The growth of global services is based on wages — a global compensation difference for technically trained and educated individuals creates the opportunity for arbitrage. Globally, wages are changing dramatically as the invisible hand of supply and demand reconciles differences. For example, in Bangalore, top talent is receiving annual adjustments of 20 to25 percent.
Through 2010, wages will be impacted by the following trends:
- Improving communications and infrastructure for tier-2 cities across India and China
- Increased presence of emerging countries, ranging from Russia to Vietnam and Ghana
- Adoption of diversified globalization strategies by customers, focusing less on any single geography, but on the balance of multiple locations and operational integration.
A global perspective of wages must be a combination of local compensation compared to a global average. Currently, while customers focus on wage rates, increasingly they will emphasize on process and productivity improvements to optimize their global operations.
Trends in wages in 2010 will be much like wages in 2007: Local compensation will increase, attrition and turnover will be high for top talent and salaries in first-world countries will remain relatively flat. By 2010, the most noticeable change will be the redistribution of arbitrage from a few global hotspots (e.g., Bangalore) to a broader base of tier-2 cities and newly emerged countries around the world.
While the hourly offshore wages (especially in India) will increase, the absolute differential between the American and Indian salaries will not be alarming
The offshore service providers who will win by 2010 will be the ones who would have controlled their operation costs and mitigated the margin squeeze caused by rising wages
As wages increase and attrition rises, companies will develop promising productivity strategies.
The current rate of wage inflation in India is unsustainable. Not only will these increases quickly price India out of the global market, but also other cities and countries will ramp up capabilities to attract business. Many customers are questioning the total cost of ownership of development centers in India when compared with the global market. India is suffering from salary inflation and employee turnover (and related training).
By 2010, India-based employers (captive units and service providers) will have branched out to tier-2 cities, such as Mysore, Calcutta, Jaipur and Kochi. A tier-2 city is one with strong physical infrastructure (airports, roads, hotels) and education system to supply a steady stream of new talent.
China is experiencing a similar migration to tier-2 cities. While Shanghai and Beijing have robust infrastructure and English-language skills, the labor pool is consumed to serve domestic as well as international firms. Emerging cities — such as Xi’an, Dalian, Guangzhou — are rapidly expanding infrastructure, and will increasingly gain momentum.
Over 40 countries currently claim to offer global services capabilities. Countries such as Russia boast over $1 billion in annual services exports. In a recent conversation with a business development manager for a “small island,” the manager made a key point: “Our island does not need to compete directly with India for 10,000 jobs. If we can bring 300 to 500 jobs to our island, it will make a significant impact on the local economy. We just want crumbs from India’s table.”
By 2010, the global services market will exceed $1 billion in annual exports for 10 to15 countries. India, China, Russia, Malaysia, Costa Rica and the Philippines will be joined by Vietnam, South Africa, Hungary, Brazil, Chile, Mexico and many others. Each country will differentiate itself with unique characteristics and the market for global services will become fragmented into niches.
While the main objective of global services is labor arbitrage, wages don’t tell the whole story. Service providers from Eastern Europe through Asia successfully provide services at nearly double the wage of India. Clearly, cost savings is not the only attribute driving investments in global services. Many customer companies consider a broader set of capabilities, including language, travel time, telecommunications, skills and business familiarity. Some even consider the type of problem solving methods that are used in university settings and prefer countries with a “Western” approach.
Through 2010, customers will continue to diversify investments into countries to leverage unique skills and reduce dependency on any single geographical location. The change in customers will not be a simultaneous, industry-wide shift. Industry change will occur within one customer at a time as each struggle with costs, turnover, attrition and risk. Each customer will assess its current global operations and examine alternatives. By 2010, this change will still be in full force as firms re-assess and revise their global sourcing strategies.
Global salaries continue to change dramatically, from region to region, as each country establishes its capabilities in the global services market, and then suffers from inflation toward the global average.
During his over 15 years of management-consulting career, Eugene has been a senior advisor to Global 2000 enterprises on a broad range of issues related to services globalization. Sabyasachi’s experience in research, management and consulting spans over a decade across both leading Indian and global corporations.