Recapturing India’s labour arbitrage in global corporations.
Much is written about the ‘demographic dividend’ in India. Stats show the current mean age is 26 years and it is expected to remain under 30 years until 2020. Japan in the 1950s and Ireland in the 1980s are examples of countries that benefited from a demographic dividend, adding significant economic growth by outstripping competing countries through massive productivity enhancements. India has now, and will have well into the future, vast numbers of young, educated and ambitious workers all vying for opportunities in the workplace. This is an advantage many multi-nationals have sought and continue to seek by acquiring or building captive business process outsourcing (BPO) operations in India. But this is not a straightforward win-win strategy.
In this article I examine the cost vs. quality quandary in which captive BPO CEOs find themselves, and discuss pathways forward that allow the organisation to continue to capture the demographic dividend while dealing effectively with India-specific challenges.
India Outsourcing Value Proposition
Firstly let’s consider the outsourcing mandate. Within the usual multi-national operating model not all operations processing is passed off to the Indian captive BPOs. Predominantly it is the people-intensive, low complexity roles that are outsourced. The initial value-add therefore is simply a cost arbitrage. Such tasks can be passed to India and completed at 1/10th or less of the labour cost of comparable work in the home economy. Moreover, the cost arbitrage doesn’t come just from salary differentials. The standard, space and comfort of operation centres vary significantly between India and most western countries, as do many other fixed and variable costs like training, pensions and payroll tax. (It is worth noting that Indian regulators do require these captive BPOs to show a profit of at least 10% per annum, in part to proscribe against using them to offshore losses as well as tasks.)
Makes sense, doesn’t it, to capture the opportunity of the demographic dividend while it is here? The strategic rational for captive BPOs is founded on capturing the cost benefits of India’s demographic dividend now, so many CEOs of these units maintain a myopic focus on costs, especially employment costs. By offering only the lowest possible pay rates to recruits and hopeful young managers desperate for experience, CEO’s plan to maintain their cost advantage over other operation groups within their global business. There are a couple of competitive challenges in the way – how do India’s captive BPOs compete on the quality of their outcomes? And is the demographic dividend sustaining the strategic rationale for these business units?
Implications of Quality v Price
In terms of work quality, many global businesses operating in India find a real problem with the task-outsourcing paradigm and the quality of the operations and processing recruits. Outsourcing ‘tasks’ rather than ‘processes’ leaves handoff gaps which can create quality challenges. As for recruits, there is a big expertise gap with young graduates in India, a proficiency problem extending beyond job-related skills. There is a gap between the accredited English skills of these graduates and their actual communication abilities. Many lack adequate verbal communication skills and can’t write well in business English meaning customer analysis, reports, plans are often of little use until rewritten (generally by their boss). One way or another, though, they have learned to pass exams. This recruit-quality issue, currently being proactively addressed in India by companies like Infosys and IBM, means recruits have few immediately applicable skills and so can’t initially add value. Companies are bridging this deficit through significant investments in onsite training: for example entry-level managers are taught how to write business emails, analyse data and recommend findings in report format. These are role specific skills; basic knowledge needed by frontline managers before they can add value to established teams.
So call centres, outsourced payroll offices and operations businesses often become training establishments first. This investment may be unsustainable in San Francisco, Slough or Frankfurt but in India unit training costs are more palatable, even in a large-scale operation with hundreds of operations trainees. The bundled training and employment costs are still cheaper than employing experienced workers in the home country. The bottom-line justifies the investment – provided the quality remains competitive and the trained employee remains in the company. But it is another cost to be absorbed and considered.
The Costs of the Dividend
As Kartik Hosenagar notes in IndiaKnowledge@Wharton, 18 Nov 2010, the demographic dividend is difficult to obtain if the raw material, the recruits, aren’t up to the task without significant investment. And what some CEO’s do is invest without realising an appropriate return as they are not maintaining the trained employee on role long enough to recoup the investment. Canny competitors, circling in wait, often profit from this strategic failure.
