MB0053-SLM-Unit-15

International Business Management Unit 15

Sikkim Manipal University Page No. 316

Unit 15 Global Sourcing and Indian Industries

Structure

Structure:

15.1 Introduction

15.2 What is Global Sourcing?

15.3 Reasons for Global Sourcing

Lower salary and wages

Regulatory costs in business

Tax breaks and benefits

Improved performance

Faster turnaround time

Uncertainty over political/business climate

Proximity to key markets

15.4 Advantages of Global Sourcing

Benefits of Core Competency

Effective and efficient business operations

Reduced overhead expenses

Better control on operations

Manpower staffing flexibility

Sustainable business operations and reduced risks

15.5 Disadvantages of Global Sourcing

Loss of managerial control

Hidden costs in business operations: when company outsources

business process

Threat to security and confidentiality

Quality assurance in business process

Financial dependence on another company

Ill-will and bad publicity

15.6 Global Sourcing Challenges to Indian Industries

Recruiting competent and skilled workforce

Training and development for manpower

Controlling attrition and managing retention

Ensuring satisfactory customer satisfaction/service levels Infrastructural and logistical challenges

15.7 Summary

15.8 Glossary



15.9 Terminal Questions

15.10 Answers

15.11 Case-let

15.1 Introduction

In this unit, you will study about global sourcing and its impact on Indian

industries. Global sourcing is a procurement strategy that is aimed at

exploiting global efficiencies in production.

This unit discusses the evolution of globalisation in India and its impact on

Indian business. It also discusses the prevailing competitive environment in

India with respect to international business, challenges and threats faced by

Indian business. Some proven strategy models have also been discussed

for better understanding of international business operations in India.

Objectives:

After studying this unit, you should be able to:

understand the importance of global sourcing.

understand why India is an attractive destination for global sourcing

understand the advantages & disadvantages of global sourcing

interpret the competitive environment in India.

explain the global sourcing challenges to Indian industry.

15.2 What is Global Sourcing?

Globalisation of the world economy under the WTO has opened abundant

opportunities of cost cutting, gaining competitive advantage and saving time

for industries worldwide. Indian industries have experienced such

developments as India is a member of the WTO since its inception in 1995.

‘Global sourcing’ is described as ‘the practice of sourcing cost effective and

best goods and services across geopolitical boundaries in order to cater to

global markets’. Global sourcing strategy is aimed at exploiting ‘global

efficiencie’ in all areas of manufacturing, trading and services to enable

offering clients and customer the best possible product or service. Usually,

efficiencies that prompt firms for global sourcing are low cost skilled labor,

low cost raw material, proximity to key markets, time zone differences and

other economic factors such as tax exemption and low trade tariffs.



Indian industries have successfully levered global sourcing strategies in

their global trade operations and sourcing has been the driving force behind

the development and expansion of Indian foreign trade in the recent past.

Global sourcing strategy has made Indian industry more globalised as

buyers from all over the world are bidding for Indian goods, particularly

services, to enable executing their contracts on time, reduce prices and

generate efficiency in the system through increased competition. Indian

industries, in order to reap the benefits of sourcing opportunities, has

opened global offices and subsidiaries to tap opportunities on all fronts,

i.e., manufacturing, trading, skilled services and call centers.

As we know, manufacturing costs vary from country to country due to

factors such as currency conversion and cost of living. Due to different

factor endowments of countries, the costs of labor and materials may differ,

for example, labour cost is far lower in developing countries like India than in

North America and Europe. For companies that have labour intensive work,

this difference in costing results into significant savings in terms of salaries,

wages, post retirement benefits, fringe benefits and other benefits. India is

emerging as a global hub in gems and jewellery, oil refining, engineering

equipments, textiles, sports goods, auto components, etc.

