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According to analysts at the Indian division of US based independent technology and market research company Forrester, despite rising salaries, India will continue to be an attractive offshore location for software development and other IT services.
Sudin Apte, senior analyst and country manager for India at research firm Forrester Research Inc. said that, the cost advantage of hiring engineers in India is likely to continue for at least another five years.
Earlier this month, two Indian outsourcers -- Bangalore-based Wipro Ltd. and Hyderabad-based Satyam Computer Services Ltd. -- warned that salary increases could depress their profit margins in the current quarter.
A number of multinational companies, including IBM, Accenture Ltd. and Capgemini, are expanding their operations in India -- and competing for staff with Indian service providers.
Cambridge, Mass.-based Forrester estimates that salaries of Indian staff employed in IT services delivery are increasing by 12% to 15% 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 flat, said Siddharth Pai, a partner at Technology Partners International Inc. (TPI), a sourcing consultancy in Houston. About 50% of India's population is under 25, and another 15% of Indians are between 25 and 30, so there's 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 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 a recent interview. 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 it was in 2005, according to a study by TPI. There has been a shift from large contracts to a number of smaller deals, according to TPI. Rather than outsource everything to one supplier, customers prefer to outsource one process at a time, and to use 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.
Even as the value of contracts decreases, delivery of offshore services is on the rise. Around 47% of the outsourcing deals on which TPI is currently advising involve an offshore component, and India still accounts for about 70% of offshore services. That business goes to both Indian outsourcers and Indian operations of multinational services companies, Pai said.
An emerging opportunity for India is offshore product development, which includes research and development, 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 tenfold from $300 million in 2001 to more $3 billion last year, according to Apte.
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