Outsourcing in equilibrium?

Outsourcing to India is nearly limitless in potential, both boosters and opponents alike claim. As evidence, they point to the proliferation of services that are currently being performed in India. No longer limited to programmers and call centers, outsourcing has grown to encompass BPO, medical transcription, tax return preparation, and concierge services. The latest frontier is the legal profession

In the past three years, the legal outsourcing industry here has grown about 60 percent annually. According to a report by research firm ValueNotes, the industry will employ about 24,000 people and earn revenue of $640 million by 2010. Indian workers who once helped with legal transcription now offer services that include research, litigation support, document discovery and review, drafting of contracts and patent writing. The industry offers an attractive career path for many of the 300,000 Indians who enroll in law schools every year. [Link]

This perspective is based on a vision of India as having a nearly limitless pool of cheap labor, which isn’t true. While there are a lot of Indians, those actually qualified to hold these jobs are fewer in number and competition for these workers is increasing:

Young people say it is no longer worthwhile going through sleepless nights serving customers halfway around the world. They have better job opportunities in other fields… The complaints come at a time when the Indian information technology sector, which includes companies that run call centers and do other outsourced work like medical transcription and claims processing, is facing a dearth of skilled labor… India faces a potential shortage of 500,000 professional employees in the information technology sector by 2010… [Link]



And wages in India for the most qualified workers has increased to the point where there are little to no cost savings for companies:

India’s software-and-service association puts wage inflation in its industry at 10% to 15% a year. Some tech executives say it’s closer to 50%. In the U.S., wage inflation in the software sector is under 3%, according to Moody’s Economy.com…while most Indian technology workers’ wages remain low — an average $5,000 a year for a new engineer with little experience — the experienced engineers Silicon Valley companies covet can now cost $60,000 to $100,000 a year. “For the top-level talent, there’s an equalization,” [Link]

Contrary to the outsourcing extremists (pro and con), we’re already seeing the limits of the labor pool. This isn’t limited to just outsourced jobs, either. India’s seeing a shortage of skilled construction workers because the economy is growing so fast and the supply of skilled workers is so low:



So many projects are now under way in India that the pool of workers with even the most basic skills is running dangerously dry. The shortage of bricklayers, rod benders, welders, wall painters and other skilled and semiskilled laborers is threatening to slow the construction of projects that are key to the nation’s economic growth. [Link]

Workers typically are trained on the job because India’s education system offers limited vocational training. Many construction workers have little schooling of any sort; most are illiterate. Rajesh Gerard Joseph, who runs a company that trains construction workers in Bangalore, says his organization has to teach new recruits not only how to use a ruler, lay bricks, paint walls and mix cement, but also how to use an elevator and even a toilet. [Link]





Nor is this limited to India. Even some Chinese companies are moving manufacturing operations to the US because between rising labor costs and other transaction costs, it actually works out cheaper for them to produce in America:

Liu is investing $10 million in the Palmetto State, building a printing-plate factory that will open this fall and hire 120 workers. His main aim is to tap the large American market, but when his finance staff penciled out the costs, he was stunned to learn how they compared with those in China.

Liu spent about $500,000 for seven acres in Spartanburg — less than one-fourth what it would cost to buy the same amount of land in Dongguan, a city in southeast China where he runs three plants. U.S. electricity rates are about 75% lower, and in South Carolina, Liu doesn’t have to put up with frequent blackouts. [Link]

Nothing is limitless, not even labor in the two largest countries in the world. And as soon as something is finite, the laws of economics apply. This wont stop the shills and the mongers from telling you otherwise, but it’s a useful thing to keep in mind when the topic comes up.

16 thoughts on “Outsourcing in equilibrium?

  1. I agree it is not limitless but the disparity between wage rates is still huge. Equity research is another function which may be outsourced, the fixed salary plus bonus for second year associates at a conservative estimate is upwards of $100K which is about INR 4 million at today’s exchange rates, I am pretty sure that people with similar qualification are not getting that kind of money so I think for most sectors savings are still there but may fast disappear.

  2. But the number of people qualified to do that sort of work is pretty small, and many of them are already being hired by ibanks, no?

  3. Agreed, it is small but in absolute numbers increasing fast, there are institutes like the Institute of Chartered Accountants and some universities that are incorporating banking and finance in their curriculum but the numbers are small. They are hired by banks but from what I have heard from friends, candidates seeking employment abroad are becoming lesser because of the opportunitines in India. I know four people who have moved back in the last year but you are right there is upward pressure on wages and it is not as profitable.

  4. I am sceptical about too much increase in the amount of legal outsourcing to India. I think document review where attorneys in big cities make between ($40-$50 an hour) will get completely outsourced but I dont see much scope of outsourcing beyond document review, in house corporate work and work done by paralegals and legal assistants.

    The Mafiosi at the 50 State Bar Associations will make sure high and medium skill level work almost completely stays in the US by continuing the regulations where almost all documents have to be reviewed by state attorneys etc.

