MANAGEMENT FRAUDS

DEFINITION

The committed by the management of a company or a firm with a view to

obtaining personal benefits by cheating others are known as management frauds.

Fraud in law means willful misrepresentation intended to deprive another of

some right.

In the broadest sense, a fraud is a deception made for personal gain. The legal

definition of fraud varies by legal jurisdiction. Fraud is a crime, and is also a civil law

violation. In the criminal law of common law jurisdictions it may be called “theft by

deception”. The law distinguishes between actual fraud, which is intentional and

constructive fraud which is not deliberate.

INTRODUCTION

Cottrell and Albrecht (1994) point out that violent crime has clear physical

evidence whereas fraud often goes unobserved directly. Fraud is called white collar

crime in contrast to more violent crime.

Most of the time, the management misrepresents facts in its books for showing

higher profits for its companies. It is the duty of the auditors to catch these

irregularities but it has been observed that very often the auditors are not doing a very

good job at it.

The recent failure of U.S. energy conglomerate Enron is a case in point which

has shaken the American audit profession to its foundations. Congressional

committees, frustrated investors, regulators and even the FBI are asking a tough

question: “Where were the auditors?”

A 1999 study by the U.S. Committee of Sponsoring (COSO) of over 200

financial statement frauds brought out certain startling facts. It concluded that a

company’s top brass (the chief executive officer and the chief financial officer) were

directly responsible for fudging the books in at least 82% of the cases.

What has added to the increase in the number of such fraud cases is an

increase in the advantages received from committing fraudulent acts and a decrease in

the risk of being caught and punished.

There are various types of frauds like fraud by employees, fraud by

management, fraud by non related outsiders. In this chapter we will focus on

management frauds.

TYPES OF FRAUDS

Albrecht and Romney (1986) grouped frauds into two categories based on

motivation. One factor is that motivates some persons to commit fraud on behalf of a

company and those that motivate persons to commit fraud against a company.

There are three basic types of fraud: asset misappropriation, bribery and

corruption, and financial statement fraud.

Mot common and least expensive type of asset misappropriation. Any

business asset can be stolen by employees or third parties, or by a collusion between

the employees and third parties. It happens in over 91% of fraud schemes. It includes

direct theft of cash or realisable assets, such as stock or intellectual property, such as

price or customer lists, making false expense claims, payroll fraud, or theft of

services.

Next is bribery and corruption which includes schemes such as cuts,

kickbacks or commission, bid rigging, gifts or gratuities, and manipulation of

contracts. According to conservative estimates 30% of the frauds that go uncovered

are bribery and corruption.

The least common and most expensive type of fraud is financial statement

fraud. This type of fraud is done in the books of account by the management as it is

interested in showing a picture of the state of affairs of the company in such a way

that suits them. Usually done to

Show less profit – this can be done by showing less receipts or by showing

less expenses and the objective of such actions could be to save tax or to

avoid take over bids.

Show more profit – this can be done by showing more receipts or by

showing fewer expenses and the aim could be to attract more investments,

loans or to attract shareholders etc.

COMPUTER FRAUD

In these cases computer can be used as a tool for committing a fraud. It

includes sending hoax emails intended to scare people, illegally using someone else’s

computer or using spyware to gather information about people, manipulating the share

price of a company by publicising invalid new items on bulletin boards, diverting

funds from one bank account to another by hacking.

Money laudering – This is the practice of engaging in financial transactions

in order to conceal the identity, source or destination of money. This is a main

operation of the underground economy. It includes obtaining bank loans against assets

derived from criminal activities or issuing company cheques to third parties and those

parties issuing cheques to an individual.

Investment scheme fraud – It can also be viewed as third-party asset

misappropriation. It entails taking money from customers on the promise of

spectacular returns but using the cash for one’s own purposes.

Intellectual property fraud – It is theft of patents, industrial design etc by

employee or third party. Intellectual property fraud may include sale of price list or

customer list or using critical business information to set up competition. Intellectual

property theft varies from region to region with the highest percentage of respondents

in Asia Pacific. IP theft was seen as the highest threat in China (38 percent) as

compared to India (14 percent).

Insurance fraud – it may include false claims, jacked up claims, multiple

claims, obtaining cover on favorable terms on the basis of false information,

deliberate under insuring to reduce premium.

WHY DO EMPLOYEES COMMIT FRAUDS ?

The majority commits frauds to meet their financial obligations.

