Manthan

WSJ talks about the rising salaries in India and  how companies are re-evaluating their strategy vis-a-vis outsourcing.  Savings and efficiency in India can only be achieved now  with scale. Smaller companies will find it difficult to attract and retain good talent. The culture of working for “stocks” at startups is not very popular in India. Besides highly motivated professional try to seek on-site assignments (i.e US and Europe) to further their career.

NASCOM (National Association of Software Services Companies) while acknowledging raising salary cost nevertheless is optimistic about growth in outsourcing revenues to India.

Responding to claims from some Silicon Valley companies that wage costs in Bangalore had risen to near US levels, the National Association of Software Services Companies said this was an isolated phenomenon. “It is there in pockets,” said Ameet Nivsarkar, vice-president, research at Nasscom. “But we haven’t come across this as a large trend.”

In spite of rising salaries and real estate costs, India’s information technology software and services industry is booming, with Nasscom forecasting sales will grow up to 27 per cent to $50bn in the year ending next March.

While raising salaries are a cause for concern, the strength of Indian Rupee vs USD is another major area of concern. Rupees has strengthened from mid 48 to mid 40 in 2007. This is hurting the profit margins.

The rupee has appreciated 5% in the last quarter and higher than the guidance provided by the IT Companies in the last quarter. Companies like Infosys, Satyam and Wipro are taking steps to hedge their rupee exposure. Outsourcing majors can hedge rupee to reduce their exposure, it not so simple for smaller companies who are doing in-house development.

While it is easy to dismiss India as a cheap source of labor, one has to remember the challenge faced by American companies in hiring the right talent in the US with the various visa restrictions. The demand for qualified IT professional far exceeds the supply and India is able to supply qualified professional to suffice this need. If outsourcing where to stop 100% in the next few years, it will drive the  salary and other costs here in the US making the companies un-competitive. An equilibrium is bound to emerge where outsourcing will continue to co-exist with Silicon Valley in the US.

Update 1 :  New York times has an article titled At I.B.M., a Smarter Way to Outsource discussing the IBM take on outsourcing.

Jobs in technology services may be particularly vulnerable because computer programming can be described in math-based rules that are then sent over the Internet to anywhere there are skilled workers. Already, a significant amount of basic computer programming work has gone offshore to fast-growing Indian outsourcing companies like Infosys, Wipro and Tata Consultancy Services.

To compete, companies like I.B.M. have to move up the economic ladder to do more complicated work, as do entire Western economies and individual workers. “Once you start moving up the occupational chains, the work is not as rules-based,” said Frank Levy, a labor economist at the Massachusetts Institute of Technology. “People are doing more custom work that varies case by case.”

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