The Coming Death of Indian Outsourcing?

From a Forbes article by Sramana Mitra:

Forbes recently published some scary statistics on wage inflation in India. (See "Indian Employees Enjoying Swift Pay Hikes.") Salaries rose 15.1% in 2007, up from 14.4% the previous year. The 2008 forecast: 15.2%. This would be the fifth consecutive year of salary growth above 10%.

Add to that the appreciation of the rupee against the weakening dollar (11.5% in 2007), and its impact on the labor arbitrage market.

Is the death of Indian outsourcing all that far off?

Assuming a 15% year-to-year salary hike rate, and a 2007 cost advantage of 1:3 in favor of India, if U.S. wages remain constant, India’s cost advantage disappears by 2015. Then what?

(HT: Mad Toothfish)

Comments

[casualobserver]

Nothing will happen.
We didn't outsource jobs to India because they were just as cheap as the U.S., we outsourced because they were much cheaper.
If the cost of labor in India finally catches up to us, that's no incentive to repatriotize those jobs. Wage growth would have to continue beyond the 2015 break even point for anything to happen.

[SaiWhat]

Already is happening . My company (EDS) is moving "bestshore" to China

[IKnow]

A few points:
1. Salary increases (percentages) are slowing down in India. This year the average increase is expected to be lower than last year. Same was the case last year and the year before that. As the salaries reach comfortable levels, the percentage increase is lower.
2. The rising rupee against the dollar is a definite concern. In fact, one of the reasons why salary increases were high in the past was that the rupee used to depreciate by 10-15% and it was easy to dole out high wage increases without affecting the bottom line. Now the reverse is true. However, there are also some predictions that the rupee will not appreciate against the dollar in 2008 and will remain steady around Rs 39-40 to a dollar.
3. Finally - and most importantly - I don't know where the figure of 1:3 in 2007 comes from. My experience is more like 1:5 if you take the blended rate and particularly if you add the overheads to arrive at a fully burdened rate in the US and in India. Therefore, with all the other arguments, it will still take quite a while for the cost arbitrage to come down to a level where outsourcing is not worth it.
4. Of course, there are some specialized skills, where companies are paying close to US salaries, but that is because those skills, in those numbers, are just not available in the US or in other geographies. I know a company that would pay even higher than US salaries, if they could get the specialized skills they are looking for, in large numbers. The value they derive out of these skills is far more than the cost they incur, even after the high salaries.

[Kebeen]

Very likely, the business will move to Thailand, Malaysia, Vietnam and China. It is unlikely that death will come anytime soon though...

[User 159537]

Actualy, wage inflation in India has been considerably offset by the quality of the work and the availablity of talent. Hence when you look at the total cost of delivery, including the increased quality, your benefit in far more than cost arbitrage. If you have offshored to India just for the cost aspect, then you are missing out the bigger opportunity to increase your quality substantially.

My read is that while the currency exchange rates will continue to provide pressure, India's large talent pool and strong education system combined with a condusive business atomsphere will continue to drive outsourcing.

[User 157527]

Central and South America are coming on line as well. Similar patterns can also be seen in Eastern Europe. Perhaps the terms "outsourcing"... and "offshoring" are about to be discarded, but in global economy it becomes not an issue of labor arbitrage, but just an issue of supply and demand?

[User 159569]

Within India there is ample opportunities in Tier II and Tier III cities.

Today outsourcing is mostly restricted to Tier I cities like Bangalore (Bengaluru!), Hyderabad, Chennai, Delhi, Mumbai, Pune etc.

Now it will spread to Nasik, Mangalore, Mysore and so on ...

It is a country of 1B+ people. There will always be people for the foreseeable future who are smart, speak english and can do the job for 500 dollars a month.

[ExOut]

@casual observer:

You are missing the point that the huge time gap and physical distance increases communication difficulties exponentially. Without the large wage savings, the value-add of outsourcing disappears well before the so-called 2015 break-even point.

@User 159537:

Althought that's a great marketing spiel, it doesn't bear out to be true based on my own experience and others' experience (I worked w/ an outsourcing company for three years). The quality of work is the same; this has always been purely a wage arbitrage situation; please note outsourcing exploded in 2000-1 for a reason!

@User 159569:

Although valid to some degree, infrastructure issues already are cropping in those Tier I cities. What is the quality of infrastructure for the other cities? If this was the case wouldn't TCS et al. be deploying more of their efforts into those cities?

[User 159569]

@ExOut:

The quality of infrastructure is improving. Let's not put the quality of infrastructure threshold as high as in western countries. What they have today is working out fine for most of the clients.

I think BPO outsourcing will actually increase if there is a US recession. For all the cry over outsourcing ... company executives will be forced to pick up every last penny left on the table in terms of the labor arbitrage.

[gps dude]

The forbes article is a steaming pile of ...

Most people commenting here miss one crucial point, Engineering services will move to a place that has engineers !

