In the early 2000s, many analyst models predicted that the US labor arbitrage incentive for outsourcing work to India would have run out of steam by 2017, but Everest Group recently revised its forecast, saying that train may still be running strong in 25 to 30+ years.
“India is still a highly attractive and viable option for low-cost labor, albeit not quite as good as it was 15 years ago, but still very compelling, and it will likely remain so for another three decades,” said Michel Janssen, chief research guru at Everest Group.
Everest Group said it moves out its estimate for the end of the India labor arbitrage to beyond the 2040-50 time horizon.
Everest Group said several factors contributed to the forecast revision.
First, while inflation slowed in the U.S., it slowed even more dramatically in recent years in India. The consumer price index in India declined from 8-12 percent between 2008-2013 to 5-7 percent for the past several years, resulting in lower wage inflation than expected. This, in turn, depressed the arbitrage difference, creating relatively smaller impacts on forecasting models.
Second, the Indian rupee has experienced a constant and significant decline against the US dollar over the past 15 years. This currency movement —a change from around 43 to 65 rupees—created a large positive impact, offsetting inflation by roughly 50 percent.
Third, and most importantly, the forecasts underestimated the labor supply in India, which has doubled since 2008.
“All of us in the analyst community completely underestimated the impact of the available supply, which created an ongoing downward pressure on entry-level salaries,” Janssen said.
In the 2000s, India salaries were rising at double digit rates, and it seemed that it was only a matter of time before we reached parity, which, for U.S. offshoring purposes, was considered to be 70 percent of U.S.-based salaries.
According to numbers provided by the India Ministry of Human Resource Development, the number of college students in India has risen from 12.25 million in 2008 to more than double that (24.92 million) in 2016. This has significantly muted salary increases, particularly for junior roles.
In addition, Everest Group says there is now a large mid-level, experienced talent pool available, created by attrition from the IT and business process outsourcing industry. Cognizant recently launched a voluntary separation program for directors and associate and senior vice presidents, through which the firm expects to lay off 1,000 employees. Wipro recently laid off approximately 500 employees as a part of its appraisal process, and Infosys is rumored to be planning layoffs as well.
Another finding that may run contrary to popular belief is that the difference in arbitrage between traditional services and digital services is quite low. Indexed against the average starting salary of employees with two to five years of experience in the US labor market (using Dallas, Texas, figures), accounting associates in Bangalore earn 12-15 percent and cloud application developers earn 14-16 percent.
Janssen acknowledges that temporary shortages of key skills, particularly digital, will create upwards pressures on salaries in the short term.
“Currently, there is a limited availability of niche, digital skills in India, such as mobile app designers and RPA experts, and that puts those talents and salaries at a premium, but as the education and corporate systems retool their training curriculums, I expect the resulting surge in available talent will create a cap and drive down salaries, with the gap between salaries for traditional and digital services decreasing further in the future,” Janssen said.
Furthermore, industry growth over the next several years is likely to be driven by digital services. Solutions like Robotic Process Automation (RPA) are going to create significant process labor efficiencies, in turn increasing headcount pressures.
Ultimately RPA solutions require fewer human resources, so even in the case of strong digital services growth, the total number of graduates needed will decline significantly, resulting in an ample supply of entry-level talent in forthcoming years.
Janssen says Everest Group expects India to maintain its cost arbitrage advantage at a minimum of 19 years and likely up to 30+ years, depending upon wage inflation and currency valuations.
As a result, India’s share of the total global sourcing market—currently 47 percent overall and 72 percent for the digital services segment—is likely to remain significant or even increase as talent supply keeps labor cost increases lower than in other parts of the world.
Companies around the world will continue to explore alternative options for a variety of reasons, some of which may be political in nature. But for most businesses, economics trumps politics.
“In the case of India, the tipping point in the sourcing equation will go back to the supply side, where the ongoing wave of college students will keep pressure on wage advances far into the future, especially for the entry level positions,” Janssen said.