Salary Costs In India
Companies provide a number of reasons for outsourcing services to India, but undoubtedly one of the top drivers is cost. The direct cost in India of services such as web design, application development and call centers can be 1/4 to 1/2 of what it is in the US or Western Europe. The number one determinate of lower service costs in India is salaries. A wage differential of 40% to 80% underpins the massive global trend of outsourcing to India.
The underlying driver of wages in India is based in history and the economics of supply and demand. Prior to the start of the outsourcing boom in the mid 1990s, average Indian salaries were extremely low with per capita GNI of about $1,000. As technology and management trends drove the growth of the global service market in the late 1990s and early 2000s, demand quickly grew for Indian workers. Salaries have been driven up at rapid rates, but because of the low starting point and large labor market in India, much of the labor arbitrage opportunity remains.
Salary differentials in India are the largest in the junior ranks where supply is the largest. Indian universities graduate over 3 million students a year. There is high variability in the skill level of these graduates, but pure salary costs can be as low as 1/10th that of US employees.
In contrast, senior, well educated and skilled employees are in short supply. Salaries for senior developers with an average skill sets are 4-5 times that of their more junior colleagues. This puts their average salary costs at ΒΌ of US peers. The very high end of the market, the most well educated and skilled, wage inflation has been even higher and these workers are now commanding previously unheard of salaries, in some cases over $50,000 per year and more than half of their Western peers.
Wage inflation has been high for the last few years, averaging about 15-20% for the broader IT and outsourcing sector and going as high as 30% for top tier talent. However, salary increases should moderate over the coming months and years. First, the global economic downturn will moderate demand through 2009. Second, Indian universities will continue to churn out millions of new graduates, thus slowing wage inflation at the lower end of spectrum. Finally, salary increases will be moderated at the higher end by the declining marginal benefits of labor arbitrage. Working with an offshore team introduces additional management costs and risks that require meaningful cost savings to offset.
Lower salaries in India will continue to provide significant labor arbitrage opportunities for many types of work. Plan vanilla IT and business process outsourcing (BPO) will continue to have cost saving opportunities in the 50-75% range. More sophisticated IT initiatives and knowledge process outsourcing (KPO) will have more limited benefits, but in most cases cost reductions of 30%-50%. However, companies that focus on top tier talent will increasingly reassess the cost benefit equation and bring some high cost work back onshore to the US and Europe.
References and Resources
http://www.nasscom.in/upload/5216/July%205%202007%20%20Education%20Initiatives-Final.doc