Afterall, Boeing does not build/design planes in China/India simply because a Chinese/Indian aeronautics engineer costs 5 times less than his American counterpart. They build planes in the US inspite of the high cost of American aeronautics engineers because the US is the one of the few places in the whole world where they can source a substantial number of high quality Aeronautics engineers at a price point that makes business sense.

India is perhaps the only country in the whole world thats churning out decent quality graduates in Information Tech. For e.g. In my masters class in a top 30 US university, there were only 5-6 Americans out of a total of 60, the rest were Indians, Chinese and a sprinkling of Eastern Europeans. And because this churning has gone on for a while, India has an OK number of technology workers starting from the most raw to the CEO level.

Lastly, people talk about wage increases as if they are independent of the laws of supply and demand :-D Just because wages rose 15% year on year, doesnt mean they will continue that trend. I was working in India from 2000-2003, and we did see wage cuts and layoffs. In fact, this is already happening in India, with TCS slashing wages across the board.

So much for Forbes and people who claim to understand demand and supply..

[ss2504]

Wage increase is slowing in India. It is expected to be approx 12% this year.
With inflation, rising healthcare cost and depreciating dollar in U.S. - U.S. cannot replace Indian jobs. Malaysia & Thailand are politically unstable and lagging in technology and management skills.
Indian I.T. companies will remain profitable for many years.

[User 159537]

@Exout

:). You worked for a outsourcer for 3 years, I am on my 8th year with a global outsourcing leader.

While O/S to India started on the aribtrage platform, that has changed rapidly to the quality of work and availability of talent. Note some of the other comments above, India continues to have the largest pool of English speaking, highly educated talent in comparison to other destinations.

And that is fact, not marketing spiel.

[ITeco]

Economic events and entities are ultimately cyclical and natural. It's not oversimplifying to use the cliché, 'What goes up must come down'.

Indian IT outsourcing is having its day in the sun. I think this cycle will likely peak in the next 2-3 years. It will retract, regroup, reposition and recover.

The current upward cycle began in the late ‘90’s with the mythical Y2K crisis. US business leaders heavily exaggerated the risk. The US Federal Govt. allowed in @ 1.5 million mostly Indian programmers and drove down US IT wages. Once Indian software firms established themselves in the US, outsourcing back to India simple and logical.

1 or 2 of you addressed the time and management issues that add to the cost of doing business half way around the world.

The cultural tendency of programming like robots from specifications so detailed that the code has virtually been written leaves little room for creativity and innovation.

At the back end, software designers and systems analysts in the US have to correct code when requirements change or when the code is of poor quality due mostly to miscommunication.

I can tell you first hand there is no 'quality' advantage gained by US business using Indian engineers. It was always about price and that margin is shrinking.

Someone used the term 'Bestsource' . I think that's exactly what is starting to happen. Strange no one mentioned the Philippines which has the second largest English speaking population in the non-western world.

India's current IT boom will bust but they're not going away. They will adapt, improve and continue to be a major force in Engineering and Information Technology for all of our lifetimes.

In the near future, they will experience growing pains and maturation just like everything else in nature.

[Big TimeConsulting]

Seven years of outsourcing experience here, with one of world's largest outsourcing organizations.

My personal experience:

1. The quality of deliverables to large organizations from outsourced Indian engineers is lower than quality of onshore deliverables created by US programmers, mostly due to communication issues, infrastructure issues, and extremely high turnover among Indian personnel as they job hop in pursuit of ever-higher wages and a mythically ever-more-creative job. (As ITECO mentioned, most outsourced jobs have such narrowly defined requirements that good programmers hate them)

2. In an outsourcing deal, the quality and speed of real-time problem investigation and remeditation for critical problems is much, much, much poorer with offshore personnel due to communication issues, infrastructure latency, and lack of experience among Indian programmers.

3. The incentive to use offshore programmers is strictly due to wage difference, especially for legacy systems which require skills which simply do not exist in India (or elsewhere).

4. Recession will indeed force CIOs to pinch every penny, which means retaining, instead of rewriting legacy systems. This will not help the offshoring business.

5. There are plenty of qualified US software engineers available to meet a resurgent demand for onshore programming, but they will be competing with programmers in the Phillippines, and in China, whose wages still significantly undercut Indian wages.

6. There will be pressure to reduce the onshore executive overhead costs that are associated with outsourcing ontracts....non-contri... senior executives will need to be eliminated to reduce costs.

So, my assessment is that India loses, China and Phillipines win, although all offshoring generally slows as recession grows, and old systems are retained instead of being rewritten.

Cheers.

[BIG BULL]

Important is stock valuation of Indian IT companies, which is ROCK BOTTOM now, this is a BUY call !!

Do not get in the trap of some sensational stories like this.

Reiterate - BUY CALL

[TechTech]

Agreed - wages are increasing 15%, are the billing rates increasing the same amount? No.
Whatever maybe the wage increase at offshore, what matters to US customers is the billing rate. As long as that is not catching up with US rates, it will not be a problem to US customers.
Which makes maintaining profitability a headache only for the Indian companies. The leadership in these companies need to come up with better ideas to offset that.