The most common reason for employees committing fraud had little to do

with opportunity, but more with motivation.

Wages in kind – the more dissatisfied the employee, the more likely he or

she was to engage in criminal behavior.

Technical ability of the fraudster.

For a fraud to occur the fraudster should be able to rationalize his offence

as something other than criminal activity.

Opportunity to commit crime, which may include the existence of national

and international social networks and transferable criminal skills.

WHO COMMITS FRAUDS ?

Frauds usually fall into one of three categories :

1. Pre-planned fraudsters : this category includes people who start out from

the beginning intending to commit fraud. These can be short-term players,

like many who use stolen credit cards or can be longer-term, like

bankruptoy fraudsters.

2. Intermediate fraudsters : these are people who start off honest hut turn to

frauds when times become hard or when there is dishonesty in personal

life.

3. Slippery-slope fraudsters: these are people who simply carry on trading

even when, objectively, they are not in a position to pay their debts. This

can apply to ordinary traders or to major businesspeople.

WHY AUDITORS FAIL TO DETECT FRAUDS

One of the major reasons is unwillingness of the auditors to look for

frauds. Auditors think that finding frauds is primarily a police detection

activity and they do not consider it as their prime responsibility.

In cases auditors place too much trust on Auditees. Year after year auditing

leads to auditors becoming friendly with the company. A level of trust may

develop over a period of time that makes the auditors lax.

At time not enough emphasis is laid on audit quality. Audit reports mostly

point out on missing records or accounts that were not reconciled and miss

out on fraud related issues.

Fraud concerns receive inadequate support from management.

Management most of the times would like auditors to skip or stop spending

time on low risk areas.

Auditors sometimes fail to focus on high-risk fraud areas. At times auditors

end up focussing to much on low risk fraud areas and miss out on high-risk

areas.

FRAUD PREVENTION

Developing an anti-fraud culture

Attitudes within an organisation often lay the foundation for a high or low risk

environment. It is a known fact that where minor unethical practices are overlooked

larger frauds committed by higher levels of management may also be treated in a

similar lenient way. In this environment there may be a risk of total collapse of the

organisation either through a single catastrophic fraud or through the combined

weight of many smaller frauds.

A Benchmark organisation will generally have;

(a) a mission statement which refers to quality or more unusually to ethic

which defines how the

(b) organisation wants to be regarded externally

(c) a clear policy statement on business ethics with explanations about

acceptable behaviour in risk prone circumstances.

(d) A route through which suspected fraud can be reported.

Risk Awareness

It is important to sensitize people about risk management. It has been seen that

almost every time a major fraud occurs many people who were unwittingly close to it

are shocked that they were unaware of what was happening. Therefore, it is vital to

raise awareness through formal education and training programme as a part of the

overall risk management and staff operating in high risk areas, such as procurement

and bill paying and to those with a role in the prevention and detection of the fraud,

for example human resources and staff with investigation responsibility.

Whistle-Blowing

Very many frauds are known or suspected by people who are not involved.

The challenge for management is to encourage these innocent people to speak out to

demonstrate that it is very much in their own interest.

In this are there are many conflicting emotions influencing the potential

whistle blower.

1. working group/family loyalties

2. disinterest/sneaking admiration

3. fear of consequences

4. suspicion rather than proof

Where fraud is committed by senior managers the predicament faced by teh

whistle blower is exacerbated. And this is where managements greatest challenges lies

– to convince staff that everyone is responsible for combating fraud and the good

health of complaint under the false claims act.

Sound Internal Control Systems

A company’s system of internal control has as its principal aim the

management of risks that are significantly to the fulfillment of its business objectives

with a view to safeguarding the company’s assets and enhancing over time the value

of the shareholders interest.

An internal control system comprises all those policies and procedures that

taken together support a company’s effective and efficient operation. These

procedures can include the division of responsibilities and checks and balances to

reduce risk.

IDENTIFYING FRAUDS

It is almost impossible to develop a system where there is no possibility or

chances of frauds being committed. It will never be possible to eliminate frauds

because no system is completely fraud proof. Many transactions are able to by-pass

control systems put in place to stop them. However, vigil and a little more attention

paid to some of the most common indicators could sound alarm bells that something

is not quite right and increase the chances that the fraudster will be discovered.

Fraud Indicators can be classified into two categories :

1. Warning signals

2. Fraud alerts

Warning Signals

Warning signals are organisational indicators of fraud risk. They have been

sub-divided into business risk, financial risk and environmental risk.

