Limits to outsourcing in health insurance

Third Party Administrators (TPAs) are the preferred means of claims settlement for health insurers across the world. In simple terms, the insurers outsource the claims settlement activity to these TPAs so as to save costs as well as time and help insurers focus on their core business.

So it comes as a big surprise that many insurers in India are cancelling TPA contracts due to customer dis-satisfaction due to health cards not reaching in time, and delays in pre-authorization, cashless issuance and processing of payment claims. A Businessline report says,

"Insurance companies also say that the claims can also be settled faster if done in-house. The claims settlement time has gone down by 50-70 per cent (depending on case to case) for ICICI Lombard since it shifted the process in-house in 2008... For Future Generali, customer complaints have gone done by 80 per cent after they moved to in-house claim settlement models in November 2010...

In-house claims settlement is faster as there is no loop in between the customer and the insurer. The industry benchmark is about 6-8 hours to approve a cashless request, whereas the approval from... in-house claims settlement team takes only 40 minutes due to... image-based process."

Is this another example of how transaction costs associated with outsourcing exceeds the efficiency benefits of specialized treatment screening and claims processing? See earlier posts here, here, and here.

Public contracting Vs in-house service delivery?

Conventional wisdom would have it that private contracting is more cost-effective than government in-house activity in that they deliver services with greater quality aand at cheaper prices. I have sought to provide a more nuanced perspective on the issue here, here, and here.

In this context, a first of its kind comprehensive comparative study of the cost of in-house government delivery versus private contracting by the Project on Government Oversight (POGO) in the US reveals several interesting findings. It analyzed the total compensation paid to both federal and private sector employees, and annual billing rates for contractor employees across 35 occupational classifications covering over 550 service activities to assess the cost-effectiveness of federal service contracting. The study writes,

"The current debate over pay differentials largely relies on the theory that the government pays private sector compensation rates when it outsources services. This report proves otherwise: in fact, it shows that the government actually pays service contractors at rates far exceeding the cost of employing federal employees to perform comparable functions.

Our findings were shocking — POGO estimates the government pays billions more annually in taxpayer dollars to hire contractors than it would to hire federal employees to perform comparable services. Specifically, POGO’s study shows that the federal government approves service contract billing rates — deemed fair and reasonable — that pay contractors 1.83 times more than the government pays federal employees in total compensation, and more than 2 times the total compensation paid in the private sector for comparable services... Federal government employees were less expensive than contractors in 33 of the 35 occupational classifications POGO reviewed... Private sector compensation was lower than contractor billing rates in all 35 occupational classifications we reviewed...

We believe awarding government service contracts is nearly always more expensive than having such work performed by federal employees, even after accounting for the total cost to the government of federal employee fringe benefits and associated overhead costs."

In simple terms, this effectively negates the widespread perception that contracting out service delivery will result in considerable savings. The argument that outsourcing or contracting will automatically result in competition and resultant efficiency improvements and tax payer dollar savings is questionable, certainly the later. As the study finds out - using contractors to perform services may actually increase rather than decrease costs to the taxpayers.

And about the reasons for this failure of governments to wring out better deals from private contractors than even the private sector,

"POGO found several failures in government procurement, employment, and data systems that limit the government’s and the public’s abilities to assess and correct excessive costs resulting from insourcing or outsourcing federal services. Failures included the lack of standards for calculating cost estimates and justifying insourcing or outsourcing decisions; the lack of data related to negotiated service contract billing rates; not publishing government information about the number of actual contractor employees holding a specific occupational position under any given contract; and that there is no universal job classification system."

Cost-effectiveness consists of two parts - efficiency improvements and cost of service delivery. Though, as the study shows, contracting fails on the later, it does bring in efficiency improvements. This does mitigate the higher cost of service delivery to some extent. But even with this, the cost of contracting remains far higher, as seen from the comparative study, for similar service delivery in private sector (where the efficiency improvements are less substantial).

This cost of contracting becomes even greater in developing countries where the cost of transacting with the government is substantial and a premium gets priced into the contract cost. This apart, the inability or limitations inherent in public contracting systems comes in the way of governments getting the best possible deal. Finally, there is the issue of inherent problems of co-ordination and resultant transaction costs associated with scale that applies to contracting certain public services. All these three problems are greater in developing countries, and therefore the premiums are higher.

