International sourcing of IT and business process services

1. International sourcing of IT and business process services Experiences from the United States, the EU and India WTO Symposium on Cross-Border Supply of Services Geneva 28-29 April 2005 Michael Engman OECD Trade Directorate

2. Overview of the presentation • Background and factors that initiated the outsourcing practice • Experiences from the Indian IT industry • Inter-modal linkages • Mutual benefits and the case for adjustment

3. Background • International sourcing may include provision of services by: • foreign subsidiaries of multinationals (International insourcing); or • foreign external providers (International outsourcing). • IT and business process services are mainly sourced domestically and cross-border supply is predominantly North-North trade. • However, cross-border supply of IT and business process services is increasingly provided by low-income and medium-income countries in e.g. Eastern Europe and South & East Asia.

4. Cross-border supply of IT and business process services is growing fast • Enabling factors: Improvements in ICT infrastructure, reduced communication costs, maturation of delivery models, etc. • Increasing demand: Companies in high-income countries focusing on core competence and cost savings, accessing local talent, servicing local markets, etc. • Increasing supply: Companies in low-income countries providing increasingly sophisticated services around the clock. Several countries have large, well-educated labour forces with matching language skills.

5. Exports of Indian IT and IT-enabled services

6. India has become a major exporter and several factors contributed to its early success • Investment in tertiary education: Investment in higher education provided crucial high-skilled labour. • Capital and best practices: Indian Diaspora returned to India with risk capital and best practices. • Foreign competition: Most IT-companies developed without a domestic client base and faced international competition from the beginning. • Independent growth path: The young industry was relatively unaffected by domestic inefficiencies. • Innovative delivery model: The modes of service delivery – including via cable, satellite and temporary movement of workers to client sites – circumvented a number of trade and regulatory barriers.

7. Inter-modal linkages in delivery • International delivery of IT and business process services is a complex practice which involves strong inter-modal linkages. • Delivery of IT services requires roughly 1/3 of manpower to be situated at the client’s site, and 2/3 of manpower to work from their home office(s). • International delivery of business process service, like call centre and data entry services, involves more offshore work and less movement of service providers. • The real value proposition for both client and service provider lies in the cross-border supply of services. →To realise the potential benefits, services liberalisation of cross-border supply need to be accompanied by liberalisation of temporary movement of service workers.

8. The mutual benefits are significant… • High-income countries: • Cost savings enable companies to offer new, cheaper, more flexible, and often higher quality services to their clients. • International sourcing allows companies to focus on what they do best, freeing up capital to be re-invested in R&D and more productive activities. • International sourcing gives companies access to scarce talent and facilitates access to foreign markets. • Low-income countries: • The development of labour-intensive high-tech service industries helps countries to gain high-income services jobs and boosts economic growth. • Cross-border supply of IT and business process services helps to transfer technology and to reduce the technological divide.

9. …but many workers in high-income countries are worrying about their jobs… What is the case for adjustment?

10. Adjustment pressure while real is likely to remain modest in OECD-country labour markets • Most services will remain non-tradable (outer limit estimates: 5-19%). • Job losses should be considered within the context of broader national employment trends. • The 60 thousand US jobs expected to migrate per quarter are relatively low compared to those 7-9 million US jobs created and destroyed per quarter. • France, Germany and Italy, for example, are experiencing even more moderate movement of services jobs abroad. • International sourcing is not a zero-sum game: there are positive dynamic effects. • Gradual convergence of salaries: e.g. wages at Infosys Technologies rose by 18% per year in 1999-2004.

11. Adjustment pressure while real is likely to remain modest in OECD-country labour markets • The largest importers of IT and business process services also show the largest trade surpluses for commercial services (USA & UK). • Surveys and anecdotal evidence indicate that outsourcing in Continental Europe is at a relatively early stage. • French companies are importing services from North and West Africa. • German companies are importing services from Eastern Europe. • Spanish companies are importing services from South and Latin America. • Labour market adjustment may affect certain occupational categories. • Importance of sound labour market policies to facilitate adjustment.

12. Thank you for your attention For further information, please visit www.oecd.org/trade or contact Michael Engman at michael.engman@oecd.org