PASSING ON INDIA?
Outsourcing to India
By Allan Richter

Rising wages in India are eating into some of the cost advantages of sending work to the popular outsourcing destination.

Wages have increased roughly 11% in each of the past three years with little sign of abating, says Michael Spellacy, vice president at The Boston Consulting Group in the US. In major cities like Bombay and Bangalore, inflation has climbed as high as 14%, with worker attrition rates now averaging 25%. A full-time worker in outsourced financial services in India earns between US$22,000 and US$27,000 a year, Spellacy says.

So far companies that have tapped India for business-process outsourcing (BPO) aren’t leaving in droves, but many are hedging their bets. Companies are diversifying by adding other countries, such as Sri Lanka and the Philippines, to their rosters, says Spellacy. “If you’re building a business case for outsourcing based on cost alone,” he says, “the case for going to India is reduced.” Although wages are comparable in Sri Lanka and the Philippines, companies can negotiate more favorable deals in those countries because the industry is not as developed there.

But outsourcers still prefer the technical and English-language skills of India’s workforce, according to Dana Stiffler, research director at US-based AMR Research. And they value Indian companies’ investments in technical infrastructure. “It hasn’t reached a point where wage inflation is making India patently unattractive,” she says.

Outsourcers have been trying to offset the impact of wage increases in India by negotiating agreements that link levels of inflation to productivity gains. They are also looking to “secondary” cities, such as Chennai, where attrition and inflation are less severe.

BPO vendors in India don’t appear to be losing sleep over the changing economic dynamics. “Wage inflation is going to be mitigated quickly,” predicts Joseph Sigelman, co-president of OfficeTiger, a BPO division of RR Donnelley with offices in six Indian locations, among others around the globe. With a population of 1 bn, and only 1m workers in BPO-related industries, India has a large labor pipeline, says Sigelman. And, he adds, the gap between wages in India and the West is still huge.