Is Outsourcing Becoming Outmoded?

The wide wage gap between the U.S. and Asia is quickly narrowing, so the cost savings of sending work overseas may soon diminish

By Bruce Nussbaum

Reports that General Electric (GE ) plans to sell its entire business-processing operation in India for a cool $1 billion raises the interesting question of whether the offshoring phenomenon may be peaking. Not that it will stop being an key part of corporations' global strategy. In an integrated business world, you go where the best talent is -- period. But the surge in companies going to India, China, and Eastern Europe in search of very cheap brainpower may soon be coming to an end -- far sooner than anyone has anticipated.

Why? Simply put, the wage gap between the U.S. and Asia is shrinking. Pay scales are rising fast in India and China for college-educated, English-speaking professionals. As U.S. and European companies send more of their call-center, design, accounting, medical-service, and legal-service business overseas, demand for folks to work at these centers has soared.

And since these Indians and Chinese aren't anyone's fools, they've been demanding -- and getting -- increasingly higher compensation. After all, these Web-savvy men and women just have to check the human-resources Web sites of Western companies to see what their counterparts are making. And indeed they have, as their rising compensation proves.


  Chinese wages for skilled talent and college-educated workers have been running up sharply in recent years. Middle managers in China are making about $9,000 a year (what I made in my first year in business journalism out of graduate school in the late '70s). While reliable statistics on Chinese engineers are hard to come by, it's a safe bet that they're making a multiple of that salary. One reasonable estimate has good software writers probably making around $20,000 a year in Shanghai. Ditto for many hot-shot programmers in Bangalore, India.

The demand for English-speaking service workers in Bangalore is so high that GE as well as Infosys Technologies (INFY ) and Tata Consultancy Services are now looking outside major Indian cities to set up new call centers and other operations because they can't recruit enough college-educated people. The same is true in China.

What does that tell you? Most of the best and brightest Indians and Chinese are already fully employed and are negotiating higher wages and benefits for their work.


  But what about those hundreds of thousands of new engineers, designers, accountants, and other knowledge-industry types that are being graduated every year in India and China? Won't they swell the ranks and keep wages low vis-a-vis America and Europe? Maybe, but chances are good that the 8% to 10% annual gross domestic product growth rate projected for both countries will increase domestic demand. And as a result, wages will continue to rise. In both India and China -- despite the scads of well-qualified students graduating every year -- salaries are still increasing.

This is a significant development offshoring. Honest corporate managers will tell you that to make offshoring work, you need at least a 300% to 400% wage spread between American software writers, engineers, accountants, and call-center employees and their Indian and Chinese counterparts.

Labor costs have to be very, very low overseas -- not just lower -- to compensate for time-shifting, managing over such long distances, and decreased productivity. Just think about how many times you've had to ask the person on the help line (who is usually in Bangalore) to repeat an answer because you couldn't understand their accent or because of a communication gap caused by cultural differences. Such friction has a real cost, and companies that have sent services offshore know this.


  At the same time, U.S. wages in software and other industries that have seen much offshoring are falling, further narrowing the pay gap. The spread isn't closed yet, but soon Indian and Chinese high-tech and professional workers will be making enough money to close the 300% to 400% difference between their wages and American wages. At that point, offshoring will begin to decline.

Look at the projections that are pouring out of consultants, and you see forecasts of millions of American jobs going to India and China over the next decade. However, few of these projections take into account the fast-rising wages of Asia's best and brightest. This may be great for GE, which could be selling its enterprise at the height of the offshoring craze in Corporate America. But whoever buys the GE operation in India would do well to realize that the era of cheap educated labor overseas may be nearing an end, and with it, the fat margins that made offshoring so profitable as a business.

In America's alarm over service-sector jobs being lost to Asia, what's often overlooked is the flexibility and liquidity of labor markets around the world. Global labor arbitrage is hard at work narrowing the international wage gap among educated workers. That may not be terrific for companies hoping to save costs by sending service operations overseas. But it's a good thing for Indian, Chinese -- and American -- workers.

Nussbaum is editorial page editor for BusinssWeek in New York

Edited by Patricia O'Connell