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Is outsourcing to India still financially relevant?
Posted by gvix on April 09, 2007 at 09:42 PM | Comments (15)
I had an interesting phone chat with a friend based in Bangalore, India using Skype (I am based in Australia). While not going into specifics, he outlined his take home pay and as he was saying it, it hit me like a thunderbolt.
His take home pay was only 10% less than my take home pay. In actual dollar terms. So, for example, if my pay was $50000, he was getting $45000 in Indian Rupees. That means, if you factor in the actual living costs, he was earning more than I was by a magnitude of at least 25 to 30% for same programming roles and equivalent experience. (And his is not an isolated example).
Various feelings and thoughts went through my head, many of them unprintable (Yes, I was green with envy, but he is a friend, so I gotta be happy for him :) ). After a couple of hours, when logical thought process returned, I thought about how the cost of rising wages was likely to impact the whole process of outsourcing.
I contacted a friend of mine in the IT department of a banking giant in Sydney to get his perspective. After a bit of cajoling, he revealed that a recent outsourcing round had saved them nearly 25% of their total IT budget.
Of course, this is speculative saving. The actual savings won't be realized till the project has finished (2 or 3 years). In which time, the actual savings would be in the ballpark of 15% (increased costs, infrastructural issues, missed requirement, inflation .. whatever).
Now, 15% of $10 million (a not so inaccurate value) is still $1.5 million. No small change and any CEO/CIO would be happy to show that as his/her legacy (especially if it ends up as a bonus for him/her :)). But to save $1.5 million over 2-3 years and have your whole business processing outsourced seems excessive. Or does it?
I know there are no correct answers here and this example is too simple to attempt a values based judgment. I am scratching my head as I am writing this in trying to find a logical explanation for this. How is outsourcing still financially viable? Or how can it continue to be viable for both the Indian outsourcing industry and the Western IT departments? Any answers from both sides are most welcome!
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Comments
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Just take your investment to Brazil :)) the next off-shore big wave... a much better place to invest comparing to India, China and other emergent countries...
Investors are wise people, they are always looking for the cheapest new opportunity.. and soon the cheap country start to acquire sophisticated technology and become part of the solution, it is no cheap anymore... then they go to the next global stop to apply the same model again :)) conspiracy theory ? can be.. but there is a pattern in the Off-Shore and also a pattern in poor countries...
sorry.. and, yes, I am Brazilian ;)
Posted by: felipegaucho on April 10, 2007 at 03:06 AM
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Old timers like me remember the big outsourcing wave to Ireland. It's only natural that wages increase until they equalize at some point. Have you checked recently what an Irish coder makes?
Posted by: driscoll on April 10, 2007 at 08:58 AM
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Dear Vikram Goyal,
Don't be jealous.
Executive salaries in India have skyrocketed, but do Indians get paid paid $30-50 an hour for typewriting? Or for answering the phones?
There is a facade of progress in India, but it will take years in India for the progress to percolate down to all levels. For example, cities have building architectures similar to or surpasses that of buildings in cities such as New York. You can find a few hundred luxury hotels in India that are second to none of that found in the US or Australia.
But comfort levels have not improved for the common man, for e.g. travel by train remains just the same.
For India to become like the West, the Government of India has to examine a far reaching, comprehensive program to cause the 5 star progress to percolate down to the common man
As of now, the cost of living for the common man hasn't gone up in proportion to that of the cost of living for the Executive in Bangalore or Hyderabad. The common man might have bought a TV or refrigerator or two wheeler, but his life remains the same.
Clerical IT manpower in India is still hired at a dollar an hour. Qualified Medical Doctors are offered positions in HIV/AIDS programs by Government and NGOs alike at $2 an hour, which is one of the reasons why such health care programs failed to produce the desired results.
But it is expensive to run a world class BPO in India for various reasons such as the skyrocketed real estate prices, rentals and due to such factors as a higher cost of hardware in comparison to the cost of hardware in US and Australia...
BPOs in India balance it all out and efficiently offer a price package that will work for a hundred years more, if India does not progress to move into core IT business sectors in roles insubordinate to the companies in the rest of the world.
Posted by: isolatednetworks on April 10, 2007 at 11:02 AM
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Next stop - China, Vietnam and Russia / Ukraine / Belorussia.
Posted by: kirillcool on April 10, 2007 at 06:06 PM
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Wealth is being hoarded in India. It is much like the early history of the US industrial revolution. Hopefully it will become very apparent soon: This approach will not be sustainable. A few cannot feast, whilst the majority starve. Yes India has tremendous problems: poor infrastructure, tremendous governmental corruption... Yet it also has a tremendous resource, its people. India most certainly can become a world economic superpower. However, to accomplish this, it will be essential to put the country first, rather than individual interests. "Ask not what your country can do for you; ask what you can do, for your country" - John F. Kennedy 1961 John PS Please note: JFK did not say government.
