Pay hikes have offshore deals drifting away

At Gartner Inc.’s Outsourcing Summit in Dallas last month, the consulting firm said wages paid to tech workers in India for application-related services continue to rise. For instance, in 2004, a U.S. customer might have been billed US$22 per hour for a Java programmer in India. By next year, that same programmer’s services may cost nearly US$40 per hour, according to Gartner.

One conference attendee whose company runs its own offshore development facility in India agreed with Gartner’s assessment of the wage increases in India. “We’re finding that ourselves,” said the attendee, who requested anonymity. He added that his CIO asked him last year to investigate other countries, and his company is currently looking at China as a possible alternative for offshore IT work.

Most outsourcing customers are insulated from wage increases under their contracts with IT services vendors. But not all are. And in general, there seemed to be a willingness among the IT managers at the conference to explore the globe when it comes to offshoring.

For instance, Nashville-based Nissan North America Inc. gets application development services from Satyam Computer Services Ltd. in Hyderabad, India. All of that work is done in India now. But James McClanahan, Nissan’s director of applications, said that if Satyam were to suggest moving some of the development operations to another country, he might not object — as long as the work met the same service standards.

“I don’t believe there is an affinity to any particular location,” McClanahan said. He added, though, that India has “the critical mass and capability” in terms of skilled workers.

If Gartner’s wage-growth forecast for India becomes a reality, the salary that a Java programmer could command there would still be less than half of what one in the U.S. might earn. But rising salaries are among the pressures that outsourcing vendors in India must deal with. Another is a shortage of experienced middle managers, said Gartner analyst Frances Karamouzis.

Peter Nassim, an outsourcing manager at Automatic Data Processing Inc.’s Canadian operation in Etobicoke, Ont., said that if he was told by his offshore services vendor that he could get a better rate or skill set in a country other than India, he would consider the suggestion.

“It’s the deliverable that matters to me,” Nassim said. Location would become a bigger issue if ADP needed specific language skills or had concerns about security, but in that case, such factors could be built into a vendor’s requirements, he added.

Lisa Gage, director of corporate strategy and planning at General Motors Corp., said the automaker is focused on getting all of its IT operations, including service providers, to follow standardized processes.

GM’s outsourcing vendors are responsible for deciding where work should be done, she said, and they can’t pass along any wage increases to the automaker — so labor costs aren’t an issue for GM. What matters to her, Gage said, “is the quality of the product.”

Vendors in India once received 80 per cent of all offshore IT spending by U.S. companies. Now they get about 59 per cent of the US$26 billion that U.S. companies pay for offshore services, according to Gartner.

Bipin Thomas, a vice-president at Satyam, said that while IT wage increases in India have been mitigated by productivity improvements and increased automation, Gartner’s warning about a shortage of experienced project managers in India “definitely is a real issue.”

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