In a globalised set up, trade and commerce of skilled services such as IT

enabled services, software development and testing, purchasing,

engineering and integrated chip designing, knowledge process outsourcing

(KPO), offshoring and home shoring is growing much faster than trade in

merchandise. India, with its demographic dividends has been benefitted

from all such developments as the level of skill and knowledge held by

Indian professional allows them to provide high quality services to their

clients in developed countries. For example, India has been successful in

software development, BPO services, KPO services and in the recent past

in areas like Engineering Process Outsourcing, Analysis Process

Outsourcing, content development and website designing. The main

reasons for skills sourcing to India is represented pictorially as under:



Figure 15.1

Global sourcing has both benefits and risks for the Indian industry. Global

sourcing has helped Indian companies in the generation of additional

revenue and profits, precious foreign exchange, scalable business

operations and employment. There are spillover effects of outsourcing to

India and its economy has grown additionally by emerging as lower cost

suppliers of merchandise and services. Brand India is widely recognised in

the ‘silicon valley’ and the Indian government’s bargaining power has

increased due to the dependence of many countries for Indian services.

Living standards of the people has improved, higher wages, improved

working conditions and learning transferable skills has helped thousands of

Indians.

Risks from global sourcing such as cultural and language related issues,

withdrawal of tax benefits, accent problems, high labour attrition,

diversification of business operations across different countries, increased

business travel and local management issues are present. In addition to

this, there also comes the risks related to logistics and transportation.



Activity 1

What are the reasons that India is a global power house in IT and ITes

enabled services outsourcing?

Hint: http://www.outsource2india.com/india/why-outsourcing-india-good-

for-business.asp

15.3 Reasons for Global Sourcing

Global sourcing is one of the most controversial subjects as the benefits of

outsourcing is not properly understood by both companies and politicians. In

the current phase of global economic recession, politicians condemn

outsourcing as it sends both money and work out of the country thus

affecting employment and people’s income level. Even then, the global

sourcing industry is on a growth run as there are sound business reasons in

global sourcing. These reasons are explained as under:

15.3.1 Lower salary and wages

The foremost reasons for global sourcing has been the ‘financial incentive’ of

outsourced operations to low cost labour destinations such as India,

Philippines, Poland and Romania. Due to the different stages of economic

development, labour cost of workers in any developed countries is far higher

than their counterparts. The following table illustrate labour cost differentials

among countries.

Indexes of Hourly Compensation Costs in $ For Select Countries 2010

0

20

40

60

80

100

India Mexico Japan

Labour Cost in $ per Hour

Figure 15.2: Source: Bureau of Labour Statistics; US Department of Labour



15.3.2 Regulatory costs in business

An underappreciated incentive in global sourcing to developing countries

including India has seen significant difference in the regulatory cost of

business. Attorneys in India charge a fraction of the cost compared to those

in the US, hence, law firms in the US get their law related work done in

India. Moreove, cost of employment in US is far higher as companies have

to offer legally complying pay packages which includes social security,

medical care, post retirement benefits, entertainment allowances, employee

group insurance, unemployment insurance, etc. Such components may not

exist in countries like India. Layoff expenditure in US are far higher than in

India, thus, companies outsource their business operations to countries like

India, China, Vietnam, Thailand, South Africa, Nigeria and Brazil.

15.3.3 Tax breaks and benefits

Developing countries like India offer tax breaks for new entrants thus

offering cost savings for these companies. For example, Hyundai was

offered a tax break (VAT) of 5 years by the Tamilnadu government for

setting up a plant. Nokia shifted its plant from Germany to Romania as it had

low labour cost coupled with tax breaks offered by government.

15.3.4 Improved performance

Developed countries usually outsource their business operations to

developing countries like India which is at the bottom of their core

operations, monotonous and require huge labor. Such work can be done by

dedicated outsourced labour force in developing country at a fraction of the

cost of developed countries. It is found that such bottom of the pyramid,

monotonous and repetitive work has far better performance in developing

countries due to specialisation and dedicated expertise for the work.

15.3.5 Faster turnaround time

Companies as well as government are outsourcing their non core operations

to low cost countries as it helps not only to focus on core activities but to

also get the required job done much faster with reduced time and accuracy.

In business, ‘time is money’ as the saying goes, thus, firms outsource some

of their business operations for faster and quicker turnaround time.



Reasons for global sourcing

Figure 15.3

15.3.6 Uncertainty over political/business climate

Another advantage of global sourcing is that companies want to evade their

political and business risks by locating their business operations at various

parts of the world. If political or economic problems occur in any region, the

company will be able to continue its operations without disruption by fulfilling

their needs from other global sourcing location. For example, auto

companies worldwide have invested in India as well as in Thailand for

supply of auto components as both are low cost countries having

specialisation in the auto component industry. If there is a problem in India

supplies can be taken from Thailand or vice versa.

