Friday, February 03, 2006

The India syndrome

One of the interesting effects of the rise and rise of India as an offshore location for technology staff is the effect that it is having on the prices that IT consulting firms can charge. We had a situation at Kalido where four well-known systems integration firms bid on a project, and in the end the customer chose none of them, but went in-house with significant input from staff in India. I also encountered a situation last year where a very well known firm was charging just USD 650 a day on a large project for its junior staff, a rate that would have been unthinkably low in 2001, when nearly double that would have been the going rate even for IROCs (idiots right out of college).

If you look at Accenture, perhaps the leading IT consulting firm other than IBM, you will see that its overall business is still growing, but in fact there are two trends: consulting has declined a lot, but outsourcing has risen to take its place. Even Accenture has been unable to protect its premium consulting pricing across the board under the onslaught of lower prices from Indian firms like TCS, Wippro and Infosys. The large consulting firms have responded by setting up large operations in India themselves ("if you can't beat 'em, join 'em") but while this has no doubt helped, the daily rates that consultants can charge in the US and Europe is still affected by this downwards pricing pressure. It's not that the Indian companies are giving it away: Wippro's profit margins are twice that of IBM.

Of course not every job can be done remotely. Support call centers and programming and testing to specifications are clearly the easiest to do, while projects that require a high degree of iteration e.g. web sites, user interface design, or reporting systems are much less suitable. Still, companies are now moving more complex work overseas e.g. accounting and financial research, so the list of "safe" jobs in IT in the developed world is gradually being eroded away.

Of course this movement has caused wage inflation in India, with 20% pay increases common amongst hot skills, and turnover rates of over 20% in Bangalore being normal (these can hit 50% for call centre jobs). Nonetheless, there is a long way to go. A top programmer with five to ten years C++ experience in the UK or the US might earn well over USD 100k (more in Silicon Valley) but the equivalent in Bangalore is still around USD 15k. It is less in Chennai or Pune. It is going to be a long time before inflation brings Indian wages up to anything like US levels.

This structural price deflation effect still has a long way to play out, with off-shoring growing steadily but still by no means universal, and large companies exploiting the lower prices to push down consulting rates in the US and Europe. It isn't going to get prettier any time soon. I was in India last week, and the sense of momentum and progress is tangible.

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