Anti-outsourcing cry unnerves corporate
giants By Indrajit Basu
KOLKATA - The issue of outsourcing and the
resulting political backlash found its way into the
corporate boardrooms of global giants, perhaps for the
first time, as chief executive officers of top
multinational companies including General Electric (GE)
and Gillette spent the week discussing the backlash as a
risk factor and its impact on their businesses. And
worse, for top Indian software companies in the United
States, the backlash is increasingly turning explosive.
Until now, the outsourcing row has only been a political
issue in the run-up to the US presidential elections.
Early this week, both GE and Gillette cited the
outsourcing backlash as a risk factor for their growth
and said the competitiveness of a number of US companies
would be severely affected by legislation barring
outsourcing and the emergence of a protectionist climate
in the US. While GE warned of its impact in the initial
public offering (IPO) filing for Genworth Financial, a
GE subsidiary, as well as in its annual report, Gillette
so far has kept its concerns limited to the pages of its
annual report.
GE is selling one-third of its
equity stake in Genworth to the US public. Through an
arrangement with GE, Genworth has a substantial team of
professionals in India who provide a variety of services
to the company's insurance operations, including
customer service, transaction processing, and functional
support including finance. "This," said Genworth in the
IPO filing, "has enabled us to reduce its recurring
operating expenses and provide funds for new growth and
technology investments." GE operates its business
process outsourcing business in India under GE Capital
International Services, which employs 17,000 employees.
In its latest annual report, Gillette said trade
protection measures could adversely affect operating
results in any reporting period, especially in the
changing political environment, "since sales outside the
United States represent a substantial portion of our
business. In addition, we have a number of manufacturing
facilities and suppliers located outside of the United
States."
But GE has taken the backlash issue a
step further to the shareholder level, by shooting off a
letter to its shareholders requesting that they quash a
resolution raised by a US-based pension fund challenging
its outsourcing business. In that letter, sent out on
Tuesday, GE's board of directors said a pension fund
based in the United States wants GE to report on the
risk to the company's image resulting from outsourcing
because it feels that GE is vulnerable to consumer
disaffection in the US, and a backlash against
outsourcing in its home country could jeopardize
political support for the giant's globalization. The
resolution is coming up for vote at the annual general
meeting of the shareholders to be held on April 28,
which "should be rejected because its challenges GE's
outsourcing business", the letter said.
Still
earlier, GE expressed its fear that if anti-offshoring
moves initiated by Democratic presidential candidate
John Kerry become legislation, GE's low-cost operations
outside the US could be forced to halt. "It could result
in consumer pressure to curtail our use of low-cost
operations outside the US, which could reduce the cost
benefits we currently realize from using them," GE said.
But even as US-based giants remain largely
unscathed by the ill effects of the outsourcing
backlash, for Infosys, India's software giant and a
multinational in its own right, it is certainly turning
nasty. Infosys was the target of a vicious attack in
California early this week when a local official and a
lawmaker on the California Franchise Tax Board accused
Infosys of "stealing local jobs and taxpayers' money".
The startling comment followed the California Franchise
Tax Board's rejection of Infosys's plea for tax relief
under an alternative filing methodology permitted by the
California tax code. Infosys had said it owed US$180,000
in taxes, rather than the $1.3 million calculated by the
tax board.
Although Infosys officials have said
there would be no material impact of this rejection on
its financials, the California government's move has
deepened the worry lines of all Indian
information-technology companies that see it as yet
another example of protectionism that will impact not
only Infosys but also all Indian IT companies doing
business in that state.
Nevertheless, Indian
tech companies are struggling hard not to be perturbed
by the increasing outcry against outsourcing. But some
feel that the constant media attention given to this
backlash is making things worse for the Indian tech
industry.
Vikram Talwar, CEO of Exlservice, a
prominent back-office outfit, said: "If this talk
continues, and the press continues to write about it, it
will be difficult for us. It will also force boardrooms
in the US to start worrying about [whether it] impacts
their social responsibilities."
However, it
seems US-based multinationals are worried more about
their bottom line than their social responsibilities and
consider outsourcing to be unavoidable. GE, for
instance, continues to stress the importance of low-cost
centers in its global strategy and growth. "Competition
from places like China and India [has] evolved beyond
low-cost manufacturing labor to include highly
competitive engineering graduates who earn less than
production workers in the developed world," said GE,
adding: "Winning companies must think globally, but
understand local consequences. Only competitive
companies can serve investors, employees and
stakeholders during this dramatic phase of
globalization."
GE also feels that globalization
could lead to a loss of jobs in low-tech industries but
that it will create jobs in high-tech ones too.
According to the company, by centralizing its operations
and leveraging low-cost operating centers in the US
states of Virginia and North Carolina as well as in
India and Ireland, "GE has also developed sophisticated
technological tools that enhance performance by
automating key processes and reducing response times and
process variations."
Meanwhile, the outsourcing
policies of giants such as GE and Gillette seem to have
found support from the US Republicans. Former Republican
senator Larry Pressler - a self-professed "friend of
India" - said companies should continue with outsourcing
as it ultimately benefits the consumer. "Back in the
1970s, we had the great debate about Japanese cars
coming into the US, after which they were allowed to
come. And consumers benefited because more safety
devices came in faster," said Pressler. "There has
always been some opposition to free trade, and during
the election years it goes up ... I think during
election campaigns we have these protectionist types of
features coming from all sides and there is a lot of
rhetoric."
Rhetoric or not, at the moment,
multinationals are facing the most daunting task of all:
handling the trickle-down effect of the anti-outsourcing
cry diplomatically.
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