Bhoo wears the thinking cap!

As if that is possible!

Is outsourcing to India losing its cost competitiveness?

Posted by bhoo on December 2, 2006

The worry is there – salary costs in India are going up and up, like there is no end!  So, will the cost arbitrage – the very reason why India has shined in the IT sector so far – sustainable?

Will India lose its cost competitiveness?

I believe that cost competitiveness is sustainable.  Here is a recent research from Everest research institute, that looked at this aspect from many different angles, and reported that labor arbitrage will likely sustain for next 30 years.  This is what Everest Institute had sent after I attented the webinar on India’s cost arbitrage .

That is just one aspect – there are several other reasons why India will sustain competitiveness for several more years:

a) Increased availability of experienced engineers:

Our CEO, Gowri – comes with this explanation: 

We did not have 150-200k engineering graduates passing out every year, till early 2000s.  It was more like 20-25% of these numbers those days.  So, the number of Indian IT people who have 5+ years of experience is limited to the lower number of people that were added to the pool before 2000.  Subtract from that those who shifted to the USA, due to the high H1B cap of 150000 that used to exist until recently.  So, the pool of engineers with 5+ years of experience is very limited.  And, the demand for them is huge – and hence that talent commands a huge premium right now.

And again, until 2002, the IT industry in India was not hiring in such volumes either – it is only in the past 2-3 years that the industry is hiring in such numbers.  But, the opportunity to shift to the USA is limited by the H1B cap, and also the sheen is lesser now than earlier.

So, these people that are added to the industry as fresh graduates are gaining experience in the industry, and in the next 2 years these people will turn out to be experienced.  The experienced lot will become a lot more available in the next 2-3 years, and hence, since supply is a lot more, the costs will stabilize.  The salaries will continue to grow, but, not as fast as it is now.

b) Shift work to the lowest possible level: 

A lot of successful companies in India are sustaining by using a good process to produce quality work with a team of less-experienced people.  That model is getting more and more perfected, and looks sustainable as of now. 

All said and done, experience counts, and so there is a process overhead of QA and testing, and a senior guidance and so on.  As the experienced pool becomes available, productivity will increase, and hence the cost will cut down further.

c) Other costs will come down:

One surprise element with India is the cost of other infrastucture.  Real estate rentals in India is comparable, and in many cases more expensive than the USA.  It is more expensive to hire a sq. ft in Tidel park in Chennai, India, than an office space in Empire State Building, New York.  The cost of power from power companies is comparable at about 10 cents per kwhr, but, the loaded costs of UPS backup, need for generator, etc makes the power very expensive in India.  Internet connection is the killer expense of them all – You can get a T1 line (1.5 MBPS) for $300 – $500 per month in the USA, and broadband connections – which provide much more bandwidth than those in India – are even cheaper than that.  If I were to get an equivalent 1:1 T1 connection in India, it will cost close to $3000 per month.  (See the tariff here.)

One investment banker that I met was saying that these costs will come down in the next few years.  If I look around and see the amount of construction going on around India, I can see how the availability of commercial space will multiply in the next 1-2 years, and how that will change the rental costs.  I can also see how power scenario has been improving in India – it is not a distant future when we are going to see India using UPS only for mission critical applications, like it is in the USA now.  I am seeing internet costs coming down so fast in the past few years, that I do not see how it will not be comparable in a very short while.

Conclusion:

These factors, in addition to those mentioned by Everest Research Institute should be able to sustain India’s cost competitiveness.

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3 Responses to “Is outsourcing to India losing its cost competitiveness?”

  1. Sai said

    This only looks at the cost factor for outsourcing and I can buy into this argument. But how about the competition. China with its huge population base, is graduating huge number of engineers. I’d imagine China and Other Asian Competitors(Philippines) pose a big challenge in the Outsourcing world with their share of engineers and cost competitiveness?? Some may argue that its their lack of communication/good english speaking skills which may hinder this, but nevertheless, this is a factor to reckon with for Indian outsourcing industry.

  2. bhoo said

    Sai:

    If India, with a 20 year legacy in IT has a shortage of engineers with 5+ years of experience, where will other countries stand? I do not know the exact statistics, but, the only “relatively lower” costs country which have this many years of legacy in IT are – Israel, Ireland and Canada. Costs in these countries are still way out of those of India.

    I know for a fact that average salaries in China for experienced engineers is higher than that of India – and that goes without saying – higher demand and lesser supply, like it exists in India today…

    The industry in India has taken 20+ years to build to where it is today, and services business is not instantly scaleable. It will take years before services businesses build such a legacy.

    India is safe for next 8-10 years as a leader, I think.

    Having said that, I am not discounting competition – it is there.

  3. Nice post, I will these points into consideration for my daily life, especially as a real estate practitioner. The job can be so dynamic (I guess most are) that you really need to be on your toes at all times. I’ll share this with my friends as well, thanks!

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