Posted by: cajo on April 10, 2007 at 09:35 PM
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yes, the top jobs may pay about the same as elsewhere (in part to prevent the people filling them from moving elsewhere) but the masses make peanuts, and that include the masses of codemonkeys sold by outsourcing firms to do the work formerly done by European and American programmers. Sure you need more of them to do the same work as they're (still) less skilled and motivated (see the level of questions in Java forum, it's appalling what supposedly entry level professionals with Indian sounding names are asking) but at a cost of under 25% of their American counterparts you can afford to hire 3 or 4 of them and still be cheaper than that single American (and if that American falls ill or goes on vacation the work stops, if one of those Indians does the same it just slows down a bit).
That may be oversimplified, but that was the situation and to a large extend still is, and on paper it looks like a massive saving. The outsourcing firm won't tell you you need 3 times the people you would back home, they'll initially budget maybe 10% more manpower and scale up (at your cost, no fixed-price projects here) when they threaten to fall behind.
Posted by: jwenting on April 11, 2007 at 07:57 AM
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outsourcing is a wallstreet placebo. i contend it's way more expensive than maintaining inhouse staff - inadequate training/schooling, language barriers, timezone logistics, rising costs, steep integration costs, and finally the cultural differences are several of the reasons why.
Couple this with the fact that programming is more and more a high-level activity, I think 1 onsite programmer is worth about 10 offshore as someone who is personally vested in a project will strive for longterm gains, not "time and materials"-type code.
I'm a bitter man, but with good reason.
Posted by: Anon on April 11, 2007 at 04:46 PM
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outsourcing is cheaper in the short term, more expensive in the long run. And as companies are ever more (under the threat of hedge funds and other investors with purely shortterm goals of quick money, never mind the longterm health of the company) interested only in shortterm profit (and thus high shortterm gains in shareprice and payouts) those shortterm savings are the only thing that's taken into consideration.
By the time the longterm effects are starting to become apparent the people implementing the shortterm strategy (or forcing it) are long gone, leaving others to suffer the consequences of poor longterm strategy for high shortterm gains.
In that outsourcing is indeed driven in large part by the stockmarket, and especially those who prey on the stockmarket with only shortterm profit in mind.
This also shows in companies being forced by shareholders to sell off their profitable divisions for the sole purpose of increasing the liquidity of the company (and thus the company's ability to pay out big money to those shareholders), while in the longterm destroying the company's profitability.
Posted by: jwenting on April 11, 2007 at 11:32 PM
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His take home pay was only 10% less than my take home pay. In actual dollar terms.
Sorry to spoil your Eureka moment, but you're looking at an isolated case here - perhaps an exceptional engineer with a lot of experience. A very good senior engineer with more than 5 years of today gets (at most) $30000 per year in Bangalore. Not more. And you get what you pay for. Companies will be prepared to pay well for good engineers irrespective of the location. If you need a quick and dirty hack written, you can pay 8000 per year, place someone in the Galapagos islands and get away with it. So, repeat after me - "Good engineers will get paid well on a universal scale irrespective of their location. They are the exception and not the rule. And they are not representative of the prevailing standards in a country."
As far as the relevance of outsourcing is concerned, I'd like to believe we have very few CIOs who don't understand economics. While technology is the holy grail for an engineer, there's no denying that economy/efficiency rules. We wouldn't see such a trend if companies intended to save a few thousand pennies a year relying on buzzword. There must've been some value to it.
Posted by: bharathch on April 12, 2007 at 12:55 AM
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Actually, India and the like have to try and focus more on quality. Its been ok to be the cheapest as long as the difference in salaries was so big, that it was profitable to do outsourcing even with all the additional costs like travelling managers and extended project-runtimes.
Also theres always been the problem of the business-department (client) being thounsands of miles away from the IT, so a lot of details often get lost on the way. India should focus on providing own solutions and sell them overseas, but consulting for small to medium projects today is more often given to it-companies that are on-site or who can send people "over" in less than a day to get things clear.
But in the end, its all about working software and Euros / Dollars...
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Posted by: hinags2002 on April 30, 2007 at 02:57 AM
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Well Vikram,
In situations like these, one can't really comment on the specifics (of pay-packages) which I won’t. However, I guess the point you are
trying to make is that the cost-arbitrage of offshoring is narrowing. … which also means that sourcing and offshoring is more about
value and leveraging a global pool of skills, right?
- Mohan
Posted by: mohan_ on May 28, 2007 at 04:06 PM
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Posted by: sunhuanjun on January 18, 2008 at 02:49 AM
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