You Say Off-shoring, I Say Outsourcing

Both the Indian economy and the India Inc brand name owe a lot to “outsourcing” as the key to their global recognition and success stories. But, as the recent HSBC scandal demonstrates, the magic of Indian outsourcing seems to be fading away faster than you can say N R Narayana Murthy! What’s happening?
The key to the outsourcing trend lies in some of India’s strengths built during the 1960s and 1970s — solid engineering institutions and a knowledge of English. Many global corporations, starting with General Electric and Texas Instruments, realised that some of their grunt work could be outsourced to India. They could use the vast reservoir of Indian engineers to do in India some of the quotidian work they were doing in USA. The prime motivation: saving costs.
This then caught the popular imagination as telecom infrastructure improved during the 90s and made communications — both data and voice — cheaper and better. Companies rushed to set up outsourcing centres in India — shops that basically made sales calls to customers across the English-speaking world, to tackling after sales service issues, to even writing software code.
Another word was added to the business lexicon: “off-shoring”. Global companies started spreading their work around the globe, basically to take advantage of cheaper skilled labour pools elsewhere. This also included another phenomenon: transfer pricing, which basically incorporated strategies at the global HQ level of reaping tax advantages by incurring costs in high tax geographies and shifting profits to low tax regimes.
But, since the basic premise behind the entire exercise was cutting costs, there were incentives for inventive managers to keep doing the same thing at lower costs. And, then came the financial crisis. With profits plunging to subterranean depths, companies starting sacrificing well-established risk measures and processes to gain that extra bit of business.
The same applies to banks which had “off-shored” their operations, compliance and risk processes to overseas locations. Ideally, the off-shore location, far removed (geographically, at least) from the business origination centres, were supposed to be neutral and free from any influence. In reality, there’s hell to pay if managers in these off-shore centres said “no” to 2-3 consecutive proposals, even if the proposals did not meet the risk matrix guidelines. The pressure to get business is so intense and so acute that anybody saying “no”, irrespective of the provenance of the funds, is viewed as an enemy of the institution.
We don’t know what happened in HSBC exactly. The bank had an off-shore compliance centre in India to ensure that funds flow met the rules regarding anti-money laundering and terrorist funding. But, what we do know is that  a probe by the US Senate’s Permanent Sub-Committee on Investigations found that the Indian compliance office was inadequately staffed, their quality of work was deficient and their monitoring procedures in internal control systems was weak (read full story here and here).
This is not the first time that India off-shore centres have been pulled up for the reasons cited above. In the mad rush to cut costs and stay competitive, many companies are sacrificing critical business processes, making compromises with sacrosanct quality standards. But, the worst culprit seems to be the practice of hiring sub-standard staff, shoring up revenues by skimping on training and telecom facilities and pushing employees to go beyond their call of duty to bring in revenues. This then creates a fertile breeding ground for suspect motives and dodgy ethics.
You can teach all the ehtics you want in B-schools (which, by the way, is another story for another day) but at the end of the day you would need an organisational culture –starting from the Board of Directors to the CEO to even the HR guys — to implement it. Are we expecting too much from the modern-day corporation?

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