Business Risk

This has been sub divided into cultural issues, management issues, employee

issues, process issues and transaction issues.

Cultural issues

Absence of an anti-fraud policy.

Failure of management to make a clear commitment to implementing a

sound framework of internal control and demonstrating this at all times.

Management issues

There are no steps from management in case of any deviations from the

code of conduct or the policies.

No effective oversight by the management which is comprised of a small

group.

Lack of clear management control of responsibility, authorities, delegation.

A history of legal or regulatory violations within the organisation and

claims against the entity alleging such violations.

Frequent change of legal advisors or auditors.

High turnover of financial personnels.

Employee issues

No checks to see that only appropriate employees are recruited taking

references for past records.

Employee relationships-internal and external.

Unusual staff behaviour patterns.

Where lifestyle is at variance with their known source of income.

Remuneration based on financial performance.

Employees working unsocial hours unsupervised.

Process issues

Poor documentation of internal controls.

Poor physical security of the assets.

Lack of internal controls.

No checks to ensure that sales are only made to appropriate customers.

Continuing failure to correct major weaknesses in internal control where

such corrections are practicable and cost-effective.

Indications that internal financial information is unreliable.

Poor management accountability and reporting systems.

Transaction Issues

Large cash transactions.

Poor documentation for specific transactions.

Susceptibility of assets to misappropriation.

Financial Risk

Rapid changes in profitability.

Unusual transactions that have significant effect on earnings.

Unusual transactions with related parties.

Complex legal ownership, organisationl structures.

Significant pressures on management to obtain additional finance.

Inadequate documentation about a client or a transaction.

Extensive use of tax havens without a clear business justification.

Environmental Risk

Significant changes in customers demand.

Highly competitive market conditions and decreasing profitability levels

within the organisation.

Rapid technological changes taking place within the industry, which may

increase the potential for product obsolescence.

The introduction of new counting or other regulatory requirements

including health and safety or environmental legislation, which could

significantly alter the reported results of an entity.

Fraud Alerts

Frauds alerts are specific events which may be indicative of fraud. A list of

possible fraud alerts is provided below.

Supplies purchased in excess of need.

Discrepancy between earnings and lifestyle.

Unusual staff behavior patterns.

Missing approval or authorisation signatures.

Signature or handwriting discrepancies.

Alteration of documents and records.

Rubber stamp signatures instead of originals.

Photocopies of documents instead of originals.

Extensive use of correction fluid or erasures.

Anonymous calls or letters.

Execution as per authorisation missing.

Subsidiary ledgers which do not reconcile with control accounts.

GLOBAL OUTSOURCING

INTRODUCTION

In a world dominated by Internet, Intranet and the IT revolution, business and

knowledge no longer have to be homegrown. In this increasingly competitive world, it

can be contracted, to reduce the cost and maximize the profit, without compomising

on quality and time. Such a contract is known as outsourcing, which is a powerful

management tool for redefining and re-energizing any organization. It is useful, not

only for maximizing the present profits of the organization, with the existing

clientele, but it also relieves and enables employees to work on higher value added

jobs. It offers online support services that use the Internet as a platform to build the

desired recognition value in the eyes of customers, through good customer servicing.

Outsourcing business process helps in taking care of daily routines, and concentrates

on the new business prospects. This process reduces overheads, and increases profit

and time to concentrate on new business avenues.

DEFINITION

According to Webster’s 10th Dictionary, the world outsourcing was coined in

1982. It can be defined as the transfer of an organization’s entire non-core, but

critical, business process/function to an external vendor who uses an IT-based service

delivery.

By doing so, BPO helps an organization to concentrate on its core

competencies, improve efficiency, reduce cost and improve shareholders; value.

RATIONALE FOR GLOBAL OUTSOURCING

Why do everything yourself, when someone else can do it at low cost? In the

current scenario, the theory sys exactly the same. The global market today is highly

competitive and continuously changing. A company must, thus, focus on improving

productivity and at the same time, cut down costs. This is the basic premise of

outsourcing. In brief, business process outsourcing can be seen as a process in which

a company delegates some of its in-house operations or processes to a third party.

Thus, it is a transaction through which one company acquires services from another,

while maintaining ownership and ultimate responsibility for the processes. The main

motive for business process outsourcing is to allow the company to invest more time,

money and human resources into core activities and building strategies, which fuel

company growth.