None of this is an endorsement of in-house serive delivery or a case against outsourcing or public contracting. My objective is two-fold. One, it is important that we rectify the skewed public perception that private service delivery is inherently more efficient and cheaper than in-house service delviery. Second, a proper recognition of these deficiencies is important to help us design and implement outsourcing contracts that are cost-effective.

Is the pendulum swinging on outsourcing civic services?

Conventional wisdom on the delivery of civic services holds that service quality can be improved only if urban local bodies (ULBs) outsource or contract out or even privatize their services. In-house service delivery is perceived as fundamentally inefficient and inherently poor in quality. Accordingly, in recent years, there has been a clearly pronounced trend towards outsourcing civic utility services - water, sewerage, solid waste management, IT operations, customer care centers, etc - in many Indian cities.

In this context, Stephen Goldsmith, the deputy mayor of New York, and an one-time Republican Party star for privatizing government services when he was mayor of Indianapolis, has triggered off a debate on the merits of privatization of civic services with this very interesting op-ed column,

"Usually, when government officials talk about spending less money, they talk about outsourcing services to the private sector. And in many cases, that can be very effective. But union leaders often argue that it would be more cost-effective to give the work to city employees - and sometimes, they are right...

Mayor Bloomberg requested that I review all information technology, or IT, contracting. After conducting a thorough review, I have concluded that much of the solution lies not in more outsourcing to the private sector, but rather in employing city workers to perform more of our IT work. So in the weeks and months ahead, we will decisively shift more work from consultants outside government to our talented public employees. This will save taxpayers millions of dollars a year."

As part of this review, the Bloomberg administration has sought to consolidate the city's 40 separate data server rooms into a handful of centralized data centers. This project, expected to yield taxpayer savings of atleast $100 mn over the next five years, is being executed using public employees,

"To build our new data center, instead of hiring an outside vendor for project management and quality assurance as we would have done in the past, we insourced the work to the Department of Information Technology and Telecommunications' project management team... Using the know-how of city staff to oversee these projects will save an additional $25 million over and above the $100 million we will save from having fewer server rooms and other efficiencies. That center where the mayor stood was built in record time, from start to finish in only six months."

He also wrote about other successes with in-sourcing,

"Our Business Express tool - which helps businesses get permits faster - and our expanded 311 online program are both now led by insourced city employees, not consultants. The Finance Department is hiring 45 city employees to replace outside consultants, almost entirely in its technology department. That will save millions more."

And about the way forward,

"At the same time as we intelligently insource, we need to tighten our oversight over outside contractors. Competent and honest vendors respond best when they are well-managed by able city officials. We are proposing, therefore, to expand a high-level city vendor management office - and in the process, reduce the cost of outside projects and test whether certain projects are even necessary.

And we are going to start challenging all components of technology contracts, and ensure that the city does not pay a markup to a consultant for work we could just as well do internally. We must also focus on subcontractors - companies hired by our own vendors to help them complete their assignments... Insourcing the management of projects and important decisions about scope and cost will allow us to save taxpayer dollars, enhance service delivery and ensure that IT vendor resources throughout the city are delivering on time and on-budget for New Yorkers."

Predictably, this has re-ignited the debate about the merits of in-house service delivery and outsourcing of municipal services. Here are a few observations

1. As Mildred Warner writes, "Contracting out only saves money if there are technological innovations or economies of scale that come from moving functions out." It therefore becomes critical to objectively and accurately assess the costs and benefits of any such initiative. However, as we have seen with the numerous examples of high-profile failures with mergers and acquisitions with big private firms, such decisions are difficult to make.

It is no surprise that in recent years there have been a large number of cases of reverse contracting - bringing previously privatized services back in house - from cities across the world. A study for the International City Managers Association (ICMA) by Mildred Warner and Amir Hefetz finds that the reasons for reverse contracting are problems with service quality (61%), lack of cost savings (52%), improvements in public delivery (34%), problems with monitoring (17%) and political support to bring the work back in house (17%). As can be seen, the "reversals reflect problems with service quality and lack of cost savings in contracted services" instead of the usual suspect of political opposition.

2. There is a fundamental incentive challenge - private firms have incentives to reduce quality to enhance profits and governments have the incentive to reduce costs. This means that the city managers have to effectively police and re-align the incentives of the contractors. At the same time, they have to bear in mind the need to ensure that life-cycle costs of delivering the service is optimized.

