Higher wages and staffing competition has hit India's outsourcing centers

India has become the location of choice for offshore outsourcing, but that status may be fading as companies confront old realities and new problems that are cutting into hoped-for savings.

Higher wages and staffing competition has hit India's outsourcing centers. Those problems, added to the difficulties of moving vital business functions halfway around the globe, are making other locations around the world increasingly attractive.

The financial calculation for offshoring in India has changed, says Ukesh Chand, who has coordinated corporate outsourcing operations for many years.

"If you look back 10 years ago, the price was right. It looked very attractive," Chand said. "But as you go now as a new player, the prices are very competitive - they're higher now."

To be sure, India still has much to offer. The country's work force possesses technical skills, English language skills and other advantages that few countries can rival. Substantial investment in infrastructure and state-of-the-art facilities in cities such as Hyderabad have attracted companies, as well. And the country's IT boom has brought it closer than ever to the United States.

Bangalore-based Infosys, one of India's leading technology services firms, boasts a client list that shows the scope of outsourcing in the country: Accenture Ltd., Andrews Air Force Base, Avis Rent a Car System LLC, Ernst & Young LLP, Hewlett Packard Co., IBM Corp., Lockheed Martin Corp., the New York Board of Education, the U.S. Army, the U.S. Navy and the Women's Sports Foundation.

But companies considering outsourcing in India need to look hard at the special challenges and plan accordingly, experts say. Obstacles are created by distance, culture, and language, not to mention the far-reaching social and economic changes taking place in Bangalore and other parts of India, where the outsourcing trend has meant much more than just new jobs.

To begin at the bottom line, the savings from offshoring to India are generally far less than they would seem to be at first blush. Wages in India may be lower, but they are rising and many other factors are involved.

Cynthia Kroll, a senior economist at the Fisher Center for Real Estate and Urban Economics at UC-Berkeley's Haas School of Business, has studied the offshore outsourcing trend.
She says companies may see that Indian programmers, for instance, make only one-fifth of the wages of their Bay Area counterparts, but the ultimate savings may be only 30 percent, not 80 percent.

Companies sometimes base their initial cost assessments on wages at the offshore location at the time. But, Kroll says, those firms find that savings shrink as wages rise. And reports show that rising wages have become the norm in India's outsourcing centers.

Next, companies usually need more managers and programmers for IT operations for the same jobs in India because of the distance and training required, adding substantially to the cost.

Companies also need to think about the learning curve, Kroll says. There is more to the process than just giving the assignment to a talented individual. There are reasons why tech activities tend to congregate in one place, as they have in the Bay Area.

This has been echoed by IT workers. Development advances often come from informal conversations in the United States - quite differently from other countries. Are the best ideas carefully formulated through an official process and chain of command, or do they spring up in spontaneous discussions around the water cooler?