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From Cost Arbitrage to Expertise: The Third Wave in Outsourcing

Arun Jain
Saturday, September 30, 2006
Arun Jain
That a company can save 30 percent to 50 percent on software development and maintenance costs by outsourcing to India is a proposition understood well enough; so much so that it hardly deserves repetition. 20 years after the initial breach in the dam of resistance made by pioneering Indian companies like Tata Consultancy Services, outsourcing has become a flood; NASSCOM and McKinsey speak airily of software exports from India reaching $100 billion, then a trillion, and eventually, one can say, the sky!

But it may be worthwhile to pause and ask: Can this really happen? Has it ever happened in the history of the world? Can cost arbitrage really drive an industry’s complete dislocation? And if these calculations are really correct, and the model of growth really linear, how long will it be before every literate man, woman and child in India becomes a computer programmer?

There are two historical forces we must keep in mind when we contemplate these scenarios:

1. labor-intensive industries sooner or later develop ways to become less labor-intensive.
2. cost arbitrage itself is not sustainable in the long run because costs in India will rise to become comparable to costs abroad.

Credible studies of the BPO industry, for instance, warn us that, since wages are rising 15 percent a year in India, the cost advantage enjoyed by Indian companies will shrink to almost nothing by 2015. BPO is, of course, the ultimate non-linear cost-arbitrage industry, and we in the software services segment must learn to get our early-warning signals from that vertical.

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