalled that issues about Indian employees stealing and divulging private information to competitors or other parties. The insurance company's decision to outsource services might also be detrimental because it lowers its flexibility and speed in reacting to changes in the business environment. As the service provider is separate from the business environment of the insurance company, the former does not feel the pressure of improving customer service even if competition is tight in the European market. IV. Business Process Outsourcing and the Indian Economy India holds the largest market share in the global business process outsourcing industry. The Indian economy recognises the benefits derived from providing services to foreign firms. In fact, the sector is one of the largest revenue generators in the economy. The Indian economy benefits from these transactions through the generation of revenue. It should be noted that business process outsourcing is one of the most active sector in the economy bringing in chunk of the country's gross domestic product. The added revenue derived from the sector is used for the development projects of the government. India can now heavily invest in improving its infrastructure through revenue flows. In fact, the development in India is directly linked to inflow of jobs in the services sector. Business process outsourcing helps in alleviating the economic situation of India primarily by lowering the nation's unemployment rate. It should be noted that foreign firms outsourcing services employs around 245,100 individuals. It is expected that the growth in business process outsourcing will generate another 94, 500 jobs in the coming year. This huge number of individuals employed in the sector significantly helps the economy by making Indian labor force more productive. Individuals employed in call handling and data processing centers are even paid higher than the average wage rate (Business Process Outrousing in India 2006). This higher level of income also means higher revenue for government due to higher taxable income. In the point of view of the employees, higher disposable income affords them of the luxury that they cannot previously have. Thus, business process outsourcing provides jobs for individuals and higher disposable income for consumption. Higher disposable income which is spent on luxury goods will also imply the establishment and development of business organisations to cater to this sector. This will include producers of durable goods and other consumables. For India, this will mean an enhancement in investment and business sector. However, amidst these economic developments brought about by outsourcing, the country also faces risks. First, the Indian economy exposes its workforce to hasardous working conditions. It should be noted that the different time zones between the service provider and the service consumer necessitates the employees to work at night, which can adversely affect their health. This is even ore pronounced as pregnant women are also increasingly involved in data processing and call handling. Aside from the benefits brought about by higher wages paid by business process outsourcers, it should also be noted that economically speaking higher wages contributes to the instability of the economy. Wages should only rise due to inflation and labor productivity. Otherwise, higher wage rate in one sector will push up the general wages rate forcing other business organisations to follow. This condition will squeeze out the revenue generated by firms, lowering their profits. Also, jobs in the services sector also attract a large of the intellectual population in the Indian economy through the lure of higher wages. Thus, educated individuals are now quitting their positions within local firms. This adversely affects the local economy as these employees are now employed in providing services in foreign firms instead of being used in the local economy. V. Conclusion Business process outsourcing is now a trend in the global economy. This trend is ushered by the numerous factors in the economy. It should also be noted that it also redefines services as it exclude the inseparability factor in the service sector. Business process outsourcing now allows the separate consumption of goods and services between the parties. Outsourcing of services benefits business organisations by lowering operational costs and by helping entities focus on their core competencies. However, they should not overlook the costs associated with it. The same should be applied to developing economies encouraging this trend. These parties should look at the impact of business process outsourcing from different angles and weigh the benefits against the costs associated. References Banham, R 2001, "Cut to the Core-Business Process Outsourcing-Statistical Data Included," CFO:Magazine for Senior Financial Executives. Oct. 2001 Business Process Outsourcing in India, 2006, Retrieved 08 November 2006 from http://en.wikipedia.org/wiki/Business_process_outsourcing_in_India#Figures_from_a_recent_survey_carried_out_by_PricewaterhouseCoopers Blomstroom, M 2003, The Economics of Foreign Direct Investment Incentives, Retrieved 08 November 2006, from http://www2.hhs.se/eijswp/168.pdf BPOIndia, n.d. Retrieved 08 November 2006, from http://www.bpoindia.org/ Kotler, P, 2003, Marketing Management, Prentice Hall: New Jersey Palmer, A. 2004, Principles of Services Marketing, McGrawHill: Europe Schaeffer, R 2003, Understanding Globalization: The Social Consequences of Political, Economic and Environmental Change, Prentice-Hall, Inc., New Jersey. Thompson, J 2002, Strategic Management, 4th Edition, London: Thomson Read More