15.3.7 Proximity to key markets

In an era of globalization, firms have outsourced their business operations

close to their key markets. For example, it is cheaper to manufacture goods

in Thailand or China and then ship them to Japan than to ship them from US

or Europe. Multination organisations have resorted to global sourcing to



countries like India to fulfil their markets demand not only for South Asia but

also for East Asia, Middle-East and Eastern Africa.

Self Assessment Questions 1

1. Firms outsource as it enables them for faster turnaround time in their

business operations. (True/ False)

2. Manufacturing costs vary from country to country. (True/ False)

3. Low wages and salary are the prime motivators for US companies to

outsource to India. (True/ False)

4. Which of the following is not a reason for India’s outsourcing

attractiveness?

a) Cost Restructuring.

b) Better Capacity Management.

c) Focus on Core Business.

d) Polite People.

15.4 Advantages of Global Sourcing

As business operations diversified in the global production chain due to

globalization, companies have to evaluate their choices, decisions and

strategy for outsourcing different components at a cost effective level from

all around the world. Outsourcing offers several advantages as different

countries are endowed with different natural, physical and demographic

resources. Multinationals spread their production to low cost, developing

countries. Business operations are shifted to many country depending on

the comparative and competitive advantage. Global sourcing has actually

helped multinational enterprises to grow and save money. There are other

advantages of global sourcing that go beyond financial benefits. Detailed

below are some advantages that prompt companies to sources globally for

cost, reliability and efficiency reasons.

15.4.1 Benefits of core competency

A large company offering products and services in many segments and

industries need to constantly focus on delivering innovative products. Larger

business organisation sometimes develop stagnancy due to their back office

operations which may affect its core function or activities. Therefore, such

companies usually outsource their non core activities to other companies.



For example, for a pharma company it is important that its manpower

focuses on research and innovation of new drugs, but if it expands its

organisation to resolve problems such as order processing, managing

inventory, warehousing, documentation, booking new orders and handling

customer problems it will make the organisation redundant since most of its

top management energy will go into non core issues. Outsourcing these non

core activities can make firms lean, fast, cost effective and competitive in

the market.

Figure 15.4

15.4.2 Effective and efficient business operations

Back office operations for any firm in today’s’ competitive environment are

not only complicated in nature but also expensive in terms of both financial

resources and time. Organisations can focus on core strength when such

non allied activities are outsourced at consistent and reasonable cost.

Outsourcing such operations can help firms tide over such problems areas.

15.4.3 Reduced overhead expenses

Firms have to outsource some of their functions to cost effective

destinations as overhead costs of performing a particular back office

function may be extremely high in its own country due to different factor

endowments. For example, medical transcription which is considered as a

non core activity is outsourced to India by US firms. India is considered as

most cost effective, cost competitive and is a strong market leader in

medical transcription outsourcing because of its large resource of young,



college educated and productive workforce. Indians are also good in the

use of the English language. Globally, firms are looking at India’s best-in-

class medical transcription training methodologies for outsourcing their work

in medical transcription outsourcing.

15.4.4 Better control on operations

Any business operations for which costs are running out of control is better

outsourced. Sometimes, there are certain departments that may have

evolved over time into uncontrolled and poorly managed areas. This

becomes a prime motivator for outsourcing. Outsourcing such departments

to another country/region helps the firm learn/imbibe better management

skills, innovation and practices.

15.4.5 Manpower staffing flexibility

Outsourcing seasonal/cyclical business operations also help firms save

costs. There are seasonal or cyclical demands of goods and services

requiring additional manpower resources from firms. Firms can outsource

such operations to another region/country where labour expenses may be

just a fraction of what it is in the domestic market. For example, taxation of

many US states has been successfully outsourced to Indian firms.

15.4.6 Sustainable business operations and reduced risks

Due to uncertain business scenarios and the changing demographic profile

of countries, there have been trends and periods of high employee turnover

which add uncertainty and inconsistency to a firm’s business operations.

More so, it has been observed that sometimes a region of the world may go

into turmoil, civil disorder, God or manmade catastropheies, etc. If a firm’s

business operations are outsourced to different parts of the world, it can

survive from such risks and can ensure sustainable business operations.

