Each month, outsourcing expert Jagdish Dalal tackles tough questions submitted by our readers. This month’s question is from a director of operations at a multimedia company in Richmond, VA. Have a question for Jag’s bag? Submit it to info@meltingspot.com.
Q. “Jag, as the sponsor of an IT offshoring program at my company, I have staked my reputation on our success with moving operations offshore to India. After two years, the cost savings I anticipated from offshoring haven’t materialized yet - not even close. What are we doing wrong?”
A. Dear Reader, I have a hunch your expectations about the cost savings you could achieve through offshoring might have been unrealistic from the start. Don’t believe all the hype you hear from people in the IT services industry and the media. They can make it seem like all it takes is mere “peanuts” (or, er… Moongphali nuts) to set up a shop in India. I’m here to tell you the whole truth about offshoring - not just the part that keeps vendors’ phones ringing and their sales orders “cha-ching”-ing.
Perhaps you’ve heard there’s a roughly 5:1 salary disparity between the U.S. and India. You figured that by outsourcing there you could immediately shave off 80% of your upfront labor costs. Perhaps now, a year or two into the engagement, you’re wondering where exactly are all those savings?
The idea of hiring three, four or five people in India for the price of one in the U.S. is pretty much a myth. Wages in India are much lower per capita, yes, because India’s nationwide average takes into account an entire working population that is still mostly agrarian. College-educated information workers, like the “elite” workers found in IT-related fields, make up only a small minority of India’s workforce. The “wage gap” between these workers in India and the U.S. is much smaller than you might think.
Also, in many cases the wage gap is shrinking. Salaries for skilled workers are rising faster in India compared with in the U.S, as macroeconomic conditions in India are driving up labor costs. India’s economic growth is fueling competition for skilled workers. According to NASSCOM, salaries are rising by double digits annually (compared with single digits in the U.S.). India’s inflation and its rupee have both been strong in recent years (although the rupee has dipped recently due to upheaval in the financial system).
What do all these figures add up to? Well, for employers, certainly a lot less “bang for your outsourcing buck” over time. Not only are salaries trending up, but dollars have been buying less when converted into rupee pay scales. If your savings appear to have up and vanished after the first year, it may be because your cost projections developed even a year or two ago are already out of date.
Finally, macroeconomic trends may only be partly to blame. Step back and take a look at your own shop for “hidden” costs that can eat up savings, such as startup delays, flagging productivity, extra government taxes and fees and extra telecommunications costs. These factors all together can really add up - and they can eat away a huge chunk of your savings. It is not at all uncommon to see 50% of anticipated savings from offshoring vanish due to unexpected or hidden costs.
My advice? Adjust your cost models to account for an economy that is more complex than meets the eye at both the macro and micro levels. Ask yourself, if and when costs of doing business in India equalize with doing business in the U.S., how will I benefit from offshoring? Focus your efforts there (see: MeltingSpot: The Jag “Dish” August issue). And pay careful attention to where your costs are increasing. In all likelihood, this is just the beginning.
Jagdish Dalal is a regular columnist for MeltingSpot. He is the Managing Director of Thought Leadership for IAOP (International Association of Outsourcing Professionals) as well as Founder and President of JDalal Associates, a consulting firm. As a thought leader in the field of outsourcing, Jagdish has more than three decades of experience in outsourcing (as a CIO of large multinationals such as Xerox, Carrier, Unisys as well as a Partner at PricewaterhouseCoopers). He came to United States from India more than four decades ago and is proud to be an American-East Indian (as Jane, his wife, says, he has a Western mind and an Eastern soul). He is passionate about outsourcing, offshoring and how it can and has changed the world. As an evangelist for outsourcing, he is proud to be an active leader through IAOP - a true global organization promoting outsourcing as a profession.