BUSINESS PROCESS OUTSOURCING

In today’s business environment, outsourcing is often not a decision that needs

to be justified. BPO Companies are often considered to provide more flexible, faster,

cheaper and effective services. The operations or processes being outsourced vary

from manufacturing, to customer service, to software development, and much more.

Most of the companies, that are looking to outsource, are multinationals, or

companies from western countries and most of the BPO units are in countries such as

India, China, Malaysia and even Russia.

Though IT outsourcing has been happening for so many years, an increased

momentum has been-witnessed since the late 1990’s, due to the rise of internet and

communication technologies. This has given rise to many specialized BPO vendors

across the globe, with India being a major hub, owing to its large computer-literate,

English-speaking’ population, low billing rates, strategically favourable time zone

and high quality. In India, the BPO market is expected to grow exponentially in the

coming years.

The controversy that outsourcing has resulted in job losses in the USA, is

largely seen as more political than economic in India. Ever since the US Senate

passed the Bill on banning government outsourcing to foreign countries in January,

2004, there has been a lot of resentment in India IT industry. By no stretch of

imagination can be estimated 245,000 employees, now working in business process.

Outsourcing in India, pose a threat to the 100 million workers in the US services

sector. American businesses themselves, do not want to be restrained in any way from

tapping cheaper sources outside the United States. The major US concerns comprise

of the prediction that by 2015, roughly 3.3 million US business-processing jobs will

have moved abroad. Research suggests that the number of US service jobs lost of off

shoring will accelerate at the rate of 30 to 40% annually, during the next five years.

These fears are without proper basis as a large percentage of jobs in US

require the consumer and the retailer to be present in the same place. Any job losses

must be seen as a part of economic restructuring, with which the US economy is well

acquainted.

Most of the jobs created in India are either in call centres or at IT firms. But

call centres companies in both Britain and US suffer from rising staff turnover and

struggle to recruit more people. In fact, ‘not moving work abroad’ would make the

companies of developed countries less competitive. By focusing on creation of jobs,

they could miss the chance to raise their productivity.

There are roughly 200 Fortune 500 companies, which outsource work to India.

According to NASSCOM (National Association of Software and Service Companies)

estimates, over 50% of the Fortune 500 companies have incorporated offshore

outsourcing into their strategies, and around 80% of these now use India as their

development base. The leading companies in India, in both the IT and BPO industries

are fighting hard to win a broader variety of work, particularly higher value activities.

Examples include EXL Services, carrying out a broad range of insurance work for

British and American firms. ICICI One Source, another Indian BPO Company

provides research services for consultants and investment bankers. Wipro and EXL

services are applying the same management disciplines that GE applies to its

industrial businesses to the way they provide services.

RATIONALE BEHIND OUTSOURCING

According to Forrester Research, 3, 4 million jobs will be outsourced by 2015.

That may sound enormous, but it implies an annual outflow of only 0.5% of the jobs

in the industries affected. In an average year, the American economy destroys some

30 million jobs, and creates slightly more, dwarfing the effects of off-shoring. But

what is the reason behind using outsourced model, by the traditionally vertically

integrated firms, at an increasing rate. The analysis revealed that three main factors

are responsible for this change, and the can be identified as :

1. The mergence of world-class service providers : Often these companies

get started, responding to the needs of one or more current customers. But

once they do, the marketplace gets defined, and the power of the free-

market economy takes over. Before long, it becomes difficult for any

organization to justify in-sourcing when their capabilities are tested against

a competitive market of specialized providers.

2. Technology : Technology is the leading area for outsourcing, but it is just

as important as the top enable of outsourcing. Once the physical barrier of

where the work is done is broken, breaking the organisational barrier is a

lot easier.

3. Competition : As competition (local, global, bricks and clicks) intensifies,

organizations must simultaneously get more efficient and more efficient and

more effect to survive.

The overseas markets for the US that might be considered as “taking away our

jobs” are product markets in themselves. Out of India’s one billion population, 300

million is classified as middle class. This is larger than the entire US population, and

represents an enormous marketing opportunity. In China, with a population of 1.2

billion, only about 5% (65 million) economy this is a significant potential market.

Sweetening the pot, India and China offer preferential treatment to companies that

participate in their local economies, such as reduced entry barriers, lower taxes 0

tariffs, and better currency exchange rates.