For example, due to the Jasmine revolution many multinationals survived

even after the shutdown of their businesses in the Gulf/Arab region. Firms

who had outsourced their activities to multiple regions were able to fulfil their

client/customer needs from another part of the world.



Activity 2

What makes India so attractive for global outsourcing companies to

outsource auto components from India?

Hint: Read the case “Indian Auto Component Industry: New Destination

for Outsourcing” at http://www.frost.com/prod/servlet/market-insight-

top.pag?docid=8011194

15.5 Disadvantages of Global Outsourcing

Global sourcing also has certain disadvantages such a loss of managerial

control, hidden costs, threat to security and confidentially, quality problems,

financial dependence on another company and bad publicity campaign to

sourced city/countries/region. For example, retrenched employees of a US

firm usually talk about being “banglored”; meaning laid off from the job. One

has to make a trade-off of between advantages and disadvantages before

arriving at ‘outsource’ of ‘not to outsource’ decision.

15.5.1 Loss of managerial control

One of main disadvantages of global outsourcing is that the company loses

managerial control on the certain functions to the outsourced company. As

the outsorcing company has only a contract and entire functional

responsibilities are handed over to another company; it becomes dependent

on the outsourced company for its operations. The main motive of the

outsourced company is profits. Thus the same performance standards;

mission and drives cannot be expected from an outsourced company.

15.5.2 Hidden costs in business operations: when company

outsources business process

The outsourced company has to sign a contract with the outsourcing

company which covers the details of the services that will be provided by the

outsourced company. Usually, the contract that best suits the requirements

is framed by the outsourcing company with the help of their legal team to.

Additional charges will have to be paid for anything which is not covered in

the contract . Additionally, each time the company signs the contract, it will

have to incur legal charges and fees to a lawyer to review the contacts that

company gets into.

http://www.frost.com/prod/servlet/market-insight-top.pag?docid=8011194

http://www.frost.com/prod/servlet/market-insight-top.pag?docid=8011194



15.5.3 Threat to security and confidentiality

In an era of globalisation; information is well considered as the fourth factor

of production, in addition to land, labour and capital. Information keeps a

business running. If business operations such as payroll processing,

medical records, credit cards records, accounting and financial information

are provided to the outsourcing company, the security and confidentiality of

the company may be at risk. While outsourcing any business process, it is

important that the outsourcing company should ensure protection of data

from falling into miscreant hands and the contract should have a penalty

clause if such an incident occurs.

15.5.4 Quality assurance in business process

Outsourcing companies usually neglect the quality assurance and control in

business operations as they are motivated to increase their profits by

reducing operating expenses. Sourcing contracts usually fix the price for any

service rendered. If any additional services are needed in line with this

service, the outsourced company will neglect it or demand extra changes for

that. Additionally, a company will lose the ability to respond to emerging

quality control changes in business operations

Figure 15.5

15.5.5 Financial dependence on another company

When outsourced to other company; such company becomes dependent on

the financial well-being of that company. If the outsourcing company

becomes insolvent or defaults on financial as well as in business operations,



the very existence; brand image and reputation of the outsourcing company

comes under risk.

15.5.6 Ill-will and bad publicity

When business operations are outsourced from one country to another,

various factors are taken into consideration. The Chinese are usually

distasted upon in Europe for offering low cost, inferior products. Similarly in

the US, retrenched employees talk of being ‘Banglored, as the company in

the US would have outsourced its business operations to a Bangalore

based company in India. Job losses lead to ill feelings. As China and India

are the powerhouses in outsourcing (China in goods and India in services),

both the countries have certain amount of bad publicity in developed

countries especially among the people that have been laid off.

