How Outsourcing Made Potential Competition Into Allies

November 28, 2018 | Arnab
How Outsourcing Made Potential Competition Into Allies

Keep your enemy closer

When questioned on what was perceived to be lack of ruthlessness while dealing with his political opponents, Abraham Lincoln had said, ““Do I not destroy my enemies when I make them my friends?”. Lincoln’s wartime cabinet has gone down in history as a rather unique cabinet, a cabinet made up of individuals who had been avowed opponents of Lincoln. And yet, by befriending his enemy, President Lincoln had ensured not just their loyalty, but also turned them into his strengths. No one is a better example of this than Edwin Stanton. A bitter critic of Lincoln in his earlier days in Washington, Stanton went on to serve as the Secretary of War in Lincoln’s cabinet and transformed a department which had been hitherto in disarray and called a lunatic asylum by soldiers, into a well-oiled machine. Destroying potential competition is almost a prerequisite for success; however, turning a potential weakness into a strength is the hallmark of genius. Be it President Lincoln, Mughal Emperor Akbar or more recently Nelson Mandela; all these great leaders have employed this tactic to leave lasting legacies. In the world of business, too, this tactic has been used successfully to eliminate potential competition. And nowhere is it as apparent as in the case of offshore outsourcing.

Lessons learnt in Detroit

Surprised? I am sure you haven’t heard this one before. It’s true though. Imagine a world where Indian software companies are bidding for a project against American or European companies. With ridiculously cheap labor available domestically and a seemingly unending supply of human resources, these firms could have been in a position to outbid American firms almost every single time. The American firms would have been in a race that would be so patently unfair that they would pretty much have ended up running on one leg. Result? The Western IT sector could very much have gone the same way as the American car manufacturing industry. Instead of plush Palo Altos and Cupertinos, we could be dealing with several Detroits by now. And if it sounds far-fetched reading it now, remember how rapidly the auto industry, once kind of the poster boy of American progress and Americanism, declined in the 70s. Within just one decade, the titans of American auto industry, the so-called Big Three had been left far behind by Japanese auto makers. And the decline, alas, was terminal. Coupled with successive oil crises and engineering disasters which led to several recalls, the American auto makers incurred massive losses. A highly unionized workforce, which meant high wage costs and inability to adapt or adapt too late to changing conditions meant that the decay was always meant to be terminal. Contrast that to Japanese automakers who, in the face of the Voluntary Export Restriction of 1980, established assembly plants in US itself, but not in the traditionally favored North with well entrenched labor unions. Instead they looked to the Southern States which had Right to work laws in place. Once the heart of industrial America, the region around Detroit is today called the rust belt.

A penny saved is a dollar earned

Offshoring is a child of its times. It is far from perfect, knows it and is rather unapologetic about it. It basks secure in the knowledge that its qualities far outweigh its perceived vices and the perils of ignoring it can be great. When offshoring as we know it today started, the idea behind it was less about profit maximization and more about self-preservation. Globalization had made the world smaller and markets accessible to everyone. Multiple financial crisis and intermittent recession that plagued the US and world economy in the period between mid-80s and the turn of the century meant that American corporations were struggling to keep their heads above water. The flipside of a deregulated market is that it can crash and burn on a whisper, especially when the economy is transitioning itself from a blue collar to a primarily white collar economy. By offshoring a significant component of the services segment to much cheaper offshore destinations like India, American firms were able to save on a large amount of capital, which in turn allowed them to diversify and become more adept at taking the proverbial hit, which is bound to come every once in a while. The result, US firms were able to stay competitive and today pretty much headline the world of IT and IT related industries.

Savings that resulted from offshoring also allowed American companies to invest more, and in areas that had been hitherto neglected due to lack of money. Increased funding in research and development led to the birth of new technologies and products, which in turn led to the spawning of whole new domains and new age entrepreneurs who set up technology startups by the dozens in the US, especially around the San Francisco Bay Area which transformed the area completely. Many of these startups have gone on to become titanic organizations in their own right, often relying heavily on offshore setups to manage their day to day functions.

Making a potential competitor into an ally

India is home to a billion people and then some. What India counts as just its working population is almost greater than the combined population of US and EU- arguably the two largest economies in the world. And while the employment rates of US and EU range between 70%-85% on an average, in India that is a shade over 50%. That essentially means that for every job, there are technically 2 Indians, compared to a more balanced ratio in Western economies. This makes the Indian labor market extremely pliant. Unlike most other countries with a similar job-workforce ratio, India is also a very stable country, being the world’s largest democracy, where democratic norms are very deeply entrenched within its populace. It also has a massive aspirational and consumer-driven economy (offshoring accounts for just 1% of the Indian economy). That makes India a very safe and lucrative place for conducting business. India’s labor laws are far less complicated, with a much smaller percentage of the workforce in favor of unionization than either the US or EU, especially in white collar jobs. The number of English language speakers in India is second only to the US in sheer numbers. Indian technology firms have seemingly an unending pool of talent to dip into. Every year a steady stream of Engineers graduate from its elite institutions and are snapped up by the highest bidders.

All this makes Indian technology firms potential competition for American firms. Yet, almost incredibly, thriving technology hubs like Bangalore, Mumbai and Hyderabad have yet to really compete with Palo Alto, San Diego and Cupertino. In fact, these Indian centers complement the ones in the US. Instead of making the waters murkier, Indian technology giants have helped make it clearer, helping US tech giants dominate this industry, all thanks to the cooperation that has been achieved through offshoring. Yes, that has meant that Indian IT firm TCS ranks as one of the ten largest tech firms globally. However, US firms occupy seven of the remaining ten spots, and Indian firms like TCS, Infosys, Wipro and HCL are almost umbilicaly tied to American tech giants for survival. Yes, there are thousands of talented engineers and technology professionals graduating from top Indian universities. However the cream of that talent head west, scooped up by American firms, since there are few Indian companies willing to pay them as much. Neither do they need to as Indian firms are happy to sit back and follow the lead of their Western counterparts. It’s a win-win situation, where by attracting the best and the brightest, the US remains the engine driving innovation globally and Indian firms act in primarily a secondary support capacity. As long as this partnership thrives, Indian businesses and by extension the Indian economy have no cause to compete.

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