Monday, February 02, 2004

Much Ado About Outsourcing

I originally made the following remarks while commenting on a post made by Edward Hugh:

I'm not as pessimistic as a lot of people seem to be about the future of software development in the Western world, for a very simple reason: IT salaries in India are rising sharply, recording the highest increases in all of Asia in 2003 - about 17 percent if my memory serves me correctly - and this from a base that is by no means as low as India's per capita GDP might suggest. What this tells me is that we're a lot closer to an equilibrium situation than the current angst lets on.

Now, a naive reading of the facts might suggest that if the average Indian programmer is earning $10,000 and his American counterpart is earning $60,000, we wouldn't expect equilibrium until the two's salaries had equalized, but there's clearly a lot more to programmer productivity than a reading of skillsets might indicate. India is a country with serious shortcomings in infrastructure and the legal system, and as such programmer productivity there will be considerably lower than in the US, even if Indian programmers are individually as skilled as their American counterparts.

Assuming the laws of economics still hold, at equilibrium we should expect American and Indian developers to earn the same amount per unit of output; what this means in plain English is that if Indian programmers are only half as productive, corporations should be indifferent between hiring IT staff in the US or India, once Indian salaries are at half American levels. Once the low hanging fruit is gone, as the rapid rise in salaries indicates is already happening, expect all the hype about outsourcing to cease as suddenly as it took off.

The idea that India's 1 billion-strong population represents a limitless pool of IT talent to draw upon lies behind much of the worry about offshore outsourcing, but all the evidence indicates that such worries are considerably overdone. If India were as chock-full of IT talent as the doom-mongers make out, one wouldn't expect salaries to be rising much, if at all, in stark contrast to what has actually been transpiring. Currently, average programmer salaries in India seem to be running at about $10-$20,000 per year, which might seem miniscule in comparison to what American developers have come to expect, but when one factors in all the hassles of doing business in India, it seems clear that there actually isn't all that much room left before Indian labor becomes too expensive to justify moving more work there; If anything, I'd say a lot of the jobs currently being moved to India will soon end up back in America, as companies realize that the cost savings are more than made up for by the drop in productivity.

I can imagine someone saying in response to all the above "Very well, the Indian job market is currently tightening up, but what happens in the longer term, as India starts churning out limitless quantities of new programmers?" To this I can only respond that It takes a lot of time and money to train decent programmers, and I see no reason to imagine that India enjoys some sort of superiority in talent development that makes it any easier over there than here in the West. In fact, I'd say precisely the opposite is true.