Why India's Wage Inflation Won't Bring Outsourced Tech Jobs Back To The U.S.

U.S. companies outsource to India primarily to save money. But tech wages on the subcontinent are rising at about 15% per year. Many U.S. programmers welcome this news--as Indian salaries rise, it's less likely that their jobs will be offshored. Or so they think. But a conversation I had this morning with the CEO of one of India's fastest-growing outsourcers reveals why jobs sent to India aren't coming back anytime soon.Over scrambled eggs, coffee, and croissants at Brown's, a posh hotel in London's tony Mayfair district, Lakshmi Narayanan was explaining why he's confident India's wage inflation won't undercut its position as the outsourcing destination of choice for U.S. businesses. "It has almost no impact on the customer," says Narayanan, who is the top man at Cognizant Technology Solutions.

Like many Indian outsourcers, Cognizant is growing fast. Its revenues in the most recent quarter jumped 57%, and it's set to join Wipro, Infosys, TCS, and Satyam in India's billion-dollar sales club. As a result, Cognizant is hiring aggressively--it increased head count 49% last year and now has more than 28,000 employees.

India's other big outsourcers are hiring at a similar clip, as are Western firms like IBM, EDS, and Accenture as they look to gain a bigger foothold in the country. Hence, 15% annual wage inflation. But this needs some perspective, says Narayanan.

Seventy-five percent of Cognizant's workers are based in India, but those workers account for only 20% of its labor costs. Conversely, Cognizant workers based in the West, mostly in the U.S., account for 80% of the company's wage expenses even though they're just one-quarter of its total staff.

Because wages paid to workers in India represent such a small percentage of total costs for companies that operate there, a 15% increase in salaries results in no more than a 2% rise in prices charged for IT services, says Narayanan. That's well below the current U.S. inflation rate.

Indeed, the wage disparity between the U.S. and India remains vast, and it's going to take many years of double-digit inflation in India for that to change. "This isn't a big concern for us right now," says Narayanan, polishing off his breakfast.

Pausing for coffee, he lets slip that a bigger challenge is finding enough skilled workers to sustain Cognizant's torrid growth. Even in India, there's not an unlimited supply. "We're competing with everyone for the same talent," he says.

In other words, India's future as the tech industry's top outsourcing hub rests not so much on whether it can continue to offer the lowest costs--that seems probable--but whether it will produce enough skilled graduates to ensure that the work is done at acceptable quality levels. If not, China looms, and outsourced U.S. workers would be happy to take up the slack.