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India IT Outsourcing Diminishing?

Published April 28th, 2007 in Tech & VC

As a meme, outsourcing IT to India seems to have died down significantly in the last year. Recently, Riya’s CEO Munjal Shah wrote that he is closing Riya’s India office. The reason: cost. It’s no longer cost-effective to outsource their IT anymore. Here’s one key paragraph to show the effect of the IT outsourcing on labor costs in India:

Bangalore wages have just been growing like crazy. To give you an example, there is an employee of ours who took the first 5 years of his career to get from 1% to 10% of his equivalent US counterpart. He then jumped from 10% to 20% of his US counterpart in the next 1 year. During his time with us (less than 2 years) he jumped to 55% of the US wage. In the next few months we would have had to move him to 75% just to “keep him at market.”

So, India is quickly catching up with the US with respect to labor costs. I wonder if other companies will pull out of India too in the near future?

5 Responses to “India IT Outsourcing Diminishing?”  

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  1. 1 Mukund Mohan Apr 29th, 2007 at 11:32 am

    For small companies it makes no sense to be in India. For larger ones (as in you want to build teams of 1000 ) the value proposition is still there.

    Its actually good that a few companies get out of India so the frothy nature of the market settles and Indian programmers and the like get a saner view of their value and cost benefits.
    Mukund

  2. 2 Darren Herman Apr 29th, 2007 at 8:05 pm

    What’s fascinating here is that the increased wages = increased spending power. Anyone want to start a consumer retail business in India? :)

  3. 3 Dr. Zareen Karani Araoz Apr 30th, 2007 at 7:26 am

    The pace of large outsourcing entrants can slow down after the larger companies have already entered. Even so, the projected trends do not support this assumption. Outsourcing to Idnia is on the increase and is economically beneficial also for the outsourcing country’s economy (Refer to my article “Why Outsourcing is good for the US Economy). We have consulted with, trained and studied people involved in these ventures for over a decade (early outsouring actually started in the 90s). Working with some of the largest investors adn MNCs, through my company “Managing Across Cultures” , I believe that many who pull out have not learnt or seen the importance of how to manage the outsourcing venture and have not PROFESSIONALLY trained their people on both sides of the ocean, to really understand the cultural differences and how they need to handle the ensuing business challenges. I would be interested to hear of companies who have done this well and professionally and then decided to withdraw from India.

  4. 4 Ankur Apr 30th, 2007 at 5:35 pm

    still huge wages difference exists . the
    salary hike is also improving productivity
    of employees . dont think it will have affect in long term

  5. 5 Surojit Niyogi May 4th, 2007 at 1:14 pm

    Outsourcing in Bangalore is diminishing - but it doesn’t mean it can’t be done in other parts of India. Bear in mind, he was hiring the best of the best (IIT grads); but that doesn’t mean useful products/services can’t be built by others.

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