Rising Costs Threaten India's Hold on Offshore IT
According to industry analysts the increasing costs of offshoring IT work to India will lead many U.S. companies to seek optional lower-cost, skilled manpower sources like China and the Philippines – already by the end of this year.
The level of salaries for IT workers in India rose 10 to 15 percent just for the last year. Plenty of organizations that established IT shops and offices in India feel the pinch of increasing prices, while companies offshoring their work via third-parties in India will feel the strike on their wallets a bit later this year.
Salaries of It professionals in the U.S. and their counterparts in India differ five times. Analysts predict that within four or five years, the differential will have dropped to three fold, or perhaps even as low as two fold. But if we remove the fundamental benefit of cost savings in IT labor from the equation, India might lose its predominant position in the global software development market. And this will definitely have a strong impact upon U.S. businesses conducting IT work there – and only God knows will it be positive or negative.
However, India is still a very competitive in terms of costs. But prices are going to continue to soar up and soon that work force cost gap will close. Customer will need to justify their use of India beyond the cost efficiency to make it an expedient endeavor. Many companies considered other countries as outsourcing destinations but it’s more as an evaluation process. These pre-assessment is not yet confirmed with money.
We may say for sure that software market giants will be looking for alternative sources of cheap and qualified developers. Executives claim that increasing personnel costs in India are impel them to start looking to other countries. India is slowly but steadily is getting expensive. Soon it will be a common practice: hire a certain number of developers in India and initiate searches at other locations. These companies are likely to cast their eye to conducting operations in China and Eastern Europe. They will definitely have less competition for skilled high-tech employees there.
India Remains Strong
Nevertheless we can name several reasons why money is still flowing into India’s IT sector.
First, Indian IT service providers are engaging the higher labor costs but not notify their clients. Software companies are much more interested in revenue and market share so they can afford to refuse the part of profitability to enhance their brands and clientele.
However, some outsourcing companies claim that their rates for work done in India have remained unchanged over the last three years. They7 admit that there has been an increase in salaries, but it concerns only the skilled workers and they offset that by hiring newbies from universities. These events do keep the salaries at a consistent rate which perfectly suits the outsourcers. Several years ago a junior-level developer would have earned $12 to $15 an hour while today, the same skilled developer would earn $15 to $18 an hour. Still the higher costs are purged by mature skills base India offers.
But the rising personnel costs in India are only to be expected.
We clearly see the trend indicating, that first, people went to India for cost, then they went for value, and now they choose quality.
The prices may and will continue to rise in India, but there will be no spike in cost. This statement is based on from state -to-state competition within India. Salaries rise in regions like Bangalore and Hyderabad, while other states bring more lower-wage jobs to the table. Indian market constantly experiences a great influx of new IT workers. India had 250,000 engineering graduates in 2005. Last year, 450,000 students entered for engineering courses.
Considering Alternatives
While India provides skilled workers with wages lower than what their Western counterparts take home, lots of organizations will consider the increasing prices as a sound reason to seek IT services elsewhere. Many analysts predict that wage increases will become more apparent later this year, thus compelling them to consider offshoring alternatives. Cost increase makes many companies cast their eyes to other destinations to set up new deals or open new offices. India is not the only offshore possibility. The Philippines, and China are also popular locations for offshore developing. But shifting offshoring to other countries creates new hurdles for foreign companies to overcome.
An increasingly growing number of companies opt for China, with its large pool of educated workers. Some IT managers are approaching China cautiously considering the lack of intellectual property rights, prospering software piracy, and smaller base of English speaking workers. Moreover, China, to a great extent, has not yet integrated Western business practices as India has. In general view China’s pros outweigh the cons. The pros: a scalable manpower, a strong dedication to engineering and IT, and the last but not least – a desire to set up outsourcing as a sector and attract Western companies.
As an alternative lots of companies also consider South Africa, with its high degree of commercial sophistication and deep knowledge and understanding of Western business practices.
In terms of players in the offshore outsourcing market India remains the big dog on the block.
People will still look at India due to available resources – the manpower, the ability to set up ODC quickly and the real estate market. Cost savings are still huge there. It’s a sound argument compelling U.S. companies to look at India as a serious option. Indian wages have increased, but we anyway talk about a quite a gap.”