However, this requires that the city managers have the requisite professional competence and integrity to effectively carry out this responsibility. Unfortunately, there are very few cities which have the required numbers of professionally competent (upto speed with the latest technologies and processes) and honest managers.

3. It is no surprise that there are massive delays in all types of projects being executed in our cities. Monitoring and supervision, even of internally executed projects, have never been a strength of public systems. It is therefore unreasonable to expect municipal governments to do an effective job of external contract management, especially those involving complex and difficult to quantify outcomes.

Monitoring the adherence with service levels involves rigorous data collection and supervisory over-sight which is often beyond the competence of public officials and their bureaucratic systems. As can be expected, project management is one of the weakest areas of urban governance.

4. The most critical determinant of the success of any contracting agreement is the ability to monitor with reasonable degree of accuracy the achievement of outcomes. However, it is difficult to quantify the outcomes, leave alone the quality, of many civic services. Sometimes, it is difficult to even define and monitor certain outcomes. Performance-based contracts, which are successfully implemented across the private sector, is therefore difficult to structure for civic service delivery.

Further, even when it is possible to quantify outcomes and their quality, the process of data collection is a source of concern. It is either gamed by the contractor, in collusion with the supervising public officials, or its reliability suspect due to the sheer inefficiencies within public bureaucracies.

5. Compounding the problem is the absence of adequate competition and depth in the market for service providers. In the US itself, for most local government services the average number of alternative providers is less than two. Only one third of the 67 most common local government services have two or more alternative providers in the market. Reflecting the virtual absence of choice, fully 75% of contracts are given to the incumbent without re-bidding. The situation is far worse in developing countries like India. In other words, "all privatization does is substitute a private monopoly for a public one".

6. Cronyism and corruption is rampant in all our urban local governments. However it is not the exclusive preserve of our local bodies. Chicago's parking meter privatization is the most high-profile example of incompetence, short-sightedness, and corruption that characterises contracting of civic services.

Contracting out civic services, especially in the larger cities, require a highly professional bid process management. It should be free from external interference and decisions should be taken on purely professional and objective considerations. It is difficult to replicate such environments in most Indian cities.

The net result is a completely compromised bid process, in which extraneous considerations prevail over professional qualifications. The willingness of most service providers to play this game only makes the process even murkier. The result is a badly designed/structured contract (often done to favor certain parties) awarded to a contractor with neither the expertise nor the intent to execute the project effectively. Failure, criticism and controversy is therefore inevitable.

None of this is to oppose outsourcing and privatization and advocate in-house civic service delivery. As Nicole Gelinas writes, "Privatization of government services can be a tool for competent governments but it's not a cure for incompetence... privatization doesn't obviate the need for government competence and honesty, as well as for the democratic checks and balances that encourage these traits". Governments should decide to use outsourcing and privatization based on the specific project and the local market conditions and not on ideological considerations. Elliott Scalar has this standard for making privatization decisions,

"Three factors drive the decision: the number of interactions required between the service supplier and the purchasing organization; the ability of the purchasing organization to judge the quality of the product; and the nature of control over the physical assets and people involved in delivering the goods. The general rule of thumb is that when the number of interactions is high, quality is not easily determined and control over assets is required, you should keep the function in-house. If the reverse is true, you can outsource."

John Donahue prescribes this standard,

"Tasks that are well-defined, easy to monitor and available from competitive suppliers — call them 'commodity tasks' — are prime candidates for privatization. Tasks that are complex and mutable, lack clear benchmarks or are immune from competition — 'custom tasks' — should be kept in-house."

All this ultimately boils down to the original Coasean theory about firms and transaction costs - firms exist because the transaction costs associated with doing ancillary activities externally are simply too large. In this case, certain services, instead of being outsourced, are more effective if done internally within the civic utility.

The final word should go to an excellent meta-study of privatization across the world of water distribution and garbage collection by Germà Bel, Xavier Fageda, and Mildred E. Warner, which finds,

"Privatization of local government services is assumed to deliver cost savings but empirical evidence for this from around the world is mixed. We conduct a meta-regression analysis of all econometric studies examining privatization for water distribution and solid waste collection services and find no systematic support for lower costs with private production. Differences in study results are explained by differences in time-period of the analyses, service characteristics, and policy environment. We do not find a genuine empirical effect of cost savings resulting from private production. The results suggest that to ensure cost savings, more attention be given to the cost characteristics of the service, the transaction costs involved, and the policy environment stimulating competition, rather than to the debate over public versus private delivery of these services."

