India attractive offshore location despite wage hikes

India is still an attractive offshore location for software development and other IT services, despite increasing staff salaries, according to analysts.

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The cost advantage of hiring engineers in India is likely to continue for at least another five years, said Sudin Apte, senior analyst and country manager for India at research firm Forrester Research.

Indian outsourcers Wipro of Bangalore and Satyam Computer Services of Hyderabad warned earlier this month that salary increases could depress their profit margins in the current quarter.

A number of multinational companies like IBM, Accenture, and Capgemini are expanding their operations in India, and competing for staff with Indian outsourcers.

Forrester of Cambridge, Massachusetts, estimates that salaries of Indian staff employed in IT services delivery are increasing at 12 percent to 15 percent a year on average.

But vendors delivering offshore services from India are introducing measures to improve productivity including creating reusable components that will make software development more efficient, and require fewer new hires, Apte said.

Salaries for experienced engineers have been going up, though the salaries for entry level staff have remained about the same, said Siddharth Pai, a partner at sourcing consultancy company Technology Partners International (TPI) in Houston, Texas. About 50 percent of India's population is under 25, and another 15 percent lie between the ages of 25 and 30, so there are a large number of people entering the workforce, Pai said. Companies that have good processes in place can reduce costs without sacrificing quality by having a higher mix of younger staff, he added.

India's demographics, including the large number of software engineers that graduate each year, continue to give it an edge over other countries such as China, according to Apte.

"In terms of ability to scale number of staff and everything else, I don't think any other country can offer what India can," Aruna Jayanthi, vice president for outsourcing at Capgemini India said in an interview last month. Capgemini plans to make India its hub for offshore services delivery.

The value of outsourcing contracts worldwide is likely to be lower this year than last year, according to a study by TPI. There has been a shift from large contracts to a number of smaller contracts, according to TPI. Rather than outsource everything to one supplier, customers prefer to outsource one process at a time, and to different providers, Pai said. Clients are also restructuring contracts with service providers for lower rates to take advantage of the cost savings from offshore delivery of services, he added.

Even as the value of outsourcing contracts decrease, offshore delivery of services is on the increase. Around 47 percent of outsourcing deals on which TPI is currently advising involve an offshore delivery component. The offshore component of the deals is about 48 percent of the contract value on an average, according to TPI. India still has about 70 percent share of the offshore delivery of services, and the business goes to both Indian outsourcers and Indian operations of multinational services companies, Pai said.

A new opportunity emerging for India is offshore product development, which includes research and development (R&D), embedded software development, and development of software products, according to Forrester. Multinational companies are setting up their own product development operations in India or outsourcing to Indian service providers. The revenue for India from this business has grown ten-fold from $300 million in 2001 to over $3 billion last year, according to Apte.