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Global Value Chains in a Postcrisis World
services providers had noted attrition rates as the “same,” “decreasing,” or “decreasing significantly” (Philippine Daily Inquirer 2009). During the crisis, India saw a reduction in the attrition rates, to levels similar to those of three years ago. According to a survey by IDC and Dataquest, India’s average IT sector attrition rate decreased from 18 percent to 15 percent in 2009 (Business Standard 2010). For the last quarter of 2008, the attrition rates for TCS, Wipro, and Infosys were 11.9 percent, 11.9 percent, and 11.8 percent, respectively. Just one year earlier, the rates were 11.5 percent, 20.1 percent, and 13.7 percent, respectively, for the three IT majors (AbhiSays.com 2009). There was general consensus among senior management from the Indian offshore services providers that the highlight of the difficult 2008 crisis year was the decline in attrition rates. Alok Aggarwal, chairman and cofounder of Evalueserve, a KPO firm, noted that “attrition in the offshore outsourcing industry came down significantly and Indian employees became more realistic about their expectations and about their careers. The current expectations will be able to provide a more sustainable, long term growth for the Indian offshore-outsourcing industry” (BPOWatch India 2008). Overall, the economic crisis has had various effects on offshore services. Some clients have frozen contracts, while others have demanded additional services in order to reduce costs. Providers have responded to the changing demands by employing a number of different strategies to reduce their own costs, including lowering salaries, opening offices in cheaper locations, and finding innovative solutions to enhance efficiency. As a result, even more activities are being moved to developing countries, both from developed nations to India, and also from India to other developing countries, due to labor arbitrage (substituting cheaper workers for more expensive ones) and the search for talent. The structural changes that facilitated the initial development of the offshore services industry have accelerated during the economic crisis, and these changes will likely become entrenched in future years. Substitution Effect Versus Demand Effect During the recent global economic crisis, the offshore services industry suffered two conflicting effects.6 The first is the “substitution effect” whereby activities are relocated to cheaper locations, leading to the growth in offshoring. The “demand effect” is a decrease in demand from the industry’s clients that were affected by the recession and consequently reduced their offshoring services. Substitution Effect In a globally competitive environment, companies use different strategies to reduce costs. Unbundling activities and relocating them to countries that have