The Coming Death of Indian Outsourcing

Came across an interesting commentary in Forbes on the above-referenced topic which touches on an earlier post of mine. Sramana Mitra leads with the incredible story of growth for the IT and business process outsourcing industry in India (7% of India’s GDP in 2008) and then digs at the foundation of that success

However, the reality is that wages are rising in India. The cost advantage for offshoring to India used to be at least 1:6. Today, it is at best 1:3. Attrition is scary.

One of the key assumptions regarding the sustainability of the India explosion has been their ability to ultimately move up the services value chain. From Mitras’s perspective, that just hasn’t happened in any meaningful way.

Yet, India, for all its glory, is still the world’s back office. India's tech industry is a "services" industry. The Indians don’t do the thinking. The customers do. India executes.

And as I have discussed before, Mitra suggestst that there may be a time in the near future when North America becomes an attractive offshoring destination.

As the 1:3 cost structure becomes 1:1.5, it will soon become inefficient to use Indian labor. Why not Oklahoma or British Columbia? For many Europeans, Eastern Europe has already become more compelling than India. The pure labor arbitrage equation will no longer balance.

While still other dynamics come into play.

The software as a service (SaaS) megatrend in technology also plays against India.

But initially, and perhaps ultimately, this is an issue of basic economics.

Forbes recently published some scary statistics on wage inflation in India. Salaries rose 15.1% in 2007, up from 14.4% the previous year. The 2008 forecast: 15.2%. This would be the fifth consecutive year of salary growth above 10%.

Add to that the appreciation of the rupee against the weakening dollar, and its impact on the labor arbitrage market.

Assuming a 15% year-to-year salary hike rate, and a 2007 cost advantage of 1:3 in favor of India, if U.S. wages remain constant, India’s cost advantage disappears by 2015. Then what?

Then, global service providers and India pure plays move operations to other ports where the economics are still meaningful (Bulgaria, Guatemala, Vietnam, Mississippi?)