Outsourcing

Geography glossary

Also called: Contracting out · Topic: Tertiary, Quaternary and Quinary Activities · NCERT: Class 12, Ch 6 "Tertiary and Quaternary Activities"

Meaning

Outsourcing (also called contracting out) is when a firm gives part of its work to an outside agency instead of doing that work itself. The firm does this to raise efficiency and to cut costs. It matters because outsourcing, especially to other countries, has made India a major exporter of IT and business services. It also changes where jobs are created and how many people migrate abroad.

Explanation

How it works: cause → process → result

Cause: the firm wants to save money and work better.
The outside agency is a specialist in that job, so it does the work more efficiently.
The agency also does the job more cheaply than the firm could do it itself.
Process: the work is handed over.
The firm signs a contract with the outside agency.
The agency does the work and sends back the results.
Result: the firm can spend its own time and money on its main business.
Work that is often outsourced:
information technology (IT);
human resources (hiring staff, running payroll);
customer support and call centres;
sometimes manufacturing and engineering (NCERT exercise 1(vi)).

Offshoring: outsourcing to another country

Offshoring means outsourcing work to another country. Example: a US firm gives its customer calls to a company in India.
Two questions help you tell them apart:
outsourcing asks who does the work (an outside firm);
offshoring asks where the work is done (abroad).
Data processing is the easiest work to send abroad.
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: the conditions it needs

Cheaper skilled labour:
many developing countries have workers who know IT 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 (the day-to-day costs of running an office):
office rent, electricity and other running costs are lower;
this adds to the saving.
Comparative advantage is the main reason (NCERT):
comparative advantage means a country gains most by focusing on the work it can do at a lower cost compared with other countries, and then trading;
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 (India is about 9.5–10.5 hours ahead);
work sent from the USA in the evening comes back finished by the next morning;
this allows a 24-hour work cycle.
Good telecom links are also needed, because the work travels over networks.

Types: BPO and KPO

Business process outsourcing (BPO): outsourcing of routine, rule-based work that needs less skill.
Examples: call centres, customer support, back-office work (billing, keeping records), data processing.
Linked to tertiary activity (delivering services).
It faces a high risk of being replaced by AI and automation.
Knowledge process outsourcing (KPO): outsourcing of high-skill work based on information that needs expert judgement.
Examples: research and development (R&D), e-learning, business research, intellectual property (IP) research, legal work and banking services.
It needs highly skilled workers, such as engineers, lawyers, analysts and PhDs.
It adds more value and creates more business opportunities than BPO.
Linked to quaternary/quinary activity (knowledge and decision-making work).

Where it occurs

Countries where call centres have opened (NCERT): India, China, Eastern Europe, Israel, the Philippines and Costa Rica (Central America).
NCERT's GIS example: a firm in Hyderabad (Telangana, India) or Manila (Philippines) does a GIS project (Geographic Information System: making digital maps and studying data about places) for a client in the USA or Japan. Even Botswana (southern Africa) takes such work.
Indian hubs: Bengaluru, Hyderabad, Chennai, Pune, Mumbai, the National Capital Region (Gurugram, Noida) and Kolkata.
Philippines hubs: Manila and Cebu.
Leading BPO hubs: India and the Philippines.
India's scale in 2020-21:
India's IT-BPM industry (Information Technology and Business Process Management, not counting hardware and e-commerce) earned US$ 149.1 billion from exports and US$ 28.9 billion from domestic sales [2].
So the industry depends mostly on exports. This shows that offshoring drives it [2].
The sector added 1.38 lakh employees in 2020-21 (provisional estimate) [2].
Where India's clients are (2020-21):
the USA gave US$ 92.1 billion of IT-BPM export revenue, about 62% [2];
the UK gave US$ 25.2 billion, about 17% [2];
together they gave nearly four-fifths of India's IT-BPM exports [2].

Don't confuse with

Offshoring: this is outsourcing to another country. Outsourcing on its own only means an outside firm does the work, and that firm may be in the same country.
Home-shoring: a new trend offered as an alternative to outsourcing. Employees work from home within the same country, so the work does not go overseas.
BPO vs KPO: BPO is routine, lower-skill work such as call centres. KPO is high-skill knowledge work such as R&D and legal work. KPO has better business opportunities than BPO.
Global Capability Centres (GCCs): offshore units that a multinational company fully owns. They do its tech, R&D and analytics work in-house, so the work is not given to an outside agency.

Prelims Hooks

NCERT names comparative advantage as the main reason outsourcing continues, even when there is 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 is done in Hyderabad or Manila. Even Botswana takes such work.
R&D, e-learning, business research, IP research, legal and banking = KPO. Call centres, back office, data processing = BPO.
Trap (NCERT exercise 1(vi)(c)): "BPOs have better business opportunities than KPOs" is false.
India's largest IT-BPM export market is the USA (~62%, 2020-21), followed by the UK (~17%) [2].

Mains Points

Location factors of offshore services (GS-I):
The main factors are IT-skilled, English-speaking workers on lower wages, lower overheads, a time-zone gap that allows 24-hour work, and good telecom links.
Together these give India and the Philippines a comparative advantage.
Services do not depend on raw materials the way industries do, so they cluster in metro tech hubs (Bengaluru, Hyderabad, Pune, NCR).
Effects on host and client countries:
Host countries (India, the Philippines, Costa Rica) gain jobs and foreign exchange. India earned US$ 149.1 billion from IT-BPM exports in 2020-21 [2]. Fewer people may need to emigrate, because good jobs come home.
Client countries (mainly the USA and UK) save costs, but job-seekers there resist outsourcing because they feel their work has gone abroad.
India depends heavily on the USA and UK (about 79% of exports in 2020-21 [2]). So it is exposed to recessions, visa rules and protectionist policies in those countries.
Moving up the value chain and home-shoring:
AI and automation now threaten routine BPO tasks such as answering standard calls and entering data.
So Indian firms are moving from BPO towards KPO and GCCs, which need more skill and add more value. This needs investment in higher education, digital infrastructure and hubs in tier-II cities.
After COVID-19 (2020 onwards), remote work and home-shoring spread widely. They cut office costs and can bring jobs to smaller towns and to women who cannot travel to an office. But they depend on broadband, so they can widen the gap between connected cities and poorly connected villages (the urban–rural digital divide).

Related concepts

Outsourcing, offshoring, BPO, KPO and home-shoring

Sources

1Class 12, Ch 6 "Tertiary and Quaternary Activities" (primary)
2Economic Survey 2021-22, page 354 (IT-BPM sector, continued)indiabudget.gov.in · tier 1