Offshoring

Also called: Off-shoring · Topic: Tertiary, Quaternary and Quinary Activities · NCERT: Class 12, Ch 6 "Tertiary and Quaternary Activities"

Meaning

Offshoring (also written off-shoring) is outsourcing to another country: a firm hands part of its work to an outside agency located abroad, for example when a US firm gives its customer calls to a company in India. It matters because it is one of the main forces behind India's IT-BPM industry (Information Technology and Business Process Management). That industry earns far more from exports than from sales at home [2][3].

Explanation

Outsourcing vs offshoring: "who" and "where"

• Outsourcing (also called contracting out): a firm gives part of its work to an outside agency instead of doing it itself.
• Offshoring: the outside agency is in another country.
• The easy way to separate the two words:
• outsourcing asks who does the work (an outside firm);

• offshoring asks where the work is done (abroad).

• Work that is often sent offshore: information technology (IT), human resources (hiring, payroll), customer support and call centres. At times manufacturing and engineering work goes too.

• Data processing is the easiest work to move offshore.
• It is an IT service that needs only computers and a network link.
• So it can be done in Asian, East European and African countries.

Why work moves offshore: cause → process → result

• Cheaper skilled labour
• Many developing countries have workers who are IT-skilled and speak English.
• Their wages are lower than in the USA, UK or Japan.

• So the same task costs the client much less.

• Lower overheads

• Office rent, electricity and other running costs are lower.

• This adds to the saving.

• Comparative advantage (the main reason, as per NCERT)

• Comparative advantage means a country does best when it specialises in the work it can do at a lower relative cost than others, and then trades.
• India and the Philippines have this edge in skilled, low-cost, English-speaking service work.

• So outsourcing keeps going even when there is political opposition.

• Time-zone advantage

• When it is night in the USA, it is daytime in India, which is about 9.5–10.5 hours ahead.
• Work sent from the USA in the evening comes back finished by the next morning.
• This gives a 24-hour work cycle.

Types of offshored work: BPO and KPO

• Business process outsourcing (BPO): routine, rule-based work that needs less skill. Examples are call centres, customer support, back-office work (billing, records) and data processing.
• Knowledge process outsourcing (KPO): high-skill work that needs expert judgement. Examples are research and development (R&D), e-learning, business research, intellectual property (IP) research, legal work and banking services.
• KPO needs highly skilled workers such as engineers, lawyers, analysts and PhDs.

• KPO creates more business opportunities than BPO.

• Link to activity type: BPO is service delivery, so it is tertiary work. KPO is knowledge and decision work, so it is quaternary/quinary work.

Effects of offshoring

• In host countries: new jobs appear wherever there is cheap skilled labour.
• On migration
• Host countries such as India and the Philippines also send many people abroad to work. They are out-migrating countries.
• If good jobs come home through outsourcing, fewer people need to leave.

• So outsourcing may reduce emigration.

• Backlash in client countries

• Job-seekers in the outsourcing (client) countries, mainly the USA and UK, resist it.
• They feel that work they would have done has gone abroad.
• This shows up as political pressure against offshoring.

Where it occurs

• NCERT's classic example: a firm in Hyderabad (Telangana, India) or Manila (Philippines) does a GIS project for a client in the USA or Japan. GIS (Geographic Information System) means digital mapping and the study of map data on computers.
• Even Botswana (southern Africa) takes such work.
• Countries where call centres have opened (NCERT): India, China, Eastern Europe, Israel, the Philippines and Costa Rica (Central America).
• Indian hubs: Bengaluru, Hyderabad, Chennai, Pune, Mumbai, the National Capital Region (Gurugram, Noida) and Kolkata.
• Philippines hubs: Manila and Cebu.
• India's scale in 2020-21:
• IT-BPM export revenue was US$ 149.1 billion, while domestic revenue was only US$ 28.9 billion. Both figures leave out hardware and e-commerce [2][3].
• The USA gave US$ 92.1 billion of export revenue (about 62%) [2][3].
• The UK gave US$ 25.2 billion (about 17%) [2][3].
• Together the USA and UK gave India nearly four-fifths of its IT-BPM exports. These same two countries have the strongest backlash against offshoring.
• The sector added 1.38 lakh employees in 2020-21 (provisional estimate) [2][3].

Don't confuse with

• Outsourcing: this is about who does the work (an outside firm), and that firm can be in the same country. Offshoring is about where the work is done (abroad). All offshoring is outsourcing, but not all outsourcing is offshoring.
• Home-shoring: this is a new alternative to outsourcing. Employees work from home within the same country, so the work never leaves the country. Offshoring is driven by lower wages abroad. Home-shoring is driven by lower office costs, flexibility and political pressure to keep jobs at home.
• BPO vs KPO: both are kinds of offshored work. BPO is routine, low-skill and low-value work. KPO is knowledge-based, high-skill and high-value work. KPO, not BPO, has more business opportunities.
• Global Capability Centres (GCCs): these are offshore units fully owned by a multinational that do its tech, R&D and analytics work in-house. Offshoring in the NCERT sense usually means handing the work to a separate outside firm abroad.

Prelims Hooks

• Offshoring = outsourcing to another country. Home-shoring = work done from home within the same country.
• NCERT names comparative advantage as the main reason outsourcing continues despite political opposition.
• Call-centre countries named by NCERT: India, China, Eastern Europe, Israel, the Philippines, Costa Rica.
• NCERT example: a GIS project for the USA/Japan done in Hyderabad or Manila. Even Botswana takes such work.
• Trap: "BPOs have better business opportunities than KPOs" is false. KPOs have better opportunities.
• India's largest IT-BPM export market is the USA (~62%, 2020-21), followed by the UK (~17%) [2][3].

Mains Points

• Locational factors of offshore services (GS-I, location of tertiary activities)
• Offshore work goes where it finds IT-skilled, English-speaking workers on lower wages, low overheads, good telecom links and a time-zone gap that allows a 24-hour work cycle.
• Together these give India and the Philippines a comparative advantage.

• Services are not tied to raw materials the way industry is, so they cluster in metro tech hubs such as Bengaluru, Hyderabad, Pune and NCR.

• Effects on host and client countries

• Host countries such as India, the Philippines and Costa Rica gain jobs and foreign exchange (US$ 149.1 bn of IT-BPM exports in 2020-21) [2][3]. They may also see less emigration.
• Client countries such as the USA and UK save costs but face job-loss politics.

• India sends about 79% of its exports to the USA and UK (2020-21), which leaves it exposed to their recessions and to visa or protectionist policies [2][3].

• Moving up the value chain

• AI and automation threaten routine BPO tasks such as answering standard calls and entering data.
• So Indian firms are shifting towards KPO and GCCs (R&D, analytics, legal and IP work), which bring more value added and better business opportunities.
• This shift needs investment in higher education and digital infrastructure, and it needs tech hubs to spread to tier-II cities.

Related concepts

• Outsourcing
• Business process outsourcing
• Knowledge process outsourcing
• Home-shoring

Read more

• Outsourcing, offshoring, BPO, KPO and home-shoring