15.6 Global Sourcing Challenges to Indian Industries

Once it becomes clear for any company that it is strategically in its interest

to outsource, strategic planning and review of the advantages and

disadvantages of each scenario under which it will outsource its business

operations to other country/region should be done. There can be many

potential opportunities and challenges which can be converted into

opportunities while outsourcing business operations to another country. The

challenges while outsourcing to India are detailed as under the following:

15.6.1 Recruiting competent and skilled workforce

India has the largest cost effective, professional talent pool of English

speaking people in the world. The main reason for outsourcing of US/UK/

Australia/Canada companies to India has been the English speaking

strengths of Indian people. While outsourcing their business operations to

India, companies look into it that the service provider has considerable

outreach activities to reach a potential talent pool. A more systematic

selection process is required than that of the home country especially in

case of voice-based process. It is estimated that a BPO company in India

has to screen at least 20 candidates to be able to recruit one employee (the

ratio is 20:1). The major challenge for Indian BPO/KPO companies is that

this number is increasing. Recruitment market for providing services to

clients is India is getting extremely competitive and companies in India are

compelled to open offices in second tier cities to expand their business

operations by recruiting cost effective talent pool.



15.6.2 Training and development for manpower

For creating a successful platform in services sector sourcing in global

markets, India has to have trained workforce that is competent to respond to

onetime floor challenges. This is especially true in case of IT/ITes sector

where India has many opportunites in terms of ramp-up of people and

processes. In addition to improving the soft skills, accent adaptation and

cross cultural sensitivity, workforce also needs to be trained in maintaining a

balance in social and profesional life. Health of employees is important.

Yoga, physical exercise can be made part of routine life of such workforce in

order to reap the desired benefits of India’s potential in global markets.

15.6.3 Controlling attrition and managing retention

In India’s IT and ITes companies; attrition levels are in the range of 15%-

60% per year. The average attrition level for a voice-based call center in

India is around 40%. There is huge challenge in workforce management in

India. Most young employees leave the BPOs industry due to the

monotonous work, and the physical toil of night-shift jobs. Companies in

India need to realise this aspect and set realistic expectations for the

employees. There should be support services by HR department for

recreation and entertainment of the employees.

15.6.4 Ensuring satisfactory customer satisfaction/service levels

Companies from developed countries that outsource their established

processes to Indian services provider expect that the quality and

performance standards should be of highest level. Customers must be

satisfied from such offshoring of business operations with at least the same

level of or even higher level of performance standards.

15.6.5 Infrastructural and logistical challenges

India has infrastructural bottlenecks in all areas, i.e., roads, rail, air and

maritime transport. Even virtual infrastructure like internet access,

telecommunication, etc., which are vital for growth of services outsourcing is

poor in India. Power and connectivity are the most important components

for sustainable growth of services sector outsourcing from India. Data/voice

connectivity, lower bandwidth, transportation, food, services, etc., are some

of the other challenges confronting the growth of outsourcing from India.



If these challenges are overcome, India can reap the desired benefits from

growth and expansion of sourcing of services and can even emerge as

market leader in the world.


5. IT/ITes outsourcing has brought some ill will/bad publicity towards

Indians. (True/False)

6. Outsourcing helps the firm with increased managerial control over all

functions. (True/False)

7. Global sourcing does not pose any security/confidentiality threat to the

country. (True/False)

8. Which one of the following is not a concern for India for increasing its

stregth as outsourcing destination?

a) Lack of skilled workforce.

b) Tax breaks.

c) Logistical challenge.

d) Managing retention.

15.7 Summary

Let us now summarise the salient points you have learnt in this unit on

global sourcing and its impact in India:

Globalisation of world economy under WTO has opened abundant

opportunities of cost cutting, gaining competitive advantage and saving

time for industries worldwide.

Manufacturing costs vary from country to country due to factors such as

currency conversion and the cost of living in different countries.

Principal reasons for global sourcing has been the ‘financial incentive’ to

outsource operations to low cost labour destinations such as India,

Philippines, Poland and Romania.

Outsourcing offers several advantages as different countries are

endowed with different natural, physical and demographic resources.

Firms have to outsource certain functions to cost effective destinations

because of high overhead costs of executing a back-office function in its

own country due to different factor endowments.



India has the largest cost effective, available, professional talent pool of

English speaking people in the world.

Virtual infrastructure like internet access, telecommunication. etc., which

are vital for growth of services outsourcing is poor in India.

Outsourcing companies usually neglect the quality assurance and

control in business operations as they are motivated to increase their

profits by reducing operating expenses.

15.8 Glossary

Sourcing: It refers to a number of procurement practices, aimed at finding,

evaluating and engaging suppliers of goods and services for better work

delivery and cost effective services.

