Outsourcing Update

OUTSOURCING UPDATE….Is the world flat? Sort of. Here’s the latest outsourcing news from India:

Nearly two decades into India’s phenomenal growth as an international center for high technology, the industry has a problem: It’s running out of workers.

….”The problem is not a shortage of people,” said Mohandas Pai, human resources chief for Infosys Technologies, the software giant that built and runs the Mysore campus for its new employees. “It’s a shortage of trained people.”

….A shortage means something feared here: higher wages.

Much of India’s success rests on the fact that its legions of software programmers work for far less than those in the West — often for one-fourth the salary. If industry can’t find enough workers to keep wages low, the companies that look to India for things like software development will turn to competitors, from Poland to the Philippines, and the entire industry could stumble.

I remember crunching some numbers back in the 90s and concluding that it was only cost effective to outsource software coding if the basic hourly rate was one-fourth to one-third the cost of doing it locally. Even at half the hourly rate, the numbers didn’t work. For companies with larger presences in India it probably works out differently, but this is still a decent rule of thumb, I think.

If India is truly starting to reach this barrier, it means that more and more of their business is going to have to be driven locally, not by Western companies who are outsourcing their development projects. And it also means they’re going to have to radically upgrade their internal infrastructure. Bottom line: Outsourcing to India will certainly continue to increase, but I wouldn’t be surprised if the era of skyrocketing growth is at an end.