INTERNATIONALSOURCINGOFITANDBUSINESSPROCESS

1、PAGE PAGE 24INTERNATIONAL SOURCING OF IT AND BUSINESS PROCESS SERVICES:EXPERIENCES FROM THE UNITED STATES, THE EUROPEAN UNION AND INDIAMichael EngmanThis paper was prepared for the 28-29 April 2005 WTO Symposium on Cross-Border Supply of Services in Geneva. It is based on Chapter 11 of OECDs forthco

2、ming publication Trade and Structural Adjustment. The publication identifies the best practices of trade-related adjustment which are based on experiences from eight business sectors. IT and business process services is one of those sectors. The author wishes to acknowledge the significant contribut

3、ion of Julia Nielson and useful comments from Ken Heydon. The author thanks Marjan Paemen and Douglas Gregory from IBM, and Rajeev Suri, Prakash Chellam and Sanjay Purohit from Infosys Technologies for sharing their experiences that are used in the case studies. The author is a consultant at the OEC

4、D Trade Directorate and he can be reached at michael.engman.TABLE OF CONTENTSI. INTRODUCTION TOC o 1-3 u .3II. BACKGROUND PAGEREF _Toc101933851 h 3 Elements of International Sourcing PAGEREF _Toc101933852 h 4III. THE ADJUSTMENT CHALLENGE PAGEREF _Toc101933853 h 5 Challenges in high-income countries

5、PAGEREF _Toc101933854 h 6 Challenges in low-income countries PAGEREF _Toc101933855 h 7IV. THE US EXPERIENCE PAGEREF _Toc101933856 h 9 Scale of the adjustment PAGEREF _Toc101933857 h 9 Policy responses and their effects PAGEREF _Toc101933858 h 10 Case study: IBM Corporation PAGEREF _Toc101933859 h 12

6、 Global sourcing activities PAGEREF _Toc101933860 h 12 Managing change and adjustment PAGEREF _Toc101933861 h 13V. THE EUROPEAN EXPERIENCE PAGEREF _Toc101933862 h 14 International sourcing practises within the European Union PAGEREF _Toc101933863 h 14 Scale of the adjustment PAGEREF _Toc101933864 h

7、15VI. THE INDIAN EXPERIENCE PAGEREF _Toc101933865 h 16 Institutions and domestic policies PAGEREF _Toc101933866 h 16 Growth and trade liberalisation PAGEREF _Toc101933867 h 17 Case study: Infosys Technologies Ltd PAGEREF _Toc101933868 h 19 Foreign expansion and future challenges PAGEREF _Toc10193386

8、9 h 20VII. CONCLUSIONS AND KEY POINTS EMERGING PAGEREF _Toc101933870 h 21Annex 1: Indicative listing of internationally sourced services PAGEREF _Toc101933871 h 24REFERENCES.25I. introductionThe purpose of this paper is to identify the business drivers behind cross-border supply of IT and business p

9、rocess services and the adjustment challenges that may arise as a result of the increasing fragmentation of services production. It starts with a brief description of the business practice and its recent development. The next section summarises some of the key challenges that may face high-income an

10、d low-income countries. These challenges are then analysed in case studies that are based on experiences from the United States, the European Union and India. The final section concludes.II. BackgroundInternational sourcing of IT and business process services was until recently lauded as a prime exa

11、mple of the mutual benefits of international trade, enabling OECD countries to access scarce talent and boost productivity, and low-income countries to develop high-technology industries and gain high-income services jobs (see Box 1 for definitions).In the late 1990s, a rush to update existing compu

12、ter systems and a shortage of IT professionals led companies to search for new sources of IT competence. Large companies often hired services providers or established subsidiaries in South and East Asia to capitalise on the skilled and inexpensive local labour. However, shortly after the turn of the

13、 millennium, the IT services (ITS) sector went through a prolonged downturn following drastic cuts in corporate IT investments and an abrupt fall in the availability of risk capital. Many IT professionals in OECD countries lost their jobs. As pressures to cut costs mounted, many companies decided to

14、 increase their international sourcing (via subsidiaries and external suppliers) of both labour-intensive business process services and more extensive IT services from low-income countries. The resulting combination of sticky unemployment among certain categories of IT professionals and expanding tr

15、ade in business services has attracted much media attention, with frequent calls for protection against foreign competition (Table 1 provides a number of guesstimates of the impact of international sourcing). International sourcing of ITS and business process services (BPS) from high-income to low-i

16、ncome countries has become an increasingly common practice among large companies. While services are also sourced from OECD countries, notably Ireland and Canada, non-OECD countries are the focus of this paper as they are experiencing high growth rates and have been the focus of most controversy. Th

17、e main enabler has been rapid technological progress, which has lowered the cost and increased the efficiency of communication and transfers of information. Companies have capitalised on the availability of information, communication and technology (ICT) infrastructure to fragment their value chain

