The end of India's offshore dominance?

Indian IT salaries are undeniably on the rise, but this will not derail the offshore-to-India IT locomotive.

Is India yesterday's news? Will China, Russia, Vietnam and Brazil become the future of information technology offshore outsourcing?

Some are making that argument, and there is an argument to be made. After all, the cost advantage of doing business in India has come under pressure as salaries for qualified Indian IT professionals reach record heights. Average Indian salaries in the field rose 12 percent last year, and they are expected to rise by about 15 percent across the industry again this year.

And as Indian salaries climb, many speculate that this presents opportunities for other offshoring hot spots, such as China, Eastern Europe--and even upstarts like Vietnam and Brazil. Some even speculate that rising salaries in India will erode the cost advantage over U.S. IT workers, ultimately returning offshore jobs to American soil. But that's only one side of the story. To paraphrase Mark Twain, the reported death of Indian outsourcing is greatly exaggerated.

The counterargument rests on two pillars: productivity and scale. Salaries may increase, but there are offsetting factors such as experience, infrastructure, high productivity levels and economies of scale to consider. Let me put it another way: The cost of doing information technology in India is falling, as the range and complexity of projects that can be offshored to India is increasing.

How can that be? If you subtract the salary advantage, what makes India different than China, Russia and the myriad other countries chomping at the bit for IT work?

One reason is that India has a multiyear experience advantage over other nations. First-generation IT offshore providers cut their teeth on mainframe legacy code maintenance--the gritty work that few IT professionals in the United States care to do anymore. Now Indian IT companies are hitting the sweet spot of the enterprise application package market, offloading many of the high-volume, routine tasks that chief information officers struggle to maintain with high-cost U.S. resources. Countries like China and Russia simply don't have the experience to handle these tasks, and it will take years for them to come anywhere close.

Better backbone
Another reason is that India has vastly improved its IT infrastructure. A few years ago, large-scale projects required mirrored offshore hardware/software environments that were expensive to set up and a nightmare to keep in sync. That's no longer the case--distributed system development is now the de facto standard in many IT shops. India's IT infrastructure improvements enable Indian businesses to match salary increases with productivity improvements.

What's more, India has achieved global leadership in adopting continuous quality improvements that guarantee mature business processes and ongoing productivity improvement. By creating real software factories, Indian companies leverage the power of doing it right the first time. The leading software quality methodology in the world today is the Software Engineering Institute's Capability Maturity Model, or CMM. It is no accident that two-thirds of the world's CMM Level 5 organizations are based in India. Other countries will get there, but it's going to take time.

In addition, many India-based companies have discovered the leverage in India's university system to achieve increased efficiency. While it's unrealistic to expect "freshers" to be highly productive the day they receive their sheepskins, Indian businesses with strong training programs quickly supplement their new college graduates' strong theoretical IT foundations with the practical skills needed on their projects. College graduate salaries start at less than $5,000 per year, which is about half the salary or less of a seasoned Indian software developer.

Finally, India is rapidly creating huge economies of scale in IT offshoring, which further offset the inflationary pressures of salary increases. To counter wage increases, many offshore outsourcers are implementing large team sizes and long-term projects to help maintain utilization levels at above 75 percent. With larger teams comes the ability to include new college graduates in the mix, enabling them to train on the job.

While Indian IT salaries are undeniably on the rise, don't think that this will derail the offshore-to-India IT locomotive. Offshore service providers continue to find ways to provide their customers with increased productivity and scale, thus ensuring that India will not easily cede its current dominant share of the global IT offshoring market. And with the Indian government's focus on dramatically upping the supply of technical graduates over time, it ensures that India keeps moving up that steep productivity curve. That's the power of productivity--and India has figured it out.

Marc Hebert is executive vice president of Sierra Atlantic, a Silicon Valley-based application development company that has a branch in India.