Wage, Inflation, Offshore, Outsourcing, Markets

Wage inflation in offshore outsourcing markets is over-stated according to Everest report

Wages for IT outsourcing and Business Process Outsourcing (BPO) services providers in key offshore markets, including India, China and Poland, are increasing on average by 8 to 11 percent per year, which is nearly half of what has been commonly reported, according to new findings by Everest Research Institute. The lower figures reflect in part the efforts that offshore outsourcing suppliers have been making to control rising labor costs, including the expansion of their operations into second-tier, lower-cost cities and countries, as well as exchange rate movements and other factors.
 
"The labor arbitrage opportunity -- created by the significant wage gap between industrialized and developing nations -- will continue to drive offshore outsourcing for many years," said Joe Fernandes, Managing Research Director at Everest Research Institute. "Despite salary increases in key offshore markets, the idea that India and other key markets will price themselves out of the outsourcing business in the near-term is unfounded."

In the report, Sustainability of Labor Arbitrage, Everest estimates that the labor arbitrage benefit that U.S. companies can achieve by outsourcing IT Application, Development and Maintenance services, which account for a large share of offshore activity, can be sustained for:

-- 18-25 years with Asian markets, such as India, China and the Philippines
-- 3-6 years with Central European markets, such as Poland and the Czech Republic
-- 30+ years with Mexico

These projections are based on an analysis of starting positions, wage inflation in source and destination countries, exchange rates and other factors. Fernandes pointed out that labor arbitrage sustainability for Asia and Mexico exceeds current expectations because wage inflation in these regions is significantly lower than widely believed. Labor arbitrage projections for Central Europe, by contrast, are lower than commonly reported primarily because of the rapid deflation of the U.S. dollar against the euro, according to Everest's calculations.