PROCESS OF OUTSOURCING

Deciding to outsource

The decision to outsource is taken at a strategic level and normally requires

board approval. Outsourcing is the divestiture of a business function involving the

transfer of people and the sale of assets to the supplier. The process begins with the

client identifying what is to be outsourced and building a business case to justify the

decision. Only once a high level business case has been established for the scope of

services will a search begin to choose an outsourcing partner.

Supplier proposals

A Request for Proposal (RFP) is issued to the shortlist suppliers requesting a

proposal and a price. The suppliers are usually chosen based on location and at the

lowest possible cost to the company.

Supplier competition

A competition is held where the client marks and scores the supplier proposals.

This may involve a number of face-to-face meetings to clarify the client requirements

and the supplier response. The suppliers will be qualified out until only a few remain.

This is known as down select in the industry. It is normal to go into the due diligence

stage with two suppliers to maintain the competition. Following due diligence the

suppliers submit a “best and final offer” (BAFO) for the client to make the final down

select decision to one supplier. It is not unusual for two suppliers to go into

competitive negotiations.

Negotiations

The negotiations take the original RFP, the supplier proposals, BAFO

submissions and convert these into the contractual agreement between the client and

the supplier. This stage finalizes the documentation and the final pricing structure.

Contract finalization

At the heart of every outsourcing deal is a contractual agreement that defines

how the client and the supplier will work together. This is a legally binding document

and is core to the governance of the relationship. There are three significant dates

that each party signs up to the contract signature date, the effective date when the

contract terms become active and a service commencement date when the supplier

will take over the services.

Transition

The transition will begin from the effective date and normally run until four

months after service commencement date. This is the process for the staff transfer and

the take-on of services.

Transformation

The transformation is the execution of a set of projects to implement the

service level agreement (SLA), to reduce the total cost of ownership (TCO) or to

implement new services. Emphasis is on ‘standardization’ and ‘centralisation’.

Ongoing service deliver

This is the execution of the agreement and lasts for the term of the contract.

Termination or renewal

Near the end of the contract term a decision will be made to terminate or

renew the contract. Termination may involve taking back services (in sourcing) or the

transfer of services to another supplier.

REASONS FOR OUTSOURCING

Organizations that outsource are seeking to realize benefits or address the

following issues :

Cost Savings : The lowering of the overall cost of the service to the business.

This will involve reducing the scope, defining quality levels, re-pricing, re-

negotiation, cost restructuring. Access to lower cost economies through offshoring

called “labor arbitrage” generated by the wage gap between indsutrialized and

developing nations.

Cost Restructuring : Operating leverage is a measure that compares fixed

costs to variable costs. Outsourcing changes the balance of this ratio by offering a

move from variable to fixed cost and also by making variable costs more predictable.

Improve Quality : Achieve a step change in quality through contracting out

the service with a new service level agreement.

Knowledge : Access to intellectual property and wider experience and

knowledge.

Contract : Services will be provided to a legally binding contract with

financial penalities and legal redress. This is not the case with internal services.

Operational expertise : Access to operational best practice that would be too

difficult or time consuming to develop in-house.

Staffing issues : Access to a larger talent pool and a sustainable source of

skills.

Capacity management : An improved method of capacity management of

services and technology where the risk in providing the excess capacity is borne by

the supplier.

Catalyst for change : An organization can use an outsourcing agreement as a

catalyst for major step change that can not be achieved alone. The outsourcer becomes

a Change agent in the process.

Reduce time to market : The acceleration of the development or production

of a product through the additional capability brought by the supplier.

Commodification : The trend of standarizing business processes. IT Services

and application enabling businesses to intelligently buy at the right price. Allows a

wide range of businesses access to services previously only available to large

corporations.

Risk management : An approach to risk management for some types of risks

is to partner with an outsourcer who is better able to provide the mitigation.

CRITICISM OF OUTSOURCING

The downsides of global outsourcing can be specified as follows :

(i) Outsourcing work that was previously done in house results in a large

number of workers being displaced and losing their jobs.

(ii) Companies tend to overstimate the savings to be had from going abroad

and fail to recognize the problems, such as dealing with inventory,

obsolescence and currency exchange rates.

(iii) For many manufacturers, the importance of direct labour is declining

rapidly. Since it often accounts for just 7 to 15 percent of the cost of

goods sold, hard-goods and high-tech manufacturers often say that

wage rates are hardly the most critical determinants of their overall

economic performance.

For the outsourcing of manufacturing operations in particular, the following

concerns are raised.

The danger of suppliers reaping undue advantages by imitating superior

products or technologies.

Exposure to supplier risks and issues of quality control.

