Offshore Outsourcing Cost Advantages To Disappear By 2027, Study Says

Rising salaries and other cost increases in emerging markets such as India and China mean the financial advantages of outsourcing to such destinations will dry up in the next 20 years, according to a study released Thursday.

The study, by consulting firm A.T. Kearney, says wage and price inflation in offshore locations is already eating into the savings enjoyed by American companies that outsource technology and back-office work and will continue to do so in the coming years.

Average wages for programmers in India, China, and Eastern Europe rose between 20% and 40% on average in 2006, compared with U.S. increases of between 5% and 10%, according to the study.

The findings show that "corporations making global location decisions should focus less on short-term cost considerations and more on long-term projections of talent supply and operating conditions," says A.T. Kearney chairman Paul Laudicina.

That message may be lost on a number of CEOs as they rush to build out operations in thriving offshore markets such as in India, where tech salaries are still anywhere from 40% to 60% less than in the United States, despite the study's findings. IBM recently surpassed the 50,000-employee mark in the country, while Accenture earlier this year revealed that it will soon have more employees in India than it has in the United States.

Significant offshore cost increases could also impact the fortunes of indigenous Indian services providers such as Wipro Technologies, Infosys, and Tata Consultancy Services, all of which have enjoyed robust double-digit growth in recent years on the strength of selling low-rate contracting services to Western companies.

For the time being, however, A.T. Kearney still ranks India as the top offshore outsourcing destination in terms of value and quality of service. It's followed by China, Malaysia, Thailand, and Brazil.

Ireland, once an offshore hot spot until it suffered considerable inflation of its own, ranked last on the list at 50th place, trailing barely developed countries such as Senegal and Sri Lanka.