Is India Losing Its Wage Edge?

For Indian outsourcers it’s the problem that just won’t go away: wage inflation.

Widely acknowledged by the outsourcers themselves and until now kept at bay by strong growth, the continual increase in salaries at top Indian firms like Wipro, Infosys and TCS (Tata Consultancy Services) is changing from mere annoyance to a present danger.

When Wipro, based in Bangalore, India, on July 18 reported first fiscal quarter net income of $134 million, up 44 percent from a year ago in 2005, it saw its stock drop 5 percent because investors were concerned about the problem.

And Wipro is not alone. The preceding week, Infosys Technologies, also based in Bangalore, in announcing its quarterly results, took pains to explain the steps it is taking to deal with the wage inflation problem. In its earnings call, TCS, in Mumbai, also took note of the impact of rising wages on its performance.

Click here to read about why many companies are looking into outsourcing to Russia.

The experience of one customer shows that some Indian firms will not only have to overcome the wage spiral, they will have to offer better value. Kana Software, a customer service software and solutions provider in Menlo Park, Calif., brought its product development operations back to the United States from India, following an unsatisfactory experience working mainly with Indian provider HCL Infosystems, of New Delhi.

“Doing the TCO [total cost of ownership], I found we weren’t saving much money at all. We determined we were saving about 5 percent. Most companies have not taken the time to do a total cost evaluation—they just think they can get an engineer for 25 percent of the cost here,” Kana CEO Mike Fields said in an interview. “Also, with global companies setting up their own operations in India, there’s tremendous turnover among the outsourcers.”

Indeed, the Indian firms are no longer merely competing with each other for the best and the brightest, they must also compete with IBM, which now has approximately 40,000 employees in India.

During Infosys’ earnings call the previous week, Infosys CEO Nandan Nilekani addressed the twin topics of wage inflation and employee attrition, saying that the company will increase starting salaries from $5,122 to $5,763, a 12.5 percent increase, on average.

Nilekani said the centerpiece of his company’s strategy for combating employee attrition is its big training center in Mysore, which can handle 20,000 new recruits annually and where new employees head for a 16-week training program. Infosys spent $100 million on training in 2005 and will spend $125 million in 2007, Nilekani said in an interview. He said 8,000 recruits joined the company in the first quarter and 7,000 were hired in the second quarter of 2006.

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