The domestic IT-BPO firms have devised many strategies to counter the 12-15 per cent annual rise in wages.
Apart from hiring freshers and students with non-engineering backgrounds, they are moving to tier-II and tier-III cities, increasing billing and employee utilisation rates, besides improving the business mix to increase productivity to beat the heat of the rising salaries.
In fact, analysts and industry players say that with these strategies, coupled with an indexed wage differential, the IT-BPO firms should be able to retain their competitive edge in outsourcing for at least another 10-15 years.
Wages comprise around 70-75 per cent of the total expenses of an outsourcing firm.
Wages are increasing not only in India, but across all the low-cost offshore markets, including Romania, Poland, China, Vietnam and the Philippines. At a macroeconomic level, despite higher wage inflation in low-cost nations, the indexed wage differential would still be considerably lower due to the low-base wages in such countries.
"Although there is an increase in wages at around 15-20 per cent a year, it is unlikely to sustain the same rate for more than 3-4 years. Even if the hike continues, India still has the cost advantage for 15 years over the US and the UK (our largest markets), where wages are increasing at the rate of 4 per cent," asserts Pradeep Udhas, global partner-in-charge, sourcing advisory, KPMG.
"The wage inflation in the country is mostly seen at the middle- and the higher-levels and not at the entry level (fresh graduates). It is these graduates that form the bulk of the engine for IT and BPO work and hence the final impact on firms is much lesser than the oft-quoted 15 per cent number. It will be at least 10 years before India loses its cost advantage," corroborates Siddharth A Pai, partner, TPI.
He adds: "There will continue to be margin pressures, but that is in the nature of this business."
V Balakrishnan, CFO, Infosys Technologies, notes the offshore wage increase is not a new phenomenon but has been happening for quite sometime now. "The competitive position of countries such as India will remain for many more years. Most large IT players are improving their business mix by becoming end-to-end players and also using a lot of tools to improve productivity."
Though most industry players agreed to this line of thinking, they cautioned the Indian firms against getting complacent. "If we are not able to offset the rising wage inflation through productivity gains and evaluate smarter ways of addressing the issue, the impact will be significant," says Prateek Kumar, executive vice-president, HR, Wipro.
Companies can look to make larger use of fresher talent and hire alternative talent pool from non-engineering backgrounds, including talent from smaller cities. It's already happening.
For FY07, Tata Consultancy Services (TCS) did around 30 per cent of the campus hiring from tier-I cities, while close to 15-20 per cent from tier-II and the rest from tier-III cities. Satyam also plans to recruit close to 15,000 employees this financial year with over 45 per cent of them being entry-level employees. Tech Mahindra is planning to recruit nearly 90 per cent of its new additions (around 10,000) from the fresher levels.
Achutan Nair, vice-president (resourcing), Wipro, says the company is planning to recruit about 7,000 non-engineering graduates in the ongoing financial year. The company, which targeted to add about 20,000 personnel in the current financial year, says just 5 per cent of the new additions will be people with 10 years of experience.
Moving to smaller cities also reduces infrastructure cost. "Infosys, however, feels that moving to smaller cities is not the answer to negate the effect of wage inflation since we pay similar salaries to all our employees across India," said Balakrishnan.
"From operations perspective, service providers are industrialising few services that would reduce human intervention and thereby save cost. This is evidently seen among BPO providers too. Automation leads to resources made available for other high margin businesses," adds S Sabyasachi, senior director, neoIT.
Prateek Kumar of Wipro says: "One of the ways to address wage inflation is to use tools and technique to work smarter with lesser number of people and deliver the work in shorter period of time."