companies checking out alternative low-cost, skilled labor sources like
China and The Philippines — as early as later this year, according to
Salary levels for IT workers in India have gone up 10 percent to 15
percent just over a year ago, say observers. Companies that have opened
IT shops and offices in India already are feeling the pinch of the price
increase, while companies that are offshoring their work through
third-party service vendors in India will begin to feel the difference in
their wallets by later this year.
The price differential between IT workers in the United States and their
counterparts in India is five fold today, says Frances Karamouzis, a
research director with Gartner, Inc., a major industry analyst firm based
in Stamford, Conn. Within four or five years, she says that differential
will have dropped to three fold, or maybe even as low as two fold.
And if the huge cost savings in IT labor is taken out of the equation,
could India, now an offshoring powerhouse, lose its premier standing in
the global software development market? And how will this affect U.S.
businesses that are having IT work done there?
”India is still a very competitive price structure today,” says
Karamouzis. ”Are prices going to continue to go up and will that [labor
cost] gap close? Absolutely. People are going to have to justify their
use of India beyond the cost to make it a worthwhile endeavor… A lot of
companies have looked at other countries but it’s been more for an
evaluation process. They’re not confirming with their pocketbooks yet,
but they will.”
SAP AG, a giant in the business software market, is one of the companies that will be looking for alternative sources
of cheap and experienced programmers.
Just last week, Henning Kagermann, chief executive officer of SAP, which is based in Germany,
reportedly told the German edition of the Financial Times that rising
personnel costs in India are forcing him to start looking to other
countries. ”India is slowly getting expensive,” he is quoted as saying.
”We have decided to hire a certain number there, and then start looking
at other locations.”
SAP spokespeople did not return several calls but reportedly have said
they are likely to cast an eye to doing work in China and Eastern Europe.
They might have less competition for skilled high-tech workers there. In
India, on the other hand, the company has to compete with Microsoft Corp.
and IBM, along with major India-based IT service companies, like Tata
InfoTech, Infosys Technologies, Ltd. and Wipro Technologies.
Dell, the world’s largest computer maker, is undeterred by the
competition or the rising cost of doing business in India. The company
announced last week that it is setting up its fourth call center, and
executives are looking for land to build a manufacturing plant there, as
well. Dell, which also has software developed in India, already employs
10,000 workers there.
”We still continue to see a very, very big uptake in India,” says
Karamouzis. ”The pipelines are very robust. We actually do polling every
three or four months and ask people if they’re going to increase their
level of spending there. [They tell us] there are plans to increase it
anywhere from 10 percent to 30 percent this year.”
India Remains Strong
There are several reasons why that kind of money is still flowing into
India’s IT sector.
One factor is that Indian IT service providers are sucking up the higher
labor costs and not passing it along yet to their customers, says
Karamouzis. ”It’s a high-growth market and they’re much more interested
in revenue and market share so they are willing to forgo a small amount
of profitability to grow their brands and their client base,” she
Brian Rogan, a senior vice president at Sierra Atlantic, an outsourcing
company based in Fremont, Calif., says their rates for work done in India
have remained flat over the last three years. ”There has been an
increase in wages,” he says. ”It’s been for more highly skilled
workers. We counter that by hiring new recruits out of university. One
almost offsets the other. It’s specifically aligned to our clients’
needs, but it also does keep the salaries at a consistent rate.”
And Patni Computer Systems, Ltd., an IT services company based in Mumbai,
India, also is trying to hold prices steady for its outsourcing
customers, despite the rising labor costs. Tony Viola, director of
business strategy for Patni, says a junior-level programmer with no
specialty would have earned $12 to $15 an hour several years ago. Today,
the same level of programmer would earn $15 to $18 an hour.
Viola, though, says the higher costs are offset by the increasingly
mature skill base that India is able to offer.
