By Dibesh Dangol
“It is believed that outsourcing appeared in the 60s. Two researchers from the University of Berkeley (Ashok Deo Bardan and Cynthia Kroll), studied outsourcing in two big states,” says Sabin Thapa, CEO at Greentick Management Consultant which was established in 2010 with the aim to render practical and feasible solutions for their clients’ businesses regardless of the industry and geographic location through strategic business planning and economic and financial management. He adds, “According to them, outsourcing started with the division of labour between US and Mexican factories, involving “blue collar jobs”, which means the jobs were divided as per the colour of the workers. Also the major attribute of outsourcing was off-shoring; the production of intermediate inputs was usually in low-cost developing countries.” He concludes by saying that the low cost of manufacturing abroad was the motivation that drove developed countries to outsource and offshore the raw materials to make the production at low costs. That was how Asians, especially those belonging to East Asia, were involved in outsourcing back then.
Ever since the adaptation of outsourcing, from mid 20th century, Asia has been regarded as a central hub for outsourcing. All the factors for good outsourcing opportunities like skilled manpower, availability, easy access to resources (manufacturing and transportation) and especially the cost played favourable roles. The geo-political and geo-economical conditions have also played a major role to attract international companies and organisations to Asia.
Two of the thrusting countries, India and China, have been the prime outsourcing destinations in the world. These two countries have been actively involved in providing customer service solutions and business process outsourcing (BPO) for a long time. India is considered as the country with the largest technical and professional gifted country in the world whereas China is where every manufacturing company comes to.
Urika Shrestha, Managing Director at Home Loan Experts Nepal which is a Business Process Outsourcing (BPO) company that specialises in working for the Australian mortgage industry agrees and says that the main reason the Western companies have begun offshore outsourcing is due to competitive cost saving for foreign companies.
There were also other Asian countries, primarily East Asian countries, like Malaysia, Singapore and Indonesia which were recognised to be great outsourcing destinations for international brands few years back but the tide has now shifted to South Asian countries like India and Bangladesh.
The countries need to meet the criteria that the international brands analyse before the outsourcing process. The criteria such as stable political situation, multilingual government, skilled manpower and flexible pricing options or low operating expenses are what the brands look for.
Outsourcing and Dependency Theory
Dependency theory talks about the dependency of developing nations on developed nations. It is a sociological theory which holds that economic events in history have encouraged developing countries to depend on the support of more advanced or developed countries. Therefore, if the country is unable to pursue its development goals, it will be assisted by developed countries.
“Companies or countries get into outsourcing only when they have insufficient time, resources, etc. and also if they are economically benefited. Hence, outsourcing can be definitely related to dependency theory,” states Thapa.
Kiran Kumar Regmi, Training Manager at Leapfrog Inc Technology Nepal that specialises in developing software (both mobile and web) and enhancing the digital experience of application for clients, agrees with Pant and adds that there are some coherent notions from outsourcing that can be linked to the dependency theory. But he also says that the idea of outsourcing and dependency theory should be diluted. He elaborates, “In dependency theory, we mostly link the periphery of work with the economic state of territories but in the case of outsourcing, it is not necessary to link the economic state of territories. Rather, outsourcing is about the transfer of work between territories irrespective of financial boundaries as primary criteria.”
Completely disagreeing with any common relationship between outsourcing and dependency theory, Shrestha says that the dependency theory is an old concept and the theory tends to focus on the power of developed nation against the underdeveloped nation, but outsourcing is advantageous to both the parent company and the host company. She states that dependency theory is more of an inward-looking approach and disregards the advantage that host countries. She believes that outsourcing is of mutual dependence for both parent and host countries. “The dominant reason for outsourcing has changed over time and is more of a two-way gain,” concludes Shrestha.
Outsourcing Controversies
Though outsourcing is a common practice nowadays both domestically and internationally, controversies regarding outsourcing is not new. Since the beginning of this practice, companies involved in outsourcing have been getting into controversies. Major international companies such as Microsoft, IBM, Nike have been getting into controversies regarding sweat-shops, poor quality products and services, loss of jobs in the parent company’s country, etc.
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“the main reason the Western companies have begun offshore outsourcing is due to competitive cost saving for foreign companies.”
Urika Shrestha Managing Director Home Loan Experts
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“As per data of Computer Association of Nepal (CAN) there are more than 6,000 outsourcing companies currently in Nepal and more companies are coming into the loop.”
Sabin Thapa CEO, Greentick Management Consultant
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“In dependency theory, we mostly link the periphery of work with the economic state of territories but in the case of outsourcing, it is not necessary to link the economic state of territories.”
