Is Outsourcing Dying Or Thriving? (Part 2)

By guest author Tony Scott

It has now been two years since Sramana Mitra’s article “The Death of Indian Outsourcing” was published. Is outsourcing dying – or thriving?

In one sense, outsourcing in India as it was known in the past is on the verge of (and in some cases is already) “hitting the wall.” Pure labor arbitrage-based outsourcing is dependent upon wage rate differentials. While the global economic downturn may have slowed the rate of wage inflation in India, it will return as soon as the world economies return to “normal” – and likely with a vengeance.

This is a big issue for outsourcing companies for which the sole or primary reason for existence is labor-rate arbitrage. The rate of wage inflation in India and current and expected future relative wages in India vis-à-vis the United States, Europe, and other developed countries that are considering India as a place to outsource information technology and business process services is the only significant factor in the ultimate attractiveness – or not – of pure labor-rate arbitrage outsourcing and off-shoring.

As wage rates in India increase, the pure labor arbitrage model starts to fall apart. It is one thing when the fully burdened wage-rate differential between the United States and India is more than 3 to 1, but at a certain point as those wage differentials decline, it becomes less and less attractive to outsource.

Indian outsourcing boosters will cite the fact that India has a huge population and produces millions of new college graduates annually as their rationale for why Indian outsourcing will continue to grow unhampered for the foreseeable future. However, while India does indeed graduate millions of young people annually, many of them do not have the language skills and accent to be effective in outsourcing roles for which English fluency is critical. Several experts estimate that perhaps only 25% of all Indian college graduates have the skills that would be necessary to successfully work in a multinational environment at graduation.

That means that in good economic times when labor demand increases, those individuals who have the academic background and level of English fluency desired by companies that are outsourcing customer interactions will be in even higher demand. In addition, as India grows its own domestic economy, many more opportunities exist for the cream of the crop of Indian university graduates – opportunities that typically don’t require people to work in the middle of the night in India to support clients halfway around the world.

Ten years ago, the idea that domestic Indian companies would be competing for the best and brightest Indian graduates was almost unthinkable. Today, that is no longer the case. This demand for top Indian graduates who can work in either purely domestic or global environments will clearly increase as the United States and world economies improve and as India’s own domestic economy continues to boom. Higher demand without increased supply of talent means that compensation will inevitably – and rapidly – increase.

Beyond issues of wage inflation, there are also many concomitant problems associated with outsourcing: language and communication issues; time zone differentials; high turnover; and something that is often overlooked in the equation – the “hassle factor” of managing something halfway around the world across multiple time zones. This doesn’t even take into account the customer relations issues that many companies faced after they outsourced part of their customer interactions to Indian call centers, for example. It may be hard to put a value on the total experience customers have when dealing with a company’s support or after-sales care, however it is clear that negative impressions of services provided in India have driven many companies to consider alternatives.

Many of those opposed to off-shoring and outsourcing have pushed on this last point. They often put forth the position that the quality of goods or services delivered in India is lower than that in their home country, and therefore companies shouldn’t outsource or off-shore. That’s a valid point in some cases, and when one adds on the price to attract – and retain – top Indian talent, the economic value proposition for outsourcing or off-shoring to India basic services based on pure labor-rate arbitrage becomes less and less attractive for many companies. This is one of the reasons outsourcing centers in the Philippines, Latin America, Ireland, Eastern Europe, Northern Africa and lower wage-cost locations in the United States have been growing, and that is another macro trend that is unlikely to stop.

The bottom line: India’s days as the undisputed place to go for outsourcing based on pure labor rate arbitrage are over. That is not to say that outsourcing based on labor-rate arbitrage is going to die. But it is certainly not going to see the same kind of easy growth in India over the next decade as it has over the past ten years – and there is a distinct possibility that within the next decade, wage-rate inflation in India will eliminate the incentives companies currently have to outsource basic services to India.

This segment is part 2 in the series : Is Outsourcing Dying Or Thriving?
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