A Gold Mine in Trouble

Location: New York
Author: Lenny Broytman
Date: Friday, August 3, 2007
 

There are those in the financial world that actually do think the comfy setup most firms have enjoyed for years might be at stake, but there are others such as Peter Harrison, who believe that the end of Indian outsourcing is nowhere in sight.

Harrison, chief executive officer of IT outsourcing firm GlobalLogic, insists that despite some reports to the contrary, India’s labor costs will not rise higher than their US counterparts for quite some time. Although the nation has seen some wage increases, Harrison notes that they have been primarily among senior-level executives and do not represent wage figures across the board. According to Wall Street & Technology, Harrison insists that Indian labor will remain cheaper for about 30 years.

“A lot of the hype over wage inflation and the end of arbitrage is sensationalized and put out by people who have a vested interest in it being over,” says Harrison. “While outsourcers do have to look for ways to move up the value chain, to deliver more value and do more with less people, to say that arbitrage is over is a little silly. The difference between US salaries and India salaries is getting closer, but it’s creeping there, it’s not leaping there.”

It is important to point out that the inflation worries aren’t unwarranted; published reports suggest that the average salary in India has increased 15-20 percent over the past five years. Despite that, Harrison says that the outlook is not nearly as grim as a lot of people are making it out to be.

“There is, in what’s widely misread and misinterpreted as wage inflation, a huge difference between what junior and senior people are paid in India,” he says. “In the U.S., the difference is modest; a junior person makes $60,000, a senior person makes $180,000, so there’s a 3X difference. In India it’s more like 30X.”

What does concern Harrison however, is currency change. As he notes, even if the dollar drops to 36 rupees, the average salary in India won’t be affected all that much and will still be less than one-third of the average US wage.

One firm seemingly unaffected by the supposed outsourcing demise has been India outsourcing giant Tata Consultancy Services (TCS), who (according to crn.com) reported a 55 percent increase in earnings to $291 million on a 42 percent increase in sales to $1.3 billion for its first fiscal quarter, which ending June 30. The firm noted that the significant prosperity was the result of effective cost management, productivity increases and hedging gains… all despite the escalating arbitrage concerns in the region.

“Over the last two to three years, there has been a tendency among US corporations to see the value of outsourcing, especially to destinations like India,” says Pradipta Bagchi, a spokesman for TCS. With just about 70 percent of all Fortune 100 firms utilizing TCS’s services for a variety of outsourcing needs, it is clear that the outsourcing sector isn’t in any real jeopardy.

Although a July 18 itbusinessedge.com article suggests that several of India’s largest outsourcing providers are currently recovering from a dismal first quarter, Asia Times Online says the nation’s IT services and software sector is poised to bring in an estimated $50 billion in revenue for 2007-08.

While Harrison anticipates that China might just be the best candidate to take over India’s reign as the US’s next outsourcing haven, experts insist that day is still a long way off. For now, the $32 billion bilateral trade connection between the US and India isn’t going anywhere. It will be interesting to see what will happen if and/or when the dollar manages to rebound against the rupee.

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