‘Tax saving is a very minor issue when one considers offshoring’

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: The debate about offshoring may have taken a political turn in the US, but it does not make business sense. US-based business strategist Robert E Kennedy believes that offshoring allows companies to be proactive in shaping their future. Kennedy is Tom Lantos Professor of Business Administration at University of Michigan’s Ross School of Management. He has also spent eight years at Harvard Business School researching global strategy. His latest book Services Shift — Seizing the ultimate offshore opportunity shows how managers should prepare for the globalisation of services. In an interview to fe’s Saikat Neogi, he talks about opportunities and challenges for the Indian IT industry. Excerpts:

If the proposed changes on ending tax breaks to American companies shipping out jobs come into effect, how will the offshoring work to India be affected?

The announcement was focused on Part D of the IRS code, which regulates how US multinationals must account for their overseas earnings. At present, they can defer US taxes until the money is repatriated. It also regulates the use of offshore tax havens. While President Obama mentioned moving jobs offshore, this really has very little to do with offshoring. The proposed changes will make it slightly less attractive for US firms to operate abroad, and it will put US firms at a disadvantage relative to non-US firms. But tax saving is a very, very minor issue when one considers offshoring. So, I don’t expect any effect.

Will US companies find a way out to still offshore to save their margins?

The major reasons for going offshore include labour cost savings, access to better skills, access to advanced delivery platforms etc. Tax treatment doesn’t even make to the top ten reasons. So, offshoring will continue and these proposed changes will have little or no effect.

It has been reported that US companies that offshore R&D work will not be affected. Will it lead to a new wave of R&D offshoring to India?

R&D is generally treated as a cost centre, so there are no profits associated with it. There has been a growing interest in moving R&D to India, primarily to access a deep talent pool. I expect the trend to continue.

How can offshoring present a compelling opportunity to improve a company’s competitive position?

There’s a huge economic value that can be created by going offshore. It’s a huge value for firms as they can take out 30% of their overheads. If their rivals do not do it, they are disadvantaged. When they go for offshoring, they transfer their process into worldclass platforms, which helps them to improve quality and cycle time and get the products to market faster.

By when will the IT budget of companies in the US and Europe look up?

There is a lot of uncertainty because of the financial turmoil. I don’t think companies will pull out of offshoring. It’s just that companies are not making investment now in hiring new people, setting up new business, or undertaking new offshore initiatives. I believe that in two or three quarters we are going to see a big acceleration of new efforts because firms under margin pressure will have to do something. Once the economy bottoms out, companies will have to improve margins and that’s when they will have to go for offshoring. Now there is a pause, but growth will come back by the end of the year.

Why are Indian IT companies focusing much more on IT-enabled services?

India’s traditional strength was in software. IT-enabled services were catching up lately. I don’t think companies are moving away from software and there’s a big line of business.

Where does India’s future competence lie in the outsourcing business?

The offshoring from the US and Europe is becoming much less India-centric. Traditionally, India had about 75-80% of the offshoring market and now it is between 50% and 60%. It’s not because India is losing out, but many other countries are imitating and that’s a challenge for India. India has by far the most sophisticated business ecosystem for offshoring. There are technical institutes, venture capital firms and offshore advisory firms. In most other countries there are a few firms doing it as they do not have the sophistication. India will be the hub for most of the sophisticated activities and for coordinating global networks.

In your book you have talked about services shift. In which sectors will this shift occur?

it is already happening in some sectors like software, medical transcription, call centres, accounting and finances. Certain sectors are now much more niche where high value added activities like architecture, legal process, design, R&D, education and healthcare would see hundreds of firms operating and a few of them will grow large. That’s where the fastest growth is and I prefer the phrase creative industries as opposed to KPOs.

How can India take the advantage of globalisation of services and how are firms in India preparing for the shift?

India has been the leader so far and would continue to be the leader. For India to stay ahead, it needs to bring in more people in the network, which means going beyond major cities to other Tier II cities. That also means building a better IT infrastructure and if there are hundreds of millions of people thinking about it, it’s going to create a lot of innovation.

Apart from India, which are the other countries that are becoming attractive destinations for offshoring business?