India has been one of the top destinations in the world for IT outsourcing, due to their focus on the IT industry, massive labor force, and low wages. This has been a huge enticement for U.S. companies to outsource much of their work to India. Although, the costs of outsourcing to India has been considered to be relatively low, this may no longer be a fact, but a myth based on India’s low costs from years ago. For smaller scale projects, there may remain some cost advantages to outsourcing to India, but at a much smaller scale than years ago. In many circumstances, there is no longer an advantage of outsourcing to India.
During the last several years, the trend of outsourcing to India has been that of rising costs, with no signs of the trend slowing down or reversing. Indian firms themselves have noted the trend, and have begun outsourcing as well, in order to maximize their profit. In 2007, the Associated Free Press (AFP) highlighted how Indian firms were outsourcing from India to other locations, such as Mexico. The rising wages of Indian workers have caused many American and European firms to rethink their strategies. According to the AFP, salaries of software professionals rose 18.7 percent in 2007, while the rupee has gained almost 10 percent [in 2007] to near 10-year highs against the dollar. Since Indian firms have to pay more in wages to their workers, they also have to charge clients more for their services. The cost-benefit advantages of outsourcing to India will continue to decrease, especially taking into account the current economic situation in Europe and the U.S.
For the typical American company planning to outsource to India, the cost-benefit advantage of outsourcing to India may soon disappear. Sramana Mitra, from Forbes Magazine, pointed out that the cost advantage of offshoring to India used to be 1:6, by 2008 it was 1:3. Mitra also expected the cost advantage of outsourcing to India to be completely eroded by 2015. This has set a reality that India is no longer competitive as they once used to be in IT. In fact, outsourcing to India is now more expensive than outsourcing to regions such as Eastern Europe or Latin America, and the costs are comparable to doing a project in-house. The competitiveness of Eastern Europe, coupled with the rising costs in India, has led companies, such as IBM, to open facilities in Romania.
Many larger companies have taken note of the rising costs of outsourcing to India, and have begun requesting for rates to be dropped as much as 15%. American companies that have not noticed the rapid rising expenses of outsourcing to India, soon will. Some Indian firms are attempting to take advantage of their low cost reputation, charging many times more than should be typical for a project, with the hope that the client will not look elsewhere. There are circumstances in which a very large corporation has the need to outsource, and I have noticed how some Indian firms charge as much as eight to ten times more than an American company would charge for the same project. If a company is careless as to why, and to whom they are outsourcing in India, they may end up paying a very steep price in doing so.
The varying economic situations around the world have led to many countries being competitive in IT, including the United States. Due to stagnant wages and job competitiveness, outsourcing to American companies is not as expensive as many think. Combine American companies’ modern day lower cost of outsourcing, with the lack of having to deal with a drastically different culture, the advantages of outsourcing within the country become apparent. There no longer remains an outsourcing destination that stands out when compared to other regions in the world. India has been dethroned as the top country to outsource IT to; many regions in the world are now competitive, and those thinking of outsourcing should plan very carefully of how, and to whom, they will outsource.
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