Why Outsourcing to India?-Special from the Pro Hawaii Newsletter and Flight Capital

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”’The following is an excerpt from the book Flight Capital by David Heenan”’

Shifting U.S. jobs overseas remains an emotional hot button. In 2004, Democratic presidential candidate John Kerry chastised “Benedict Arnold CEOs,” who favored foreign over American employees.


Then-secretary of state Colin Powell, dispatched by President Bush to New Delhi, countered by saying that outsourcing was “a reality of the twenty-first century” but that India should do more to offset the loss of U.S. jobs by opening its market to American goods.

But don’t dismiss the gains in productivity and competitiveness to U.S. business and the jobs that are created as a result of outsourcing. The rule of thumb is that each Indian employee represents an annual savings to American employers of $20,000 to $30,000.

The cost of transmitting work offshore is expected to plummet by as much as 60 percent in 2005 thanks to new undersea cables. While such savings are a big draw, quality of work is a close second — and gaining in importance. The skills of India’s computer scientists, for example, are unsurpassed. The Capability Maturity Model, or CMM, developed by the Software Engineering Institute at Carnegie Mellon University, has been used to evaluate the software development processes of hundreds of companies.

Software teams receive a rating of 1 to 5, with 5 being the highest. A decade ago, only Motorola’s unit in Bangalore achieved a 5 rating. Today, 387 Indian companies are so accredited. Therefore, multinational enterprises are getting more complex work done on the subcontinent — not just in IT but in fields ranging from financial services to biotechnology.

Clearly, corporate America can no longer be lulled into thinking it is immune to Indian competition. “The globalization of white-collar services has become mainstream,” says Nandan Nilekani, CEO of Infosys, India’s IBM. The country’s unforeseen leap into the top ranks of global technology refuted conventional development theory, which predicted that India and other poor countries would follow the same long, slow path Western industrial nations had followed — from agriculture to manufacturing to high technology. India’s development shortcut made it the first Third World nation to use its brain- power, not natural resources or low-wage labor, to propel its entry into the economic big leagues. “Every company aspiring to be global has to have an Indian strategy,” says Nilekani.

This does not mean the United States will repeat the fall of the Roman Empire. “Offshoring is not a zero-sum game,” says Diana Farrell, director of the think tank McKinsey Global Institute. “It creates value for individual American companies and frees U.S. resources for activities with more value added.” Infosys’s Nilekani agrees: By working together, both India and the United States win.

“You have this whole ecosystem [that constitutes] a crucible for innovation,” he told the ”’New York Times”’. “The whole process where people get an idea and put together a team, raise capital, create a product, and mainstream it — that can only be done in the U.S. It can’t be done sitting in India.

The Indian part of the equation [is to help] these innovative [U.S.] companies bring their products to market quicker, cheaper, and better, which increases the innovative cycle there. It is a complementarity we need to enhance.”

While Americans fret over Third World competition, half a world away in Bangalore engineers are hard at work writing software for the latest telephones, designing next-generation microprocessors, and developing wireless broadband technology that they hope will transform homes around the world. By some estimates, there are more IT engineers in Bangalore (150,000), India’s self-proclaimed Silicon Valley, than in its California counterpart (130,000). In this southern city once known as “pensioners’ paradise” for its mild weather and slow pace, you’ll find the landscape blazoned with famous corporate logos: GE, Intel, Cisco, IBM, Philips, AOL. More than half the U.S. Fortune 500, as well as leading European, Japanese, Chinese, even Pakistani companies, have a significant presence here — all using Indian brainpower.

”’David Heenan is a leading expert on globalization and author of Flight Capital: The Alarming Exodus of America’s Best and Brightest (Davies-Black, $24.95). His career in business and academia has taken him from Citigroup and Jardine Matheson to the B-schools at Wharton and Columbia. Today he serves as a trustee for the Estate of James Campbell, one of the nation’s largest landowners with assets of more than $2 billion. Contact him at https://www.flight-capital.com”’

”’The Pro Hawaii Newsletter is distributed monthly to over 1,000 Hawaii businesses and their staffs as well as globally to empowered consumers and professionals. See more at https://www.ProHawaii.com”’