Me.Tech()

The last 20 years have been more than fruitful for Bangalore and India in general as the preferred destination for outsourcing, but the tide may soon ebb. The cost advantage that India presented to the west isn’t there anymore. True globalization of the Indian work force has meant multinational and international companies are recruiting in India, offering international salaries and providing immigration opportunities. The impact of this globalization is the increase in salaries that Indian companies have to match to find skilled labor. The increased opportunities also mean very alarmingly high attrition rate amongst tier 2 and lower companies. In business processing outsourcing and ITES sector the attrition rate is almost twice that of Software. The rise in salaries especially in cities like Bangalore and Hyderabad have created high income inequalities amongst the lower and the middle class. The increased money and spending power has also raised costs of living. Its estimated that about 5000 people are entering Bangalore everyday in search of opportunities, but that’s easy math when you consider the population of India; This inflow of people have put severe infrastructure constraints in these cities. Clogged roads and sky high infrastructure costs are common in these cities. Companies are finding it hard to find breathing space in the city and the instability in the government means there is no end point to the woes faced by the IT companies.

For a new company trying to establish a presence in Bangalore, the costs of infrastructure are extremely high and the sheer amount of companies plus the income inequality created by the increased wages will assure that only high salaries will ensure loyal employees. That’s not even guaranteed. There is a resource crunch, high infrastructure costs and productivity numbers are beginning to decline. The cost advantage is clearly lost. Indian companies are setting shop in tier cities like Tumkur, Pune etc where the infrastructure costs are significantly lower and the local talent pool is still unadulterated by the outsourcing boom. This still isn’t the solution as the reason why cities like Bangalore saw the boom was due to high concentration of engineering workforce and also the output of engineers in the southern region thanks to the 1000 odd engineering colleges in the region. The setting up of companies here will only guarantee reduced costs and not skilled labor, which means poor quality software.

This situation isn’t new, it happened at route128 and also in the valley. This was the prime reason for outsourcing and now it seems we have come full circle. Falling dollar prices, recent slowdown in the US economy and the opportunities presented by countries in South East Asia, China and Russia which are currently centers of low costs means India faces severe competition. India’s economy is riding on the success of outsourcing exports and the currency has become costlier. Outsourcing has become a victim of its own success and only time will tell what fate lies ahead for India.

I recently wrote an essay on the software bottleneck and the reasons behind some of measures to resolve the bottleneck which include outsourcing, open source etc. If you were interested in the reading material above, be sure to read the essay.