Is Indian IT getting too expensive?
(The Economic Times (India) Via Thomson Dialog NewsEdge) : Early this year, SAP CEO Henning Kagermann went on record stating India was getting expensive. He said, We have decided to hire only a certain number there (India) and then commence to look around for other locations. Last month, Apple shut down its newly commenced Bangalore operations without giving any reasons. But analysts believe the reasons had to do with costs. On Wednesday, Pervasive Software decided to call it quits, saying it is unable to cope with the increasing costs in a hot market like Bangalore .
Analysts told that since middle and senior management cadre accounts for 30% of an organisation, MNCs are increasingly finding India an expensive resource base. However, the story even two years ago was pretty different. Companies could hire a CEO for Rs 30-40 lakh while the same professional in the US carried a price tag of $200,000
Some may like to see these as stray cases. But when TOI decided to do a reality check on India's low cost proposition, we found a large number of voices expressing anxieties about the direction that costs in IT were taking and the pace of its acceleration . And much of that cost worry came on account of the rapidly rising salary levels at the mid and senior levels.
The salary factor
While at the entry level, Indian engineers still provide significant cost savings, the mid and senior management professionals are proving to be very expensive for many. While in the US, a software professional in the mid managerial level (over 5 years experience ) costs around $70,000 (around Rs 31.50 lakh), in India , a manager's pay packet at Rs 25 lakh is not much lower.
And this difference narrows further as the manager adds years to his career. According to StantonChase International's senior consultant , G C Jayaprakash, the professionals in the 10-15 years category are giving even bigger worries to hirers. While a techie with 10-15 years' experience costs around $100,000-150 ,000 (around Rs 45-67 lakh) in the US, he/she is already in the Rs 1 crore bracket in India.
Analysts told that since middle and senior management cadre accounts for 30% of an organisation, MNCs are increasingly finding India an expensive resource base. However, the story even two years ago was pretty different. Companies could hire a CEO for Rs 30-40 lakh while the same professional in the US carried a price tag of $200,000.
While the salary levels in the US have moved up gradually, the bi-annual inc re m e n t s coupled with frequent jobhopping by senior management prof e s s i o n a l s have taken pay packets to dizzy heights in India . In fact, no techie with 10-15 years experience is seen to be willing to meet a prospective employer if the salary is not above Rs 1.5-2 crore.
While the cost of acquisition of talent has gone up both for Indian and MNC firms, the MNCs are at a further disadvantage because they hire more mid and senior management professionals. A project manager in an Indian company typically manages a team of up to 400-500 professionals, but in MNCs, he does not manage more than 100. As a result, the need for high cost managers is higher in an MNC firm.
Prices hit tech boom era levels
Frances Karamouzis, vice president (research), Gartner Inc, says salaries have been going up sharply since 2004. Indian professionals became costlier by 10-15 % in 2004 and that level of increase continued through the next calendar.
It is likely to go up in the coming years as well. India's low cost advantage is slowly diminishing and the talent pool is depleting. Global buyers are questioning India's original selling points. Under such a scenario, the country needs to change its existing positioning by playing the game of value addition, quality and delivery capabilities,'' she says.
According to Avinash Vashistha, chairman and CEO of Virginia-based globalisation services and financial and market advisory firm, Tholons Inc: Current price points are touching the all-time high levels of 2000. It's the pure economics of demand and supply. The demand is obviously higher than the existing supply capabilities , and that puts an inflationary pressure on pricing .''
These cost increases in India are compelling many to look at alternative locations like Eastern Europe, Russia, Vietnam and East Asia. Most of these countries have not seen the kind of salary increases India has. Cost of high-end services in India are of particular concern because they tend to increase faster because of the lower talent base.
Third party advantage
Some feel that third party operators may be at a slight advantage over captive business units, except perhaps for big cash-rich players like an IBM or Oracle. Third-party players are seen to do more with less. Because, by working for multiple clients, they get economies of scale. Companies operating in different centres within the country normally work on common pay scales. So, cost is not a differentiator . Those working with a captive model with less than 1,000 people cannot be viable ,'' says Mohan Sekhar, chief delivery officer of igate global solutions.
Companies like Symphony have mastered the art of doing high-end engineering work for their worldwide clients in India. In 2000-2002 , 95% of all commercial software work in India were done by captives. We believe that within the next two years, this is going to be less than 50%. Much of the wage inflation in Bangalore is due to an increasing number of promotions that is presently happening in companies,'' says Gordon Brooks, CEO of Symphony Services.
These salary differences are much narrower at the mid and senior levels
Mid level software professional (over 5 years experience):
US: $70,000 (around Rs 31.50 lakh) India: $56,000 (around Rs 25 lakh) The latter gets more expensive as he adds years to his career.
Senior professionals (10-15 years experience):
US: $100,000-150 ,000 (around Rs 45-67 lakh) India: over $222,222 (Rs 1 crore)
There are 20 big, small and key outsourcing destinations - India, The Philippines, Russia, Canada, Ireland, Singapore, Czech Republic, Hungary, Poland, Romania, Russia, Slovakia, South Africa, Brazil, Mexico, Costa Rica, China, Malaysia, Singapore, Thailand and Vietnam. Of these, the Philippines, Russia, Vietnam and some East European countries could give Indian players a good run for their money, say analysts.