More on the limits to outsourcing?

Sometime back, I had blogged about how outsourcing and expanding supplier networks had played an important role in Toyota's recent vehicle recall problems,

"As it has gained sales, Toyota has moved away from some of the business practices it adopted in its years of slow but steady growth. One example is its decision to buy parts from companies around the world, rather than from a small group of Japanese suppliers that have been longtime partners. For example, the pedals in the vehicles affected by the production and sales stoppages come from a supplier’s Canadian plant... The move to expand its supplier network was necessary to save money, given cost pressures on Toyota and other manufacturers... But the shift also makes it harder for Toyota to control quality."

Now Paul Krugman points to similar problems at Boeing, most famoulsy with delays facing its 787 Dreamliner. In order to cut costs and improve efficiency, Boeing ignored warnings and aggressively farmed out design and manufacture of crucial components to suppliers around the nation and in foreign countries such as Italy, Sweden, China, and South Korea. The 787 is expected to have 30% foreign content, to a mere 5% in 747. Its objective was to source modules from across the world and assemble it at Seattle. However, this is what happened,

"Some of the pieces manufactured by far-flung suppliers didn't fit together. Some subcontractors couldn't meet their output quotas, creating huge production logjams when critical parts weren't available in the necessary sequence. Rather than follow its old model of providing parts subcontractors with detailed blueprints created at home, Boeing gave suppliers less detailed specifications and required them to create their own blueprints."

Boeing's 1997 merger with McDonnell Douglas also accelerated the push towards more outsourcing,

"The merged company appeared to prize short-term profits over the development of its engineering expertise, and began to view outsourcing too myopically as a cost-saving process."

This aggressive outsourcing was not complemented with appropriate strengthening of the quality supervision and more intensive management of the supplier network. Some of the contractors and suppliers, sub-contracted the work, leaving Boeing with limited ability to supervise design and manufacture.

In this context, Paul Krugman draws attention to the work of Nobel laureate Oliver Williamson about the limitations of the market in co-ordinating activity among small firms or individuals and the consequent persistence of large firms. He writes,

"Williamson (talked about) the difficulties of writing complete contracts; when the tasks that need to be done are complex, so that you can’t fully specify what people should do in advance, there can be a lot of slippage and strategic behavior if you rely on market incentives; in such cases it can be better to do these things in-house, so that you can simply tell people to do something a particular way or to change their behavior."

I completely agree with the trade-off, though the big challenge lies in identifying how much to trade-off and what.

Is free trade efficient and/or good?

Greg Mankiw's recent column in the NYT praising international trade, where he urged Americans to see emerging economies as trade partners and not competitors, has generated an interesting debate about the costs and benefits of international trade.

Uwe Reinhardt highlighted the difference between the way non-nationalistic economists and nationalistic citizens view the issue of gains and losses from trade,

"Many Americans might balk at the lower-priced scarf if it were offered not by an American but by a low-cost manufacturer in Shanghai or Bangladesh... Whether a fellow American gains from a trade or someone in Shanghai does not make any difference to most economists, nor does it matter to them where the losers from global competition live, in America or elsewhere."

He also points to the controversial work of Alan Blinder (see pdf here and here), where he questioned the wisdom of the theory that "every country gains by unfettered international trade" in the context of the threat to American jobs posed by off-shoring of services to emerging economies. Prof Blinder had estimated that 30-40 million jobs in the US are potentially off-shorable and this "may pose major problems for tens of millions of Americans over the coming decades". He also raised the concerns about how America would be able to cope up with its impact, especially given its tattered social safety net.

