Offshoring As A Catalyst For Economic Recovery

Baird Private Equity Operating Partner Mohan Kharbanda, Shares Insights on the Trend‘s impact in India and the United States

CHICAGO - The impact of the recent economic downturn was felt around the world, and off shoring activity slowed as a result. The technology sector was particularly hard hit as clients cut outsourcing projects and demanded lower rates. However, the trends that initiated off shoring momentum more than a decade ago are stronger than ever, particularly as companies continue to implement survival strategies to weather the recession. The continued focus on cost savings and the increasing need for talent at competitive rates have stimulated growth in off shoring, and this secular trend has a number of countries, from Ghana to Bangladesh, pursuing the market. The positive connotations for these still-emerging economies are obvious. If used properly, off shoring is an investment that can also lead to job creation and spur economic recovery domestically.

Fostering U.S. Economic Growth
In the United States, off shoring can help prevent larger job losses and help reduce inflation to preserve a low interest rate environment while the U.S. economy regains its footing.

In a networked global economy, it is inevitable that the United States will shed certain lower-wage jobs. Even though the shift of service jobs to countries such as India adds to the temporary pain of structural unemployment, new jobs are being created in the United States as well.

U.S. firms that shift employment abroad are often able to translate the savings to lower prices for consumers and higher dividends for shareholders. In turn, these consumers and shareholders spend more in areas that create U.S. employment. In addition, lower prices allow the Federal Reserve to keep interest rates lower, boosting the domestic job-creation engine.

India Bounces Back
On the other side of the equation, service jobs are viewed as prestigious in emerging markets like India, and the corresponding income has helped the country to recover quickly from the twin shocks of the 2008 terrorist attacks on Mumbai and the global economic crisis. India experienced a relatively muted, short-lived downturn and, in the last nine months, its economy has revived. GDP growth bottomed in 2009 at close to 3 percent and is expected to reach somewhere between 7 and 8 percent in 2010. In many ways, India appears to just be entering the steeper portion of its growth curve.

Off shoring has grown from nearly 1 percent to nearly 6 percent of the Indian GDP in 10 years with $60 billion in exports, employing two million people directly. It is forecasted to grow to about $120 billion in exports in five years rivaling Saudi Arabia oil exports, which are in the vicinity of $100 billion.

Beyond direct employment and exports, off shoring is transforming India in other ways. The education sector has grown as the demand for talent grows; the second tier cities, long left out of the Indian economic boom, are visibly transforming as they attract and win off shoring businesses; and the success in the technology sector has India emulating a similar model in medical tourism, analytics and modeling, clinical research and even remote compositions for daily news papers.

Developing an Off Shoring Strategy
For companies that off shore, the cost savings can mean anything from survival to competitiveness. When considering a strategy, it is important for company management to understand that off shoring is more complex than outsourcing operations to a domestic supplier. Generally, large companies have some in-house capabilities, but small and medium-sized companies usually need to seek outside assistance from experienced operating professionals if they have never off shored before. Access to a network of operating experts who are intimately familiar with foreign business practices and policies -- like the resources at Baird Private Equity -- is crucial for small and medium-sized companies determining the most appropriate strategies for pursuing off shoring opportunities.