    Plus most Americans are not going to pay $300 an hour for speaking with Singanlluru Puttaswamayya Mutthuraju about their legal options.

  5. Nigerians – the new “Model Minority”?

    A propos, I came across this article quite by happenstance: http://www.chron.com/disp/story.mpl/metropolitan/5791096.html

    It seems plausible that Nigerian immigrants with their high levels of education and connections near the top the economic ladder in the U.S. may start channeling a wave of outsourcing back to educated workers in Nigeria, giving India a run for her money. At the very least, it seems that Nigerians have for the time being wrested the “model immigrant/minority” championship title away from Indians in the U.S.

  6. PAFD,

    I think the legal work that has been outsourced is research and document review as you mention, I think none of the client facing functions are getting outsourced in finance and legal industries at the moment.

  7. Plus I am not sure if I agree with your description of Indian lawyers, please look up top Indian law firms and I am sure none of their lawyers in advisory fit your description.

  8. Plus I am not sure if I agree with your description of Indian lawyers, please look up top Indian law firms and I am sure none of their lawyers in advisory fit your description.

    What description are you referring to? Are you suggesting that there can be no lawyer in India named S.P. Raju? You must be a Northie.

  9. The client facing work that I can imagine being outsourced would be things like do it yourself wills, where they might be marketed as advisors or some such. That said, small time lawyers would legislate that sort of work out, pdq.

    Honestly, I don’t even see this as being an area of much growth. The article claims that Indians can handle US commercial law b/c it’s based on common law tradition. I suspect the work that these lawyers are doing is glorified paralegal work. It would take more experience to handle something tricky, and I don’t think that the two legal systems are so similar that an Indian lawyer can automatically do a great job in an American context.

    Accounting is different because many accountants looking for work with multinationals are trained in American accounting standards from the start, and b/c accounting has a fair amount which is common. My cousin is studying accounting in India, and she’ll come to America to sit for her CPA. That’s the only certification she’s looking for.

  10. And wages in India for the most qualified workers has increased to the point where there are little to no cost savings for companies:

    yes and no. It is the Indian middle level managers who will be hit really hard. The ones whose value addition is predominantly one of a post office – routing etc. At the higher end the value add is one of tech skills coupled with strong communication skills. Comms skills – an area where most Desi Managers are pretty weak as compared to their Western Counterparts. As early as 2004, the outsourcing arms of IBM / HPQ / MSFT had modelled moving a number of jobs to South Dakota / Montana. This is now coming to pass. Note : Call center jobs are McJobs and moving them around is relatively easy.

    Many friends and ex-colleagues in Management positions have moved out of companies that focus on overseas customers to ones that are desi focused. The trend will accelerate whereby one gains experience working in western focused firms and then leverage that experience into desi focused firms.

  11. I suspect the work that these lawyers are doing is glorified paralegal work.

    Spot on. The cream of the crop of Indian-trained lawyers are going to work for “virtual Indian practices,” rather than doing the outsourced drone-work.

  12. At the risk of sounding like a shill (which I admittedly am), I disagree with Ennis and Sramana Mitra’s claims of the death (or even an equilibrium) for Indian outsourcing. While I agree that there is a labor shortage, the industry is going through a maturation process that is good for the indian economy.

    Since Legal outsourcing is relatively new, Indian IT is a better example. An industry essentially built on Y2K paranoia, most Indian firms are still handling rudimentary tasks for their corporate clients. However, there has been a steady (albeit slow and clumsy) movement up the value chain. The same programmer that was only handling testing for a software application in 1999 is now making minor enhancements and managing the application. Next, his team might get the opportunity to write the next version. Those that learn how to perform at this level can and are demanding higher salaries. Fortunately, their US counterparts are demanding even higher salaries for the same tasks (and will continue to do so for the foreseeable future).

    This demand for better and better labor in the IT industry will get a response from the market…since it’s India, the response will be slow and clumsy. But as skills improve, we may even see [gasp] entrepreneurs developing their own software products.

  13. I don’t understand why people get all worked up about Indian entrepreneurs not making their own software products. They don’t make new products not because they cant, but it does not make business sense to do so. Making a new product in software world means high initial investment and high risk and a moderate return. When there is easy, low risk, sure thing of labor and currency arbitrage available, no smart businessman would risk investing in a new product.

    The day labor and currency arbitrage vanishes (and it will, all arbitrages eventually go away. There is no exception) Indian software firms will get into the high initial investment, high risk game of product development.

  14. It is difficult to argue with a potential young entrepreneur who has a shot at making more in one year than his father made in the first 10 years of working. However, it is important that India begins establishing an innovative culture.

    The day labor and currency arbitrage vanish is the day that India BEGINS creating a culture of innovation in its software industry. And building that culture takes time.

    That doesn’t mean that a business based on arbitrage isn’t the smart thing to do…just that true innovation is necessary to sustain the industry for the next few decades.