Conversely, experienced operations managers are expensive in India, relative to the international perspective on Indian salaries (perceptions always seems to lag reality in these things). Maturing BPO workforces likewise are becoming increasingly expensive. Inevitably, incrementally, and unavoidably, India’s labour arbitrage, and by inference its demographic dividend, is being eroded. This is not just due to maturing and performance-enhanced workforces. There are other factors at play. In tier-one cities like Mumbai and Bangalore we witness the continued, rapid escalation of employment overheads, infrastructure and other capital costs; linked in part to competition for resources and massive cost of living increases.
And thanks to the relative value of experienced teams, India now has half a generation of workers accustomed to, and expecting, 20-30% pay rises every year. Younger, career assertive employees are strongly predisposed to move employer – jumping ship for a 30% salary premium – a tactic which has been easy to execute due to the value of trained vs. raw recruit staff. Inflation is running at a headline rate of >10% per annum, and over the last 4-5 years the Rupee’s value has fluctuated 20-30% against leading international currencies.
The Labour Cost Arbitrage Inverted?
Now we can identify with the quandary in which many captive BPO CEO’s find themselves. Global leadership questions the ‘value for money’ of India BPOs – a situation diametrically opposed to the initial cost-arbitrage strategy. While trying to make up for skill-less graduates and continuing to capture the projected labour cost metrics, sometimes their business begins to look like a training establishment for competitors – a skill-inculcating revolving door. This leads necessarily to the CEO’s next big problem – customer satisfaction. The continued drain of trained staff dramatically increases dissatisfaction for the internal customer frustrated with forever dealing with new, inexperienced operations staff and constantly building new relationships. Company ethical and cultural standards are constantly re-explained and corporate knowledge re-learned. Quality necessarily suffers. Eventually grumblings become howls.
Many local CEO’s resolutely stick to the extant methodology. Culturally this is coherent with my experience. Immediate costs are vastly more important in almost every aspect of day-to-day life in India than is quality. So how can a CEO resolve this cost/quality conflict? An enlightened CEO can have his/her cake and eat it, but not before making strategic investments. Experience in the BPO sector in India suggests two polarised genre of investments can pay handsome dividends: people centric value-add through executing higher-order processes and system centric reduction in skilled staff dependency.
Rely on Systems or People?
Highly profitable Indian businesses like Reliance Industries make systems investment a cornerstone of their operating model. They exhibit a strong preference for investing in systems over investing in people, office suites and comfort. The read-across is: in the BPO space, maintaining the low cost paradigm while delivering consistently high quality requires a principal investment in robust, dependable and coherent operating systems. Remaining heavily dependant on key talent is proving a big risk for the reasons articulated earlier. Even if it is a material short-term impact on the balance sheet, a systems investment is a predominantly one-off cost; the training investment described above is perpetual. The system investment does return dividends; you don’t need to continually retrain a system!
While no longer an ultra-low cost location, India still offers many desirable attributes from the demographic dividend, including English language familiarity and an abundant workforce supply. Captive BPOs harvest the dividend by building process-delivery capability. Operations businesses can move from completing low-end, outsourced tasks to becoming quality-driven value creation centres, competing on both quality and cost with other global operations centres. The great intelligence and capacity for hard work I found in the Indian workforce, coupled with their impatient hunger for achievement enables these BPOs to take on the full complement of business processes. By changing the culture of the business from a simple ‘task completion’ style of captive BPO to that of a ‘value-add’ and ‘competitive advantage’, the new-age BPO leaders are enhancing their value-add. This allows companies to invest in their people and build a cadre of appropriately remunerated staff who know their operations business, and their customer. A wise strategy leveraging both the relative cost benefits of India and the service benefit to be gained by retaining the better quality worker.
Summary
The key summation is that the demographic dividend can still be harvested in India. It’s not as easy to reap as it was a decade ago, but by focusing on quality (through either systems or process-outsourcing investment) the dividend can and is being reaped by multi-nationals’ captive BPO.