Monday, March 29, 2004

Outsourcing Hysteria in Perspective

This CNET piece being carried in the NYT, asking if India is pricing itself out of the offshoring market puts the lie to any notion of a there being such a surfeit of talent in India that IT wage levels are doomed to sink to Third World subsistence levels. If these gloomy scenarios were on the mark, how would it be possible for Indian IT workers to be enjoying double-digit salary increases?

The U.S. technology industry's demand for offshore services is apparently beginning to drive up pay rates in India, raising questions about the long-term benefits of outsourcing work to that country.

Information technology workers in India reported double-digit salary growth in 2003, according to recent research, while pay for similar work within U.S. borders has been relatively stagnant if not declining. Although India's salaries generally remain significantly lower than U.S. averages, the narrowing wage gap and other unforeseen factors are leading at least some American companies to reassess the cost savings to be had by sending work offshore.

"Expectations about the benefits of outsourcing are becoming more realistic," according to a report by DiamonCluster International, a Chicago-based consulting firm, which recently released a survey of more than 180 companies involved in offshore outsourcing. "Most buyers in the previous study expected gains in efficiency in the range of 50 percent. Today, those expectations have declined to 10 to 20 percent."

India's wage inflation, which approached an estimated 14 percent last year, is a natural byproduct of a classic supply-and-demand scenario. Although projections for outsourcing remain highly speculative, Forrester Research has estimated that 3.3 million American jobs will be moved to other countries by 2015. But as far back as a year ago, India technology trade association Nasscom (National Association of Software and Services Companies) was already concerned that India would fall short of demand for workers by as many as 235,000 professionals.


India reported gains of 12.8 percent and 13.7 percent last year for positions in categories labeled "IT solution provider" and "software development," according to an annual Asia-Pacific survey of more than 500 companies by Hewitt Associates, an international business consultancy. The numbers, which reverse a six-year decline in pay raises in India, are far more than any increases reported among other nations surveyed.

By region, India's highest increases were reported in Chennai, at an average of 13.5 percent, followed by Bangalore, with 12.5 percent, and Kolkata, with 11.5 percent. For 2004, the study predicts that average wages will rise again, as much as 13.4 percent.

There you go - I, Brad DeLong, Daniel Drezner, and everyone else who's insisted that outsourcing is greatly overrated as a "destroyer" of American jobs, are being proven correct. It's just plain stupid to look at per capita GDP in India, compare it with America's, and then draw the conclusion that there are 1 billion Indians with MCSEs willing to work for $450 a year. Hysteria over outsourcing is being driven by little more than a sense of entitlement brought on by the technology bubble, coupled with racist fears of innumerable brown-skinned hordes just waiting to take our jobs and wimmin.