A possible change in supplier behaviour from collaborative to

opportunistic.

Difficulty in measuring actual costs of the supplier, typically above

baseline costs, due to the experience curve.

Potential problems with taking an outsourced function back, or substituting

the suppliers when the outsourcing agreement terminates.

THE OUTSOURCING DEBATE

The practice of outsourcing has, of late, been the subject of intense debate. The

primary contention being, is outsourcing just a new way of doing international trade,

or is it something to fear as being fundamentally damaging to the economies of

developed nations? The forces of outsourcing are being blamed for the relentless

export of jobs from the rich to the poor countries, whereby outsourcing becomes a

shorthand for the process by which good jobs in America, Britain or Germany become

much lower paying jobs in India, China or Mexico.

Research suggests that the number of US service jobs lost to offshoring will

accelerate during the next five years. Several US states are considering legilsation to

prohibit or severely restrict their state governments from contracting with companies

that move jobs to low-wage developing countries, and labour unions are notably the

Communications Workers of America, are lobbying the Congress to prevent

offshoring.

The argument against outsourcing can be refuted through a consideration of

the following factors :

1. A large percent of jobs in United States are in service industries such as

retailing catering, tourism and personal care, that require the consumer

and producer to be present in the same place and therefore, by their

very nature, cannot be moved abroad.

2. Any job losses must be seen as part of an ongoing process of economic

restructuring, with which US economy is well acquainted. Even when

the economy is growing, mass layoffs usually from restructuring, are

much higher than the job losses predicted from offshoring.

3. As jobs in call centres, back-offices operations, and repetitive IT

functions go offshoring, opportunities to train labour and invest capital

to generate opportunities in higher value-added occupations, such as

research and design will appear.

4. The industries said to be badly hurt by the migration of job overseas,

report a shortage of workers at home. Most of the jobs created in India

are either in call centres or in IT firms. But call centres companies in

both Britain and US suffer from rising staff turnover, and struggle to

recruit more people.

INDIA’S PERSPECTIVE

India has made a strong niche for itself in the Information Technology Enable

Services and Business Process Outsourcing sectors. The %3.6 billion outsourcing

industry in India has emerged as the single biggest employment generator in recent

years.

In a study by the Hewitt Associates of US on global sourcing trends and

outcomes, India got 60 percent preference amongst the global companies, while its

closest competitor was China, with 32 percent preference. Today, companies

outsource to destinations like India because they see value in their investments in

terms of quality service and financial spending.

In the 1990s India was able to respond very quickly to the growth in demand

for IT services. It had a sizeable number of English speaking people, who were

available in the job market at a low cost and were willing to work hard. There were

also a lot of entrepreneurs and managers who could quickly make inroads, and take

advantage of this new business opportunity. This was coupled with some initiatives

by the government, like the formation of software and other industrial parks. This

helped to give the Indian IT sector a kick-start.

The BPO sector in India has been growing at almost 60 to 70 percent per

annum. According to NASSCOM, each day, nearly 200 people join the Indian ITES-

BPO industry. BPO offerings are becoming more comprehensive. As pointed out in

the McKinsey Institute study, the US economy benefits in outsourcing in more ways

than one. A NASSCOM report estimated 60 percent savings in costs for companies

outsourcing to India. There exist 185 Fortune 500 companies which outsource work to

India. Information Technology Enabled Services (ITES) provides opportunities for

MNCs to reap the surplus in the service sector that did not exist earlier.

Thus business proposition of BPOs is to take over the non-core processes of

companies and bring in the best practices. From outside, companies are using BPO to

reach a wide range of goals. What was once viewed, primarily, as a way of reducing

expenses, has now emerged as a means of achieving productivity gains. Short-term

innovation cycles enhance customer intimacy, and enter new markets.

The the short run, the gains from outsourcing might be concentrated, however,

in the long run; it holds promise for India and other developing nations. One of the

longer term potential benefits of IT industry development (and globalization

processes) is competency capacity building, which can spill over into other sectors,

boost the local economic dynamism and competitiveness, and thereby facilitiate

processes that impact poverty. Off shoring also has demonstration and empowerment

effects, and helps to inspire the country’s youth and people, both in urban and rural

areas.

Many Indian firms are rather good at being flexible, taking advantage of new

business opportunities, ramping up manpower, being responsive in terms of prices,

and improving in quality. They have also managed to form mutually beneficial

strategic alliances with multinational and their local subsidiaries.