The Impact of I.T. Development Outsourcing on Worker Dynamics in Vietnam
18.2 The Global Context
In 2012 as Barack Obama and Mitt Romney were contesting for the position of US President for the next 4 years, outsourcing became a topic of hot debate. Romney considered outsourcing to be one answer to fears over rising unemployment by both keeping industries alive, and therefore maintaining jobs in the country, and expanding skilled employment options in locations most in need of assistance [1]. In contrast Obama was reported to be against outsourcing as it essentially represented the export of jobs from America. In practice it was alleged that both supported financially or conceptually those who practice outsourcing [1,4]. Any topic that provides debate in the American presidential election process is considered a global issue. Outsourcing has become a source of global debate well beyond the US election. The following discussion provides an overview of the debate.
18.2.1 Outsourcing criticisms
There are many criticisms of outsourcing with the following most commonly presented:
• It is a method to avoid unions and hence the requirement to involve the work- ers in decisions and address their workplace needs [1]. There are many ethical arguments presented against outsourcing on the grounds that it results in worker exploitation especially in locations where there are minimal industrial relations laws or protections. For example, there are suggestions of child labour in some parts of Asia and long working hours with few breaks [5].
• Low-cost workers are exploited resulting in significant gaps between wages paid in the home country and that of the country being outsourced to [1]. The argu- ment comes both from displaced workers and outsourcing employees. Displaced workers object to being replaced by cheap labour when they had potentially been
18 The Impact of I.T. Development Outsourcing on Worker Dynamics in Vietnam 155 loyally employed for a company for many years and had become highly proficient in their job. Outsourcing workers know that the company had previously been happy to pay significantly more than they are being offered but they are unable to negotiate due to insufficient workplace agreements or fear of losing their job which may be supporting more than one generation of family members.
• Outsourcing leads to a loss of jobs for those most disadvantaged in the home country and exacerbates the unemployment problem [1,6]. The loss of jobs is often long term with reports of up to a third of outsourced persons not finding employment within 3 years [6]. Where jobs are found they are frequently at a lower level of pay. Chronic unemployment can become endemic in families with subsequent generations relying on government benefits. Unemployment means low income which in turn leads to lower education and then employment oppor- tunities for children and the vicious cycle continues. This cycle is exacerbated as the children have no employed role models to advise on career choices or provide access to education especially at the post high school level.
• There is a danger of entire industries being ‘hollowed out’ [1]. This results in industries that are fragmented with the seat of decisions being in one country and the actual production work in another location. This can present significant cultural issues with decisions being made without consideration of the environment they are being made for and resentment or non-compliance resulting. Management at a distance presents new business risks. Communications often occur through a translator with a loss of meaning and misunderstandings being common. This can mean costly delays in decision implementation and operational schedules. This clearly defeats the purpose of outsourcing to reduce costs.
18.2.2 Outsourcing Advantages
• Outsourcing presents an opportunity to create new, more skilled opportunities or employment where there was little previously [1]. It provides a significant number of jobs in very poor populations and can result in improvement of living standards for thousands of people through employing several hundred people who can then support their families. In countries where skills are low, outsourcing can provide an opportunity for improved training and up skilling as supervisory, management and more technical roles become available over time. This provides long term improvement for the whole population and a sustainable future for the country.
• Many large corporations have employed outsourcing to minimise their costs and maintain more profit in their home. The cost of IT development is $ 400-$ 1,000 a month per employee in India or Vietnam. This is several times lower than in Europe or the U.S. [5]. As a result outsourcers can facilitate improvement in living standards for local employees that would not have been possible without the profits realised through off shore production [5]. Employees are also able to access significant non-financial benefits including medical and personal accident insurance, subsidised food and transportation, supported accommodation, per- sonal health care, education benefits for themselves and families, flexible salary
156 A. Shillabeer benefits and maternity leave. Health benefits in particular are of immense value in countries where there is little or no healthcare insurance and low accessibility to high quality healthcare as a result. Many employees working in an outsourcing capacity experience untold lifestyle changes and wealth and their families and often whole towns and villages benefit as a result.