18、and carry out different parts of their operations via geographically dispersed subsidiaries and foreign third-party services providers. Standardisation and service market liberalisation, including increasing openness to foreign direct investment by non-OECD countries (improving ICT infrastructure an

19、d permitting establishment by foreign subsidiaries) are other important enabling factors.Box 1. Elements of International SourcingThe term “international sourcing” of IT and business process services encompasses two types of activities: companies sourcing these services from their foreign subsidiari

20、es, and companies engaging specialised service companies established as domestically-owned enterprises overseas to provide them. From a corporate perspective, provision of services by foreign subsidiaries is considered to be “international insourcing” as the service provision remains within the comp

21、any, with “international outsourcing” referring only to the procurement of services from an external company in a foreign country. Outsourcing can also occur within the domestic market (e.g. a company outsources its recruitment processing to a local firm). This may be indirectly related to trade, wh

22、ere work is outsourced to a local subsidiary of a foreign company (e.g. to the British branch of an Indian company). However, the focus of this paper is international sourcing, i.e. cross-border trade in services. For example, Gartner Dataquest Guide (2003) defines business process outsourcing as “t

23、he delegation of one or more IT-intensive business processes to an external provider that, in turn, owns, administrates and manages the selected process(es) based on defined and measurable performance metrics.” For companies, the key distinction is thus between activities undertaken within or outsid

24、e the company; different locations within the company are simply part of the global value chain. From a government perspective, both types of international sourcing (foreign subsidiaries or foreign external providers) involve the movement of jobs across borders. It is this movement of jobs as IT and

25、 business process services are increasingly traded across borders rather than domestically produced, which gives rise to adjustment challenges. This study thus refers to “international sourcing” to capture the full dimension of the issue. However, it should be noted that a number of commentators use

26、 the term “outsourcing” to refer to both types of sourcing, a usage which many companies reject, or focus only on activities contracted to entities outside of the companies concerned. There is no internationally agreed definition of the range of services covered by international sourcing. The Gartne

27、r Dataquest Guide (2003) divides these services into IT and business process services. IT services include data centre, desktop, network, and enterprise applications. Business process services include enterprise services (e.g. HR, finance and accounting and payment services), supply management (e.g.

28、 buying services, storing services and moving services), demand management services (e.g. customer selection and customer retention) and operations (e.g. financial services operations and healthcare operations). Annex 1 provides an indicative list of internationally sourced services.The WTOs Service

29、s Sectoral Classification List (W/120, cross-referenced to the UN Provisional Central Product Classification) defines business services as including professional services, computer and related services, research and development services, real estate services, rental/leasing services without operator

30、s, and other business services. However, it is not clear that this list includes the full range of services currently sourced internationally, in particular where technology has led to the development of new services. Some new services may also fall under other categories in the list, e.g. it has be

31、en argued that “web-hosting” has elements of both computer and related and telecommunications services. These issues have implications for the extent to which GATS commitments can cover the range of services currently sourced internationally and those which may be so in the future.On the demand side

32、, increasing competition in international and maturing markets has led companies to focus more on cost-cutting than revenue-enhancing strategies. International sourcing offers significant labour-cost arbitrage and enables companies to offer their clients new, cheaper, more flexible, and often higher

33、 quality services. Limited opportunities for skilled labour in many low-income countries mean that business process service jobs can attract more highly qualified and motivated applicants than they do in OECD countries. For example, the call centre industry in OECD countries often struggles with hig

34、h attrition and sick leave rates, but attracts skilled graduates in low-income countries. International sourcing may offer reduced time-to-market, facilitates access to foreign markets and creates business opportunities to develop new products for niche markets. International outsourcing of ITS and

35、BPS allows companies to focus on what they do best, freeing up capital to be re-invested in R&D and more productive activities. Innovations in business practices and low productivity growth have worked as drivers in other instances. Several factors have contributed to the increase in international s

36、ourcing: the maturation of offshore outsourcing platforms, e-based connectivity enabling cross-border trade in services previously only tradable via mode 4, new imperatives of cost control, innovations in business practices and the pool of skilled labour created by investments of several developing

37、countries in education (Morgan Stanley, 2003; Mattoo and Wunsch, 2004). Motivations for choice of sourcing locations can vary, with access to technical expertise the key factor in software development, creativity the main concern in marketing, reputation most important in accounting and financial se

38、rvices, and cost the main factor in routine data processing and data entry services (Huws and ORegan, 2001).On the supply side, many low-income countries that have invested in education are now able to offer an abundance of young, motivated and well-educated professionals. International sourcing ena

39、bles companies to provide around-the-clock services thanks to differences in time-zones between consumers and producers. Language is an important factor, e.g. French companies source ITS and BPS from Morocco and Tunisia, while American and British companies often rely on services provided from India

