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India Outsourcing and Rising Salaries

May 3rd, 2004 · 4 Comments

NYTimes wonders if India could be losing its outsourcing edge:

Over all, according to a recent survey by Hewitt Associates, the international consulting group, wages in the country’s major outsourcing sectors have been rising by close to 15 percent per year.

The reason is increasing competition for labor, thanks in large part to a rush by American companies to outsource work offshore. In fact, the competition has grown so fierce that the typical Indian operation in business processing – things like call centers and payroll, accounting and human resources functions – can expect to lose 15 to 20 percent of its work force each year, compared with single-digit losses in the late 1990’s.

as the data from India show, the offshore outsourcing phenomenon may to some extent be self-correcting. Though outsourcing is surely here to stay, rising wages and rapid turnover in Indian hubs may put a dent in the cost savings that American firms enjoy when they ship work abroad.

The stiffest competition for offshore labor tends to occur in India’s so-called first-tier cities: Bangalore, Mumbai (formerly called Bombay), New Delhi and Hyderabad. “You said it – Bangalore is a hothouse right now,” said Jaithirth Rao, chairman and chief executive of the midsize outsourcing firm MphasiS, which has operations in the city. In certain sectors of the outsourcing market, attrition rates are 50 to 75 percent, according to Sunil Mehta, vice president of the National Association of Software and Service Companies, or Nasscom, an industry trade group in India.

Even with wages rising 15 percent per year, the cost of a computer programmer or a middle manager in India remains a small fraction of the cost for a similar employee in the United States. A programmer with three to five years’ experience makes about $25,000 in India, but about $75,000 in the United States. But the wage savings from offshore outsourcing have never translated directly into overall savings – typically an outsourcing contract between an American company and an Indian vendor saves less than half as much as the wage differences would imply.

Tags: Emerging Markets

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