In this context, David Autor, David Dorn and Gordon H. Hanson (via Mike Konczal) explored the impact of import competition on US local labour markets that were differentially exposed to the rise of trade with China in the 1990-2007 period due to differences in their initial patterns of industry specialization. Controlling for various external factors, they found,

"Increased exposure of local labor markets to Chinese imports leads to higher unemployment, lower labor force participation, and reduced wages. While the employment reduction is concentrated in manufacturing, wage declines occur in the broader local labor market, and are most pronounced outside of manufacturing. Growing import exposure spurs a substantial increase in transfer payments to individuals and households in the form of unemployment insurance benefits, disability benefits, income support payments, and in-kind medical benefits. These transfer payments are two orders of magnitude larger than the corresponding rise in Trade Adjustment Assistance benefits. Nevertheless, transfers falls far short of off-setting the large decline in average household incomes found in local labor markets that are most heavily exposed to China trade."

They also write about the distributional consequences of trade - while it lowers incomes for workers in industries or regions exposed to import competition, gainers include consumers who have increased product variety and industries and regions with expanding exports have higher income growth. They find that the gains from trade with China are between $32 and $61 per person, whereas the deadweight losses are estimated at $52 from the transfer mechanisms in place.

This analysis does not fully capture the benefits. As the article itself mentions, while the benefits of trade are permanent, the deadweight losses of transfers are temporary. More importantly, it does not include the benefits of trade by way of exports (after all, we cannot assess the impact of trade by merely valuing only one side of the equation!).

The critical issue here is not whether free trade is beneficial or not. On the net, it is hard to argue that free-trade is not beneficial and harder still to prove it. But, as the aforementioned study acknowledges and we all know, the benefits and costs of free-trade are not evenly distributed. It is natural that the gainers are happy and the losers are disgruntled and oppose free-trade. The important issue therefore is how the gains and costs are distributed among different people and regions and whether governments can have any role in that.

This raises questions about the relative gains and losses, both in terms of amounts lost and gained and the numbers of people on both sides of the equation. It is here that there is a growing belief, among a larger number of people and regions, that they are being forced to take a disproportionate share of the costs of trade. They accuse a few of disproportionately benefiting from trade. Economics has little to teach us about how to resolve such distributional issues. That is the realm of politics.

The politics of fairness and the sustainability of Pareto optimizing trade demands that the losers be appropriately compensated for their losses. The compensation is usually in the form of some type of transfers from the government to these losers. However, this raises the issue of where the government can find the resources to finance such transfers.

Since the gainers benefited disproportionately, it is only natural that some portion of their excess gains be appropriated by way of say, taxation. In other words, re-distribute a share of the (disproportionate) benefits obtained by the gainers from trade to the losers. This will buy the support of the losers and ensure the sustainability of the Pareto improving trade.

Now free-market economists would argue that this raises questions of how much to re-distribute and to whom. How do we redistribute? Who are the gainers and how much did they gain? Who are the losers, and how much should they be compensated? Yes, the answers to these and more are not simple. But they are not insurmountable.

But the alternative is to accept the losers argument that they do not deserve to lose because of trade and therefore all trade should be stopped (in any case, once you oppose some types of trade, a slippery slope appears, where trade in general gets questioned). After all, and economists understand it better than anyone else, any transaction is economically efficient (and Pareto optimal) only if it makes people better off without making anyone worse off. Free-trade, minus re-distribution, clearly leaves the losers worse off and is both inefficient and not a Pareto improvement.

Such re-distribution can be made less distortionary and with minimal deadweight losses if it is structured so as align the incentives of all the parties. The losers, getting the transfers, should have incentives in place to search for newer jobs and acquire new skills that can help them find a job quickly or recover their income losses. Similarly, the gainers should be taxed for the disproportionate gains, arising from easy arbitrage opportunities, so that their incentives are not distorted badly.

The important take-away from all this is simple. Free trade is good, but only if it is supplemented with transfers that cushion the losers. Put differently, sustenance of free-trade makes the strongest case for social safety nets. In fact, losers from free trade are just another example of market failures (in so far as an "efficient outcome generates "bad" results). A social safety net can address all these problems, not just those arising from trade failures. And Econ 101 teaches us that social safety nets are in place precisely to resolve such failures. William Polley is spot on

"You see, it is the potential for a Pareto improvement that makes free trade desirable. There are winners and losers. But the winners gain more than the losers lose. So effect a transfer from the winners to the losers that still allows the winners to gain but compensates the losers for what they lost. Only then can you really say that free trade (with the compensating side payment) benefits everyone. If the compensation is not there, then I cannot unconditionally advocate free trade. I must call attention to the fact that some will lose."

See also Mark Thoma (also here), Tim Worstall, and Free Exchange debate the issue.

