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Offshore Labor Markets Impact IT Outsourcing

By Anthony Mitchell
Sep 28, 2004 9:03 AM PT

Labor market conditions can change dramatically in a few months. As American firms become increasingly dependent on labor market conditions in other parts of the world, changes in those labor markets can have profound economic consequences in the U.S.

Offshore Labor Markets Impact IT Outsourcing

Here we examine the rapidly changing IT labor markets in India, Sri Lanka and the Philippines. In future columns, we will explore how IT firms are responding to changing labor market conditions.

There are currently 340,000 information technology engineers in India and another 210,000 customer service workers in the international call center and business process outsourcing field. The Indian Ministry of Information Technology (MIT) and the Indian IT industry association Nasscom estimate that by 2008, there will be a demand for 1.1 million IT engineers and technical support personnel in India, and an equal number of international customer service workers. MIT estimates that international demand for IT workers hired from India for positions in other countries will increase by 20 percent.

To cope with rising demand for IT workers, India has promised to spend US$1 billion to triple the number of computer science graduates from Indian institutions from 100,000 per year now to 300,000 per year by 2005. In other words, after 2005, India will produce almost as many IT professionals each year as are employed nationwide there now.

Worker Shortage

IT faculties in India are already in short supply for IT workers. The All India Council for Technical Education (AICTE), the main body for accrediting post-secondary engineering schools, finds a faculty-student ratio of 1/45 in IT courses at AICTE-approved institutions. AICTE recommends a ratio of 1/15. This faculty shortage will reach critical proportions as MIT's plans to triple the number of IT engineering graduates are implemented.

The quality of computer science education will suffer as a result of faculty shortages. Indian undergraduate degree programs are only three years long, compared to four years in North America.

Wage scales for IT professionals are increasing as firms seek to minimize turnover. The Indian software giant Infosys reportedly raised salaries by 30 percent in 2003 and 16 percent in 2004. Other firms are providing employee stock ownership plans and opportunities for international travel in efforts to reward staff and keep them from leaving.

In 2001 InternationalStaff.net found an average turnover of 8 percent at Indian IT facilities that we surveyed. That rate inched up to 10 percent in 2002 and then skyrocketed in 2003. It now stands at 30 percent. This puts a burden on our call center outsourcing programs because it forces us to spend more time training new staff at our contract facilities.

Other Countries

India's IT workforce shortage is welcome news in Pakistan, where turnover is less than 10 percent and the average employee wage and benefit package at IT firms is $400. Of that, $350 is for wages.

The inflationary effects of a tight labor market can be illustrated by the history of the international call center industry in the Philippines.

The labor market for call center employees in the Manila region is the tightest of any developing country's IT labor market that we know of. The tight labor market has seen our total service costs rise to $12 to $16 per production hour for simple voice services to the U.S. without telecommunications redundancy, up from $10 to $12 in the Philippines in 2002.

Agent quality in the Philippines is excellent for general customer-service work, but at those prices we can recruit and retain highly trained technical or medical personnel elsewhere in South Asia. Or we can go to South Asian centers with onsite American trainers and managers. For $18 an hour we can go to Canada and for $22 an hour we can stay in the U.S.

When the Philippines experienced a modest call center boom in 2002, it did not appear at that time that the boom was sustainable because when available labor supplies were fully utilized, the labor market would tighten quickly and wages would rise correspondingly. This dynamic is common in small labor markets.

The former British colony of Sri Lanka has many of the advantages of India and Pakistan in terms of English language skills and an emphasis on education. The population of Sri Lanka has a relatively high quality of life but a per capita income of only $930. In comparison, India's per capita income in 2003 was $530.

Sri Lanka Draw

The civil war that began in Sri Lanka in 1984 has been winding down and the business climate is improving. With a little more pressure exercised on the Colombo government to compromise with the Tamil rebels, long-term peace and stability will be within reach.

A mix of domestic and international IT firms have been cautiously setting up operations in the Colombo area.

Rapid tightening of the labor market for customer service personnel will happen in Sri Lanka if the IT industry expands too quickly there. Escape velocity and a tightened labor market could be reached in six to eight months if India implements taxes on U.S. clients of domestic or foreign-owned outsourcing facilities in India.

The average size of new merchant call centers going up in Colombo in 2004 is only around 60 seats to start, expandable out to about 150 to 200 seats. One South Indian firm is setting up operations in Colombo in order to provide redundancy for inbound mission-critical work from its international call center in Tamil Nadu. It is bringing over technicians and support personnel from India to compensate for a shortage of specialized call center technicians in Sri Lanka.

Press attention on offshore IT labor markets has largely focused on Bangalore, where more than 2,000 IT firms cater to Western customers. The place was already a traffic nightmare when I was there in 1995 to help found an expert-systems software firm. Now there are traffic jams in the middle of the night when call center workers change shifts.

Bangalore's labor market is more elastic there than the Philippines or Sri Lanka because employers can recruit workers from other parts of the India. About half of Bangalore's population is Tamil.

Second-Tier Cities

In 2004, we are seeing outflows of experienced IT staff from Bangalore. Up through 2003, outflows appeared largely directed at other major metropolitan areas. Now they appear increasingly directed at second-tier cities.

Second-tier cities in the region, such as Mangalore, are seeing IT firms locating there to escape the relatively high costs and inconveniences associated with Bangalore. Workers from those second tier cities who originally migrated to Bangalore as part of the software boom in the 1990s or the call center boom that began in 2001 are now being lured back to their home areas for personal reasons.

Wages at IT firms in second tier Indian cities are at least 15 percent lower than in Bangalore. The quality of life and personal advantages offered by those second tier cities are drawing experienced staff away from Bangalore. Whereas western staff in Bangalore can usually afford to live in self-contained residential communities, local staff usually have to endure the inconveniences of power and water shortages.

In future columns, I will examine how IT firms are responding to changing labor market conditions in South Asia.


Anthony Mitchell, an E-Commerce Times columnist, has been involved with the Indian IT industry since 1987, specializing through InternationalStaff.net in offshore process migration, call center program management, turnkey software development and help desk management.


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