Banglored: Losing a job to an Indian outsourcing firm based in Banglore

city is called “banglored” in US.

BPO: Business Process Outsourcing

KPO: Knowledge Process Outsourcing

Jasmine Revolution: This is the December-January mass uprising incident

that overthrew the president Zine El Abidine Ben Ali. An intensive campaign

of civil resistance along with a series of street demonstrations took place in

Tunisia.

Sub-contracting: The practice of assigning work under a contract to

another party.

15.9 Terminal Questions

1. What is global sourcing? What makes India so attractive for global

sourcing?

2. Elaborate the reasons due to which firm outsource to India.

3. What are the advantages of global sourcing?

4. What are disadvantages of global sourcing?

5. What has been the impact of global sourcing on Indian business?



15.10 Answers


1. True.

2. True.

3. True.

4. Polite people.


5. True.

6. False.

7. False.

8. Tax breaks.

Terminal Questions

1. Global sourcing is described as ‘ the practice of sourcing cost effective

and best goods and services’ across geopolitical boundaries in order to

cater to global markets”. Refer to section 15.2

2. Global sourcing industry is on growth run as there are sound business

reasons in global sourcing. Refer to section 15.3

3. Global sourcing has helped the multinational enterprises to grow and

save money. There are other advantages of global sourcing that go

beyond financial benefits. Refer to section 15.4

4. Global sourcing also has certain disadvantages such loss of managerial

control, hidden costs, threat to security and confidentially, quality

problems, financial dependence on another company and bad publicity.

Refer to section 15.5

5. Indian business is facing competition and has to improve in efficiency

and quality due to market forces. This will ultimately help india in utilising

opportunities and facing challenges. Refer to section 15.6.

15.11 Case-let

Challenges faced by McDonalds in India

McDonalds is an MNC and is one of the largest fast food chains in the

world. McDonalds began its operations in India in 1996. Initially, the

McDonalds food outlets reported accumulated losses. To overcome this

failure, McDonalds developed a business strategy in India which adapted



to the local culture in India, its localisation and pricing strategy.

McDonalds famous dish is the beef-based hamburger. In India, most of

the people do not eat beef and pork and some prefer vegetarian.

McDonald’s customised its menu with more than 50 percent vegetarian

products. It introduced an Indian version of burgers which are made from

mutton and chicken. McDonalds also introduced its price strategy in

India. It announced reduction in prices by 25 percent for its lunch and

dinner menus. Today, McDonalds is a successful food chain and has

more than 170 restaurants in India.

Discussion question

1. What challenges did McDonalds face in India?

Source: http://www.scribd.com/doc/6464143/McDonalds-4Ps-Of-

marketing

References:

Jayanta Bagchi. (2005). Liberalisation of Services – Global and Indian

Perspective. I.K.International Pvt Ltd.

Boutilier, Robert. (1993). Targeting Families: Marketing To and Through

the New Family. American Demographics Books.

Miller, Berna. (1995). A Beginner's Guide to Demographics. Marketing

Tools.

Nirmalya Kumar, Pradipta K. Mohapatra & Suj Chandrasekhar. (2009).

India's Global Powerhouses. Tata McGraw-Hill Publishing Company

Limited.

Abrol P. N., Bhalla V. K. (2005), International business environment and

management, Anmol Publications PVT LTD.

Bennet Roger (2006). International Business, Pearson Education Ltd

Aswathappa. K. (2008). International Business. Tata McGraw Hill

Education: New Delhi.

E-References:

http://books.google.co.in/books?id=bgLXTW2oq2cC&pg=PA144&dq=

labour+practices+in+indiaglobal+sourcing, retrieved on 10th April, 2012



http://books.google.co.in/books?id=39lJz_L4MdUC&pg=PA133&dq=

Challenges+for+Indian+BusinessesBrand+india, retrieved on 3rd

November, 2010

____________________

http://books.google.co.in/books?id=39lJz_L4MdUC&pg=PA133&dq=%0bChallenges+for+Indian+BusinessesBrand+india

http://books.google.co.in/books?id=39lJz_L4MdUC&pg=PA133&dq=%0bChallenges+for+Indian+BusinessesBrand+india

MB0053-SLM-Unit-15

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