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 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  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. Background

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  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 Adjustment pressure while real is likely to remain modest in OECD-country labour markets

11  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. Adjustment pressure while real is likely to remain modest in OECD-country labour markets

12 Thank you for your attention For further information, please visit or contact Michael Engman at