Myth #3: The cost savings from labor arbitrage in India will be lost in the very near future

A common critique of offshore outsourcing is that wage inflation in India is quickly shrinking the value of labor arbitrage.   However, this analysis is based on three myths:

• Myth #1: All Indian IT Wage Levels are Going Up at a Dramatic Pace
• Myth #2: Increased wages in India translate directly to increased costs for U.S. buyers of IT services
• Myth #3: The cost savings from labor arbitrage in India will be lost in the very near future

This post exposes the flaws in Myth #3 and explains how outsourcing professionals can leverage the truth to improve decision making and negotiations.  We explained Myth #1 here, and Myth #2 here.   

Myth #2: Increased wages in India translate directly to increased costs for U.S. buyers of IT services

A common critique of offshore outsourcing is that wage inflation in India is quickly shrinking the value of labor arbitrage.   However, this analysis is based on three myths:

• Myth #1: All Indian IT Wage Levels are Going Up at a Dramatic Pace
• Myth #2: Increased wages in India translate directly to increased costs for U.S. buyers of IT services
• Myth #3: The cost savings from labor arbitrage in India will be lost in the very near future

This post exposes the flaws in Myth #2 and explains how outsourcing professionals can leverage the truth to improve decision making and negotiations.  We explained Myth #1 here, and will explore Myth #3 in a future post.

Myth #1: All Indian IT Wage Levels are Going Up at a Dramatic Pace

A common critique of offshore outsourcing is that wage inflation in India is quickly shrinking the value of labor arbitrage.   However, this analysis is based on three myths:

• Myth #1: All Indian IT Wage Levels are Going Up at a Dramatic Pace
• Myth #2: Increased wages in India translate directly to increased costs for U.S. buyers of IT services
• Myth #3: The cost savings from labor arbitrage in India will be lost in the very near future

This post exposes the flaws in the first myth and explains how outsourcing professionals can leverage the truth to improve decision making and negotiations.  Future posts, will explore Myths #2 and #3.

Three Myths about Wage Inflation in Indian IT Services

One can hardly mention global IT outsourcing these days without hearing references to “wage inflation” in India and the fast-shrinking value of labor arbitrage from offshore outsourcing. These dramatic, seemingly logical, arguments are used to support an analysis that predicts that cost savings will soon be too small for offshore outsourcing to be viable.  However, this deeply flawed analysis is based on three myths:

• Myth #1: All Indian IT Wage Levels are Going Up at a Dramatic Pace
• Myth #2: Increased wages in India translate directly to increased costs for U.S. buyers of IT services
• Myth #3: The cost savings from labor arbitrage in India will be lost in the very near future

In future posts, we explain why each of these myths are false and how outsourcing professionals can leverage the truth to improve decision making and negotiations.

Analysis and Opinions by Matthew Sullivan and Cindy Carpenter.

Evaluating the Maturity of a Portfolio of Offshore Services Engagements

Thousands of U.S. companies now receive services from offshore vendors.  Many companies that began global outsourcing to reduce labor costs by augmenting staff now source project-based services from multiple vendors in multiple countries.  Many also have offshore captive (subsidiary) centers that provide competitive and/or complimentary services. As companies increase their usage of outsourcing providers, it becomes increasingly important to manage these portfolios of global services relationships in a deliberate, organized way, not just the engagements. One tool to help manage the global services portfolio is a periodic evaluation using three relationship aspects: (1) global services buyer management practices, (2) the individual buyer and provider relationships, and (3) provider service capabilities.

True Global Outsourcing: It’s about Skills, Not Visas

Writing in Forbes, veteran Forrester analyst Stephanie Moore, recently wrote that “every offshore development team requires an onsite component, [and] that [the] onsite component could be provided by American citizens — who naturally have more contextual business understanding, thus satisfying one of clients’ most pressing needs today.” (True Global Outsourcing Should End The Visa Debate). Moore is right that American employees can and should staff more of the onsite roles in global IT outsourcing projects, but the reason they don’t is driven more by the difficulty of finding American employees who have the appropriate skills and interests than it is by costs.

Understanding Concentration Risk in Offshore Operations

Offshoring analyses routinely incorporate comprehensive risk evaluations of economic, political and other well-known risks, but often fail to consider how these intensify as offshore operations scale. This probability of magnifying other risks as operations become geographically clustered is called “Concentration Risk.”  The remainder of this post illustrates the concept of Concentration Risk by applying a simplified offshoring risk management architecture to the operations of a hypothetical U.S. company as it evolves through an offshoring lifecycle.