A strong rupee won't undermine offshoring

Many IT industry watchers have had a lot to say recently about the rise of the Indian Rupee against the US dollar.

Despite this currency shift, leading Indian service providers like Infosys and Cognizant have sustained strong revenue growth in North America, but in some cases not without seeing some challenges to their profit margins in the region. One consequence has been a marketing surge by Indian firms in Europe, where local currencies have held up against the rupee. Many of the top 20 Indian IT services firms achieved higher revenue growth in EMEA over the course of 2007 than in North America.

More recently, sterling has begun to weaken against the US dollar, meaning that Indian service providers face more margin pressures in the UK market also – threatening their largest source of business in Europe. This has prompted speculation that the IT industry will soon reach an inflection point where the low-cost advantage enjoyed by India’s offshore service providers will shrink to a level where their revenue growth will peter out.

An extreme view sees the advantage enjoyed by Indian firms vanishing completely. Proponents of this argue that wage inflation, high attrition rates, and increasing headcount growth in higher cost regions like Europe will reinforce the currency shifts to push Indian services prices more into line with those available in Europe.

Does this analysis stand up? Work by Forrester Research suggests not. A forthcoming Forrester report examines the factors involved, like the wage inflation rates among software programmers employed by the indigenous IT services firms in North America and Europe – alongside those for the Indian firms. The research also evaluates Indian firms’ ongoing work to improve productivity - revenue per head - in areas like application development and maintenance services.

Forrester’s analysis shows that a typical programmer in North America, earning something in the region of US$82,000 annually today, will likely earn upwards of US$100,000 by 2012. By contrast, an equivalent programmer in India today will earn between US$10,000 and 15,000. When adjusted for currency effects and the overheads of working offshore, the cost to the client still amounts to no more than US$20,000.

By 2012, the research shows that figure may have reached no more than US$25,000 per annum. Even taking a worst case scenario, with higher currency impacts, greater Indian wage inflation, and no productivity progress, the Indian programmer’s cost to the client would reach no more than US$50,000.

Quite a few IT execs in Europe – especially on the vendor side – appear to be assuming that economic factors will take the Indian service providers out of the game and leave the local services industry a clear field to consolidate its dominance in local markets. Forrester’s work makes that seem more like wishful thinking. Instead, it is far more probable that India’s offshore impact is here to stay, and all of us in Europe need to plan accordingly.

At Forrester Research, Andrew Parker serves sourcing & vendor management professionals and is joint global leader of the team that delivers research and consulting to help these professionals.

Please visit www.forrester.com/computinguk where several key studies from the Forrester sourcing & vendor management team have been made available to Computing readers free of charge.