18.2.3 Outsourcing Drivers
• Transportation, coordination and operational costs have been lowered sig- nificantly through improved communication technologies and faster transport options. This has provided efficiency gains in travel and enabled management teams to commute greater distances with relative ease and to be able to remotely manage and monitor operations of external suppliers, contractors and production locations [1]. The opportunity to reduce operational costs and optimise busi- ness processes, whilst maintaining production quality is fundamental to the drive towards increased outsourcing.
• Customers want cheaper products without lowered quality and outsourcing is an obvious business choice to meet this demand.
• Investors want greater profits. By saving money through reducing human resource costs without reducing the product cost or value, organisations have an opportunity to provide sustained improvement in investor returns.
• In the software industry the time to market is a critical success factor in determin- ing the viability of a product, or even a whole company when there are so many competitors in the market place. Similarly the time taken to address security risks or provide updates is equally important in retaining market share. Having access to a 24 h working day by outsourcing to teams in different time zones is a key facilitator of rapid delivery [5].
18.2.4 Outsourcing Around the World
Currently the United States and India are the biggest players in the outsourcing market, with the USA on the demand side and India on the supply side. American companies paid over $ 17.6 billion for offshore outsourcing serviced in 2005 with India exporting over $ 23 billion in that same year and increasing to $ 50 billion in 2008. China, is a major competitor for India in the general offshore manufacturing market, but is not yet a significant threat to the IT-services market. Their revenue from software and IT-enabled services is a fraction of that from India but their position on the market is increasing rapidly. Their major advantage is that the labour costs are considerably lower than in India. This gap is expected to increase due to the labour costs in India increasing quickly [5]. The global top 10 outsourcing countries are shown in Table18.1[7].
18 The Impact of I.T. Development Outsourcing on Worker Dynamics in Vietnam 157 Table 18.1 Top 10 outsourcing destinations
Rank Country Overall Operating
cost
Resources
& skills
Business environment
Avg
1 India 7.1 8.3 6 4.2 6.2
2 Indonesia 6.7 8.6 4.3 4.4 5.8
3 Estonia 6.6 7.5 5.2 6.9 6.5
4 Singapore 6.5 6.4 5.7 9.4 7.2
5 China 6.4 7 5.6 5.6 6.1
6 Bulgaria 6.4 8.8 2.9 5.2 5.6
7 Philippines 6.3 9 2.8 3.9 5.2
8 Thailand 5.9 8.2 2.3 5.9 5.5
9 Lithuania 5.9 7 3.9 6.5 5.8
10 Malaysia 5.8 7.9 2.2 6.9 5.7
Whilst India is ranked in first place there are 3 strong contenders for the position;
China, Singapore and Estonia. Singapore is a significant threat due to its very high skills and resources, and business environment rating however its operating cost rating is higher and reduces a key opportunity presented by outsourcing. Estonia and China are a similar threat but fall behind in terms of cost and skills availability.
With attention to these points they could be strong contenders for the top position especially in the US for off shore production. In a trend that began in the late 1970s and picked up speed in the 1990s, with the opening of trade with China, India and Eastern Europe, competition from foreign imports forced U.S. firms to find cheaper and better ways of doing business [5]. India clearly took best advantage of this opportunity but the others are not far behind.
18.2.5 Downward Trend in Outsourcing
Information technology and IT-enabled services employed approximately 4 million people in 2008 and accounted for 7 % of GDP and 33 % of India’s international business influx. The cost advantage for offshoring to India has recently reduced from 1:6. to, at best, 1:3. Given the narrowing of the pay rates and reduced cost advantages there is an alarming level of attrition occurring in outsourcing organisations [8].
India’s $ 30bn IT service industry, is gradually losing its competitive advantage. It is predicted that by 2015 the 1:3 cost advantage will be closer to 1:1.5 and it will then be inefficient to use Indian labour. This will potentially trigger a massive shift away from India and to other countries. South East Asia would seem like a rational choice given its proximity and cultural similarity to India. Relocation costs could be minimised and operational logistics and management budget only minimally affected. There would also be an opportunity to relocate Indian resources to assist with start-up.
Vietnam would be in a strong position to take advantage of this shift if it acts now to overcome a number of barriers and build on its strengths.
158 A. Shillabeer