|
Wage inflation in offshore outsourcing markets is over-stated, impacting labour arbitrage estimates, says a new study.
Wages for IT outsourcing (ITO) and Business Process Outsourcing (BPO) services providers in key offshore markets, including India, China and Poland, are increasing on an average by 8 to 11 per cent every year, which is nearly half of what has been commonly reported, according to new findings by Everest Research Institute.
The report, 'Sustainability of Labour Arbitrage' examined the sustainability of labor arbitrage in five key locations, US and European countries like UK and France, offshoring work and six key locations receiving that work (India, China, Mexico, Poland, Philippines and the Czech Republic).
The lower figures reflect in part the efforts that offshore outsourcing suppliers have been making to control rising labour costs, including the expansion of their operations into second-tier, lower-cost cities and countries, as well as exchange rate movements and other factors.
According to the study, the reported numbers usually talk about the maximum wage inflation in an area rather than the corrected average numbers. Giving the Indian example, it says in Indian call centers last year, senior customer care executives enjoyed the highest rise in wages at 13 per cent.
But the vast majority of employees (over 60 per cent) are entry-level staffers; their wages rose just six per cent. So the average wage inflation at call centers was much more muted than widely reported.
According to the study, the reported numbers usually talk about the maximum wage inflation in an area rather than the corrected average numbers. Giving the Indian example, it says in Indian call centers last year, senior customer care executives enjoyed the highest rise in wages at 13 per cent.
But the vast majority of employees (over 60 per cent) are entry-level staffers; their wages rose just six per cent. So the average wage inflation at call centers was much more muted than widely reported.
The report believes that the offshoring value proposition will evolve beyond labour arbitrage to include elements such as quality and productivity improvements. This will help increase the hurdle rate, allowing for meaningful offshoring even when the wage gap reduces significantly.
Everest report estimates that the labour arbitrage benefit that US 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 in the Asian markets, such as India, China and the Philippines
- Three-six years in the Central European markets, such as Poland and the Czech Republic
- 30 plus years in Mexico
These projections are based on an analysis of starting positions, wage inflation in source and destination countries, exchange rates and other factors. Labour arbitrage sustainability for Asia and Mexico exceeds current expectations because wage inflation in these regions is significantly lower than widely believed.
Labour arbitrage projections for Central Europe, by contrast, are lower than commonly reported primarily because of the rapid deflation of the US dollar against the Euro, according to Everest's calculations.
|