India's salary growth threatens outsourcing

The US technology industry's demand for offshore services is apparently beginning to drive up pay rates in India, raising questions about the long-term benefits of outsourcing work to that country.

Information technology workers in India reported double-digit salary growth in 2003, according to recent research, while pay for similar work within US borders has been relatively stagnant if not declining. Although India's salaries generally remain significantly lower than US averages, the narrowing wage gap and other unforeseen factors are leading at least some American companies to reassess the cost savings to be had by sending work offshore.

"Expectations about the benefits of outsourcing are becoming more realistic," according to a report by DiamondCluster International, a consulting firm, which recently released a survey of more than 180 companies involved in offshore outsourcing. "Most buyers in the previous study expected gains in efficiency in the range of 50 percent. Today, those expectations have declined to 10 to 20 percent."

India's wage inflation, which approached an estimated 14 percent last year, is a natural byproduct of a classic supply-and-demand scenario. Although projections for outsourcing remain highly speculative, Forrester Research has estimated that 3.3 million American jobs will be moved to other countries by 2015. But as far back as a year ago, India technology trade association Nasscom (National Association of Software and Services Companies) was already concerned that India would fall short of demand for workers by as many as 235,000 professionals.

India quickly became the outsourcing nation of choice for US companies years ago because of its abundance of engineers, large English-speaking population and historical ties to Western countries, as well as its relatively low labour costs. So it is understandable that wages there would eventually rise as demand increased, especially as the expanding technology market has created new prosperity and begun to raise the cost of living in some parts of the country.

"If you had to come to Bangalore today, you would see very significant signs of development, a lot of new construction, a lot of young people, a lot of energy, a lot of shops and restaurants," said Nandan Nilekani, co-founder and chief executive of Infosys Technologies, in a recent interview with ZDNet UK sister site CNET News.com. "I think you get a sense of economic vitality that can largely be traced to the IT explosion."

India reported gains of 12.8 percent and 13.7 percent last year for positions in categories labeled "IT solution provider" and "software development," according to an annual Asia-Pacific survey of more than 500 companies by Hewitt Associates, an international business consultancy. The numbers, which reverse a six-year decline in pay raises in India, are far more than any increases reported among other nations surveyed.

By region, India's highest increases were reported in Chennai, at an average of 13.5 percent, followed by Bangalore, with 12.5 percent, and Kolkata, with 11.5 percent. For 2004, the study predicts that average wages will rise again, as much as 13.4 percent.

Choosing China
Though it is too early to predict any sort of bubble on the horizon, the rise in India's salaries could prompt more US companies to consider other parts of the world, where wages are far lower. Indeed, even some Indian companies have begun offshoring their own work to China.

"Tata Consultancy Services, one of India's four largest exporters of software, has begun to offshore its staff," the American Electronics Association says in a new report. "By 2005, TCS plans to have 3,000 software engineers in China, or 15 percent of their global work force."

China's universities, like those in India, award more bachelor's degrees in engineering than their counterparts in the United States. Yet China's wage growth rate for technology jobs was about half as much as India's, according to the Hewitt study. US pay rose 3.3 percent to 3.5 percent, the lowest increases ever recorded for American technology positions in the annual survey.