Philippines, Not India is World's Call Centre Capital

Now this article kind of took me by surprise. While India is renowned as a global hub for business process outsourcing (BPO)--we even have popular entertainment glamorizing its services-led economic renaissance in Slumdog Millionaire--it seems another country has been away from the BPO limelight that has just stolen India's thunder. Alike India, the Philippines has been subject to the (English-speaking) white man's burden of enlightening us coloured people about the benefits of markets and democracy (well sort of). Also like India, then, the Philippines has a large English-speaking population which happens to be tertiary educated. And while India has its slumdog millionaires, the Philippines has its own emerging call centre subculture of those who work the night shift to synchronize with overseas markets like Western Europe and North America. (As a side note, I am very pleased with phenomenon since daytime traffic in Manila is horrendous.) Heck, stories of escapades by call centre workers are rife with alleged rises in HIV cases being attributed to them.

Anyway, back to the story. Earlier this year, I was struck by outgoing Philippine President Gloria Macapagal-Arroyo claiming in May that the Philippines was second only to India in BPO foreign exchange revenues. Pretty impressive for a country that's not been as widely stereotyped as a call centre destination, right? Well now comes news that, actually, the Philippines is set to end the year ahead of India in terms of call centre new hires and revenues for 2010. Of course, call centres are only a sliver of the BPO market--and not often very attractive ones unless you consider telemarketing and fielding customer service calls fun.

I am also not entirely sure if the head of the Commission on Information and Communications Technology (CICT)--an executive-level body in the Philippine government--has his numbers entirely right. But, as the Indians aren't contesting these figures, perhaps they're correct. From BusinessWorld:

The [Philippines] may have surpassed India in terms of call center employees and revenues, but it has yet to take a similar lead in other segments of outsourcing, an official said Tuesday. Commission on Information and Communications Technology Chairman Ivan John E. Uy told reporters at the sidelines of an electronics industry conference that the Philippines had exceeded India in the number of new employees, with 15,000 as of end-October. "India had 13,800 new hired [sic] employees for this year but we still have to wait until the year ends."

Mr. Uy said the Philippines had also surpassed India in call center revenues, with $5.5 billion as of end-October against the latter’s $5.3 billion. "We are projecting to reach $5.8 billion by the end of the year, while India projected $5.5 billion. These are significant accomplishments, but the entire [Philippine outsourcing] industry is still valued at $9 billion, while India is at $47 billion," he said.

On its Web site, IT services firm SourcingLine said the entire outsourcing industry goes beyond call centers, to include services that demand higher skills like software development, engineering design and investment research. Business Process Outsourcing Association of the Philippines chief executive officer Oscar R. Sañez said in a phone interview that the country’s annual offshore outsourcing revenues could more than double to $25 billion, equivalent to a 10% share of the global market, by 2016.

"The industry can grow from $9 billion in annual revenues and approximately 500,000 direct employees today to $20 billion and 900,000 employees by 2016 if current conditions are sustained and with a lot of hard work," he said.

The reasons given for this surprising factoid are many (and a few are likely self-serving): Filipinos have a more "neutral" accent (i.e., they can imitate talking like white people more easily--cue "Apu Nahasapeemapetilon"); Philippine workers are better equipped with relevant skills; etc -

"We won this war not because we're lower cost than India. To some extent, we are a little bit higher priced to operate a call center compared to India. We won this battle by virtue of Filipino quality. We grew faster than India because it's the Filipino talent, which is world class caliber," he said. He noted that Indian call centers are already migrating some of their operations to the country.

Jojo Uligan, CCAP corporate secretary and executive director, said the Philippines played up its strengths in the past 10 years by being a superior value destination for US companies. He said Filipinos have a better cultural affinity to Americans, and their accents are more neutral. "When you train a Filipino to speak English, you would never know it is a Filipino. I think Americans like to talk to a person they can understand," he said...

"We're not just focusing on the United States but other English-speaking countries like the UK, which we only service a little. Australia and New Zealand are also good potential for us. But again, if you can market in these areas where we service a smaller percentage of the business, then we will have a better chance of getting more jobs," he said...