40、 and the Philippines. Several non-OECD countries ITS and BPS sectors are achieving very high growth rates as delivery models improve and service providers become increasingly sophisticated, e.g. revenues from IT services grew by 18 percent in India in 2002-03, while IT-enabled services grew by 67 pe

41、rcent (Macroscan). Development of the IT sector has been facilitated by other linkages, e.g. Indians working in the IT sector in the United States, either temporarily or as permanent immigrants, have brought back best practices and reinvested in India or facilitated investment by US companies in the

42、 Indian IT industry. International sourcing can be a substitute for mode 4, as jobs move to workers rather than vice versa. Given quotas and wage parity requirements for mode 4 workers, developing-country labour-cost advantages show up more in international sourcing (where the service crosses the bo

43、rder via mode 1/2, including from a foreign subsidiary mode 3) when workers are paid the prevailing local wage than in mode 4. (There is no agreement among WTO members about whether electronic supply falls under GATS mode 1 or 2, hence the terminology modes 1/2 is used). In reality, modes 1/2, mode

44、3 and mode 4 are complementary: first, mode 4 facilitates international sourcing (the presence of Indian IT professionals helped to make US companies aware of the pool of talent in India); and second, international sourcing requires the ongoing movement of personnel for negotiation, familiarisation,

45、 training and oversight. International sourcing typically involves around 30-40% of total work being carried out at clients offices. While there are cost benefits for both client and supplier in a larger ratio of offshore work, as a rule, it increases demands on management.III. The adjustment challe

46、ngeInternational sourcing of services is changing the nature of the global value chain. While trade in ITS and BPS is predominately conducted between high-income countries, companies in OECD countries are increasingly outsourcing IT and business process services to companies in, or are establishing

47、their own subsidiaries in, non-OECD countries. Both importing and exporting countries face a multitude of challenges in adjusting to these underlying changes. Challenges in high-income countriesHigh-income countries importing services from low-income countries may experience significant changes in c

48、ertain labour market groups. Governments may face protectionist sentiment owing to job uncertainties and companies may face internal strains in dealing with workers who risk losing their jobs. There will be growing demand for education and retraining programmes; efficient recruitment services to smo

49、oth job transitions; new insurance schemes to reduce adverse effects from labour market shocks; and facilitated re-location of workers. While challenging, this situation is arguably not very different from previous trends in the manufacturing sector and the overall effect on labour markets related t

50、o services is likely to remain modest. Mann (2003) notes that the number of workers in most job categories in the US Bureau of Labor Statistics (BLS) occupation code grew between 1999 and 2002. Most job losses were in management and manufacturing occupations. The BLS (2004a) predicts that three out

51、of the ten fastest-growing occupation groups between 2002 and 2012 will be IT-related: network systems and data communications analysts, systems software engineers and applications software engineers. Over the same period, job growth in computer and mathematical occupations is forecast to be more th

52、an twice the rate of job growth in the overall economy (34.8 percent compared to 14.8 percent). Software publishers will have the fastest wage and employment growth over the same period; computer systems design and related services the second fastest; and Internet services, data processing, and othe

53、r information services the ninth fastest. That said, the situation is less clear for a broader range of administrative workers, who may be more likely to bear the brunt of international sourcing.ReferencesAgrawal, V., D. Farrell and J.K. Remes (2003), “Offshoring and Beyond”, The McKinsey Quarterly,

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57、ne issue, /20040501faessay83301/daniel-w-drezner/the-outsourcing-bogeyman.htmlDTI (2004), “Services and Offshoring: The Impact of Increasing International Competition in Services”, .uk/ewt/offshoring.pdf.Forrester Research (2002), “3.3 Million US Services Jobs To Go Offshore”.European Foundation for

58、 the Improvement of Living and Working Conditions (2004) “Outsourcing of ICT and Related Services in the EU”.Farrell, D. (2004), “How Germany Can Win From Offshoring”, The McKinsey Quarterly, Number 4.Financial Times (2004), “When Push Comes to Shove”, Special Report: Including News from the FT/Nass

59、com Conference, 1 December, 2004.Forrester Research (2004), “Two-Speed Europe: Why 1 Million Jobs Will Move Offshore”.Gartner Dataquest Guide (2003), Worldwide IT Services Market Definitions Guide, 2Q03, /resources/116300/116318/116318.pdfGlobal Insight (2004), “The Impact of Offshore IT Software an

60、d Services Outsourcing on the US Economy and the IT Industry”, Sponsored by Information Technology Association of America.HSBC (Hong Kong Shanghai Banking Corporation) (2003), World Economic Watch, November.Huws, H. and S. ORegan (2001), eWork in Europe: The EMERGENCE 18-Country Employer Survey, Rep