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Offshoring in India to flourish, despite wage hikes

Rising wages won't be enough to topple India from its throne as the destination of choice for IT offshoring. In fact, Indian firms will continue to take business from their competitors simply because they have a better business model.

Despite recent warnings that rising wages will put the brakes on the torrid growth of India's top-tier IT service providers, several analysts make the case that India will continue to be the destination of choice for application services -- and not just because of lower cost. India's IT powerhouses have changed the rules of engagement between client and provider, leaving onshore global providers struggling to adapt.

But the truth is that Indian firms will continue to grow -- and not just because they are a lower-cost option.
Stephanie Moore
analystForrester Research Inc.
Every six months or so, a spate of headlines proclaim that India is losing its appeal as the offshore destination of choice for information technology services, because of rising wages.

The most recent flurry comes in the wake of last month's warnings by two large outsourcing firms, Wipro Ltd. and Satyam Computer Services Ltd., that salary increases will lower their profit margins for the quarter ending in September. The companies' shares took a beating on the news.

Salaries for Indian IT workers are climbing an average 12% annually. As large U.S. companies such as IBM and Electronic Data Systems Corp. expand operations in India, some analysts and competitors contend that pressure on wages will only increase, and the top-tier Indian IT providers will become victims of their own success.

Bah humbug, says Stephanie Moore, an analyst at Cambridge, Mass.-based Forrester Research Inc. Moore pointed out that despite wage inflation, India's three largest IT providers, Infosys Technologies Ltd., Tata Consultancy Services Ltd. and Wipro, enjoyed stellar year-over-year revenue and profit growth for the first quarter of the current fiscal year.

More to the point, the top-tier Indian providers will continue to take business from their onshore "legacy" competitors, Moore said, because they have created a new and improved delivery model for IT services.

"The popular press is currently touting a pending slowdown among Indian providers as they become victims of their own success, but the truth is that Indian firms will continue to grow -- and not just because they are a lower-cost option," Moore wrote in a report published Aug. 1. "These players will continue their growth path because they have caused a fundamental and structural change in the service provider/client relationship. Offshore providers have taught clients to expect transparency, efficiency and accountability in service delivery."

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With few exceptions, notably Hamilton, Bermuda-based Accenture Ltd. ("the best adapted of the legacy providers") and Paris-based Capgemini, onshore providers "are struggling to adapt to this new dynamic, Moore said. Bottom line: "Forrester expects the offshore trend to continue."

Moore said that because of the new dynamic, companies contracting for IT services no longer expect to pay for "extra and ambiguous charges like 'transition costs.'" They do not "passively accept late delivery or change order fees that exceed the value of the original contract," Moore said, and they expect systems "to be optimized for maintenance as part of the deal -- not some hugely expensive, front-end consulting project."

Indeed, when dealing with onshore providers of IT service, Forrester recommends clients heed the lessons learned from working with Indian providers and ask the following questions:

  • Inquire about the maturity of delivery processes: How much is automated? Red flags are answers that focus on individual consultant expertise rather than process and technology investment.
  • Ask how the provider integrates onshore delivery. How is the work divided among onshore workers, and how is the work "contracted" internally?

Despite Indian wage rises, salaries for software engineers are still about one-fifth of those for Western engineers. How long will the cost benefits last? Everest Research Institute, a Dallas-based outsourcing advisory firm, published a study in May that estimates the labor arbitrage benefit for U.S. companies in Asian markets, including India, China and the Philippines, will hold for another 18 to 20 years. Forrester analyst Sudin Apte predicts that the cost advantage for contracting with Indian engineers will last another five years.

Let us know what you think about the story; email: Linda Tucci, Senior News Writer

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