”I would say that five or six years ago, you probably couldn’t find that
many skilled specialists in India,” adds Viola. ”First of all, a lot of
that work was still being done locally. The offshore model at that time
was still unsophisticated… It’s another thing to understand today how
to Web enable [an application], how to connect it to middleware and how
to make it work with legacy applications.”
Ashutosh Sheshabalaya, a former journalist and technology consultant who
heads Allilon, an IT services firm in Europe, says the rising personnel
costs in India are only to be expected.
”First, everyone went to India for cost. Then they went for value,”
says Sheshabalaya, who, in 2004, authored Rising Elephant a book
about offshoring U.S. IT jobs. ”Now the shift is towards quality, to
integrate into the frontiers of high quality, and you pay a price for
this, especially given the sheer pervasiveness of India in the world IT
While prices may continue to rise in India, Sheshabalaya says he doesn’t
believe there will be a spike in cost. He bases part of that belief on
the amount of inter-state competition in the country. He notes that as
pay scales rise in hubs like Bangalore and Hyderabad, other regions have
entered the IT services market, bringing more lower-wage jobs to the
table. And he adds there simply is a great influx of new IT workers
hitting the Indian market. In 2005, India had 250,000 engineering
graduates, according to Sheshabalaya. Last year, 450,000 students
enrolled in four-year engineering courses, so that means by 2009, there
will be a near doubling of newly available engineers.
Read on to find out what the alternatives are for companies looking to offshore elsewhere.
While India remains a source for increasingly skilled workers who earn a
fraction of what their Western counterparts take home, many companies
will see the rising wages there as good reason to look elsewhere for IT
Some analysts say wage increases will become more apparent in companies’
wallets later this year, forcing them to consider alternatives for
offshoring. Eugene Zakharov, director of professional services for
Technology Business Research, Inc., a firm based in Hampton, N.H., says
that shift already has started to happen.
”It’s making many companies look at other locations,” says Zakharov,
who adds that companies may set up new deals or open new offices in other
countries, but he doesn’t see many companies pulling out of India in one
fell swoop. ”India is not the only offshore possibility. There’s The
Philippines, and China is one of the more popular locations for offshore
developing and engineering work.”
But other countries have their own hurdles for foreign companies to climb
A number of companies are checking out China, with its large labor pool
and educated workers, as a growing source of offshored work. Peter Ryan,
an outsourcing and offshoring analyst with Datamonitor, an analyst house
based in London, says some IT executives are approaching China cautiously
because of its lack of intellectual property rights, its problems with
software piracy, and its smaller base of workers who speak English.
”Are they at a point where they need to be with their Western language
skills?” asks Ryan. ”I’m not sure they are. And China, to a very large
degree, has not yet absorbed Western business practices like they have in
India… It can be very trying to work with the government.”
But Ryan also is quick to add that China is still worth a good hard look.
”I’d say China’s pros outweigh the cons,” he says. ”The pros are a
scalable labor force, a strong emphasis on engineering and information
technology, and there’s a desire there to develop outsourcing as a sector
and work with Western companies.”
Ryan says companies also might consider doing work in South Africa, which
has a ‘high degree of commercial sophistication’ and a strong
understanding of Western business practices.
However a surprise player in the offshoring market just might be Egypt,
according to Ryan. ”Keep your eye out for Egypt, which has come on
strong in the last few years,” he adds. ”I went down there and was
thoroughly impressed with what I saw. They have 200,000 university
graduates coming out every year and 80,000 have engineering or IT
In terms of players in the offshoring market, though, India remains the
big dog on the block.
”I mean, really, in terms of IT, what’s happening is people will still
look at India because of the resources on the ground — the labor force,
the ability to set up shop quickly and the real estate market, which is
still fairly fluid,” says Ryan. ”You’re still taking on a huge cost
savings there. It’s compelling enough still for U.S. companies to look at
India as a serious option. The U.S. dollar has dropped over the last few
years and Indian wages have increased, but we’re still looking at a
pretty wide gap.”