Kiran Kumar Regmi Training Manager Leapfrog Inc Technology Nepal
[/su_column][/su_row]“One of the main reasons for such controversies may be due to the decline in employment rate at the parent company located in developed country,” focuses Rupak Kayastha who is the Head of Production at Incessant Rain Animation Studios, one of the country’s leading animation and visual effect studios, and has screen credits in Hollywood projects like The Greatest Showman, The Meg, Tom Clancy’s Jack Ryan, Colony, Nerdland, Moonbeam City, The Royals, etc. He gives an example of IBM being an American based company which has employed more people in India via outsourcing rather than in native America.
Shrestha also gives a similar answer saying that big or multinational companies play a vital role in employment and overall development of the host country. Outsourcing does create a major shift in employment. “In context of Nepal, I know of a few companies that got into controversy and were shut down overnight.”
Regmi adds, “The position companies such as IBM, Microsoft and Nike stand at are because of smart strategic business moves. Chips for IBM are built in Indonesia and Nike has African workers working on their products hinting that one of the core fundamentals of business strategy is cost reduction.”According to Regmi, this draws the attention of their competitors. And they drive the story as to whether it’s ethical or not. Another company that comes to mind is Apple. Documentaries like Broken Promises of Apple clearly highlight this concern.
In Nepal, the controversy is different. It’s more about fear of loss of control or inability to compete. Outsourcing companies are much more efficient, pays higher salary, the young generation are attracted to work with multinationals, etc thus local companies may feel threatened.
Outsourcing Business in Nepal and its Impact
“There is no doubt that we have great talent here in Nepal which is also a primary reason for outsourcing. The technological innovation in terms of the internet has uplifted outsourcing processes massively,” says Shrestha.
Outsourcing to Nepal is now better recognised and the sectors for outsourcing are also diversifying. Regmi states, “I think the most important reason for outsourcing to Nepal and other Asian countries is the labour cost.”
“The positive thing about outsourcing is that you get to work with other people, share and bring new knowledge and ideas, whereas the negative point can be that you won’t have full control and authority over the finished product which is why here at Yala Mandala we never outsource completely,” says Pravin Chitrakar, Founder and Creative Director at Yala Mandala. Yala Mandala designs, develops and manufactures products that are inspired by the local community and heritage and has been a manufacturing outsourcing company for brands like Mulxiply based in Maine, USA.
When asked about the impact of outsourcing in Nepal, Sabin Thapa focuses on the fact that as per data of Computer Association of Nepal (CAN) there are more than 6,000 outsourcing companies currently in Nepal and more companies are coming into the loop.
Shrestha states that there are no clear and specific policies for outsourcing and no written guidelines that outsourcing business must follow. “Even government officials of Foreign Direct Investment or Department of Industry do not know much about the requirements of outsourcing policies”.
Rameshwor Shah, President of Outsourcing Association of Nepal (OAN), says, “At the moment, no policies have been applied except that the Government of Nepal has made provisions regarding outsourcing in the Labour Act 2074. All outsourcing companies must get a licence from the Government of Nepal, must pay salary or wages to their staffs via formal banking channels, labour audit is to be done along with health and safety benefits and such.” He adds that even though the Labour Act 2074 is impressive, any policies, laws and plans are good only when they are implemented and not just limited to paper. It is important that the government not only introduce laws and policies but also ensures its enforcement and monitors it adequately.
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“The positive thing about outsourcing is that you get to work with other people, share and bring new knowledge and ideas, whereas the negative point can be that you won’t have full control and authority over the finished product which is why here at Yala Mandala we never outsource completely,”
Pravin Chitrakar Founder and Creative Director, Yala Mandala
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“At the moment, no policies have been applied except that the Government of Nepal has made provisions regarding outsourcing in the Labour Act 2074.”
Rameshwor Shah President, Outsourcing Association of Nepal
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“One of the main reasons for controversies may be due to the decline in employment rate at the parent company located in developed country.”
Rupak Kayastha Head of Production Incessant Rain Animation Studios
[/su_column][/su_row]Money Matters
Establishing or working in an outsourcing business has always been profitable for the company founders and employees. Outsourcing companies offer higher salaries. Shrestha says, “Most outsourcing companies are performance-based whereas in Nepali organisations, no matter how hard you work, your work is only praised or even goes unnoticed. She says that in her company salary reviews are done any time of the year for high performing staff and they don’t wait for the end of the year to review their salary which is why their staff are motivated and loyal to the company.
Shah says, “Higher salaries in outsourcing companies can be because of the economic difference. Employees working in outsourcing companies get paid according to their parent company, whereas, domestic companies cannot compete at the same level as international companies which is why when you pay higher, obviously you get good employees, but when you pay peanuts, you get monkeys.”