But then comes the honest truth: call centres are atthe bottom end of the BPO totem pole. So, in reality, India may already be leaving such services behind in search of greener and more profitable pastures:

Call centers are generally positioned at the bottom of the BPO value chain since they provide lower profit margins compared to other BPO offerings. Non-voice BPO offerings, such as financial, medical, editorial, and engineering services, contribute higher profit margins, thus is preferred by more established BPO players, including those from India.

Local BPO firms have pursued call center services as part of a strategy. Call centers are considered as their entry point for a slice of the non-voice outsourced and/or offshored businesses of clients.

So perhaps it's Jai-Ho (You Are My Destiny) for the Philippines to rule the roost in call centre operations, but the challenge is to continue to move up the ladder like India in terms of the sophistication and profitability of services on offer such as CAD/CAM work, digital animation and so forth. In the meantime, Shakalaka Baby not to Bangalore but to Manila!

Already I'm thinking of preparing my screenplay for The Great Philippine Call Centre Movie to raise public awareness about the country's status as the world leader. In tawdry modern fashion, it will concern before or after work-hours recreational (procreational?) activities by call centre workers. Fielding calls by Yanks who don't know what a MAC address is, long-distance love triangles at Hewlett-Packard Philippines, an A.R. Rahman soundtrack, Danny Boyle for the director...it's a guaranteed hit, I tell you. I am yours forever; yes forever I will follow...

Obama, India and Making Outsourcing Acceptable

[NOTE: It's been a while since we've had a feature on Indian outsourcing, so it's about time we got back in the swing of things via President Obama's visit to the services powerhouse nation.] To many Americans, the Great White Collar Fear is outsourcing. And, nobody represents this phenomenon to many eyes than India. With its formidable array of business process outsourcing firms like Satyam, Tata, Wipro, and Infosys, the very mention of the country strikes fear into middle class hearts. Contrary to the suggestions of less perceptive individuals, the real determinant of whether American jobs are "shipped overseas" isn't skill level but the geographical transferability of the tasks performed. That is, America will still need hairdressers since you need a pair of hands and scissors at the end of the day, but it certainly might do away with computer programmers who can do these tasks more inexpensively in, say, India. Routed at home, Barack Obama thus journeyed to India to paint an image of the commander-in-chief drumming up business elsewhere. What's more, he wanted to get the point across that India's rise bodes well for the United States instead of the more conventional job-stealer stereotypes:

President Barack Obama used his first visit to India to herald the virtues of democracy and trade, telling business leaders that increased commerce was a “win- win” proposition that would create jobs in both countries. “I am here because I believe that in our interconnected world increased commerce between the U.S. and India can be and will be a win-win proposition for both nations,” Obama said in a speech to the U.S.-India Business Council in Mumbai yesterday.

Obama’s first day in Asia, at the beginning of a four- country, 10-day tour, was studded with meetings with CEOs and Indian entrepreneurs to emphasize the importance of job creation. He was greeted at the airport by Boeing Co. Chief Executive Officer Jim McNerney, who briefed the president on doing business in India as they flew by helicopter to central Mumbai aboard Marine One.

“The United States sees Asia, especially India, as a market of the future,” the president said. “We don’t simply welcome your rise as a nation and people, we ardently support it, we want to invest in it.” Obama announced that controls on exports of technology, imposed after India tested a nuclear device in 1998, will be relaxed.

Five days after his party lost control of the House of Representatives, Obama also warned against protectionism. He sought to dispel what he said were perceptions that trade leads to U.S. jobs being outsourced to India, though he acknowledged that as India’s economy continues to emerge, there will “undoubtedly” be competition between the world’s two largest democracies. The mutual benefits of trade “might not be readily apparent” to both Americans and Indians, Obama said. “There are many Americans whose only experience with trade and globalization is a shuttered factory or a job that was shipped overseas.”

In the U.S. there was a caricature of India as a land of call centers and back offices that cost Americans their jobs, he said. While in India, Obama said many see the arrival of American companies and products as a threat to the livelihood of small shop keepers. “These old stereotypes and old concerns ignore today’s reality,” Obama said. “Trade between our countries is not just a one-way street of American jobs and companies moving to India. It is a dynamic two-way relationship that is creating jobs, growth and higher standards in both our countries.”

The two countries’ ties are “not about job creation in just one place,” said Kris Gopalakrishnan, chief executive of Infosys Technologies Ltd. Obama “talked about keeping markets open for both products and services.”

