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Is outsourcing to India still financially relevant?

Posted by gvix on April 9, 2007 at 9:42 PM PDT

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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