All this lovey-dovey stuff had sentimental ol' me reaching for my hankie [sniff]. Such a sweet guy, that Barack Obama. Or maybe not. This dog-and-pony show aside, the truth of the matter is that Indian BPO firms are being squeezed by the US through costlier work visas for Indian workers and states banning the outsourcing of government IT projects altogether. Still, Indian firms are locating more operations Stateside and hiring Americans to hopefully dispel the notion that they're taking away work and jobs. Still, India's challenges diversifying away from the US--learning Mandarin or Nihongo is likely more difficult than learning English in this former British colony--mean that it cannot make a clean break altogether:

[Obama]'s sure to encounter some harsh words about the current U.S. backlash against Indian outsourcing firms. In August, Congress passed a law raising fees for work visas by $2,000 to about $4,300. The visas, used by foreign IT workers spending time in the U.S., could cost Indian companies up to $250 million a year, says Som Mittal, president of Nasscom, the Indian software industry's lobbying group.

Also in August, Ohio banned the outsourcing of government IT projects to offshore destinations such as India. "There's some level of concern," says P.R. Chandrasekar, chief executive of Mumbai-based Hexaware Technologies. "You don't want other states to do that..."

The worry is that protectionist measures in the U.S. could quickly change the outlook from robust to dreadful in a market that represents 61 percent of India's $50 billion in annual IT service exports. Two-thirds of Hexaware's $215 million in revenue last year came from the U.S. Bigger Indian companies rely on the American market, too. U.S. sales accounted for 57.5 percent of TCS's revenue for the year ended March 2010, and North America made up 66 percent at Bangalore-based rival Infosys Technologies, according to Bloomberg data.

Indian executives know they must diversify, yet they have had limited success generating new business in markets beyond North America and Western Europe. Their presence in Japan is insignificant, says Arno Franz, president of Asia Pacific for sourcing advisory firm TPI. Indian outsourcers have high hopes for China, where they are hiring engineers to work on projects for multinational and local customers. "They are placing most of their bets on China," says Franz. "But it takes years and years." India's major IT companies only employ around 5,000 people in China, according to a Goldman Sachs (GS) report, and generated sales of just $257 million.

That means India's IT companies have to keep building their business in the U.S. while their efforts elsewhere slowly take root. To defuse the outcry about companies shipping American jobs offshore, Indian firms are trying to build up local staffs.

Mahindra Satyam, a Hyderabad-based company that on Oct. 13 announced a contract to design a document-management system for the Kentucky state government's health and family services department, has so-called near-shore operations in 11 countries, including the U.S. It wants to be positioned in the U.S. and elsewhere to hire locally. "Firms are more comfortable with near-shore centers," says the firm's chief executive CP Gurnani. As a result, "dependence on U.S. visas is reducing." About 20 percent of employees are outside India, he says, up from zero in 2006.

The uncertainty surrounding visa rules and state outsourcing policies might accelerate the trend of Indian companies making acquisitions in the U.S. Indian outsourcers have already done $1.9 billion worth of technology acquisitions in North America over the past decade, according to Bloomberg data.

But then a next question comes on the last point: will Americans also discourage Indian acquisitions of US technology firms in the way it does Chinese ones over specious "security" grounds? While you contemplate that question, the White House also has a laundry list of projects the US is supposed to undertake together with India as well as a transcript of the Obamas speaking in Mumbai.

Brain AIDS Discovered in America

My sensationalist headline aside, the Bill and Melinda Gates Foundation is doing some serious work on global health, and the man himself is focusing on the economic variety. Gates went before Congress recently to diagnose the U.S. with what you might call Acquired Intelligence Deficiency Syndrome—a shortage of knowledge workers due to strict immigration policies, poor domestic high-tech education, and low government spending on R&D. Microsoft published a transcript of the testimony.

Given the security concerns surrounding immigration and terrorism, safely increasing visa quotas might not be as easy at it seems. But it should come as a wake-up call that one of the primary pillars of the information society can't get enough people to staff his business.

In a creative economy, the efficiency of outsourcing butts up against the fact that location is very important—if your workers can perform their tasks from anywhere, chances are they will want to be somewhere good. And as the country that advertises its freedom and opportunity, America should maintain a comparative advantage in real estate. My guess is that earnest national loyalty motivates Gates along with economic self-interest.