The steady rise of the rupee

Questions over the future of Indian IT service providers do not mean a decline in their success, says Andrew Parker

IT industry watchers have had a lot to say recently about the rise of the Indian rupee against the dollar.

Despite the currency shift, leading Indian service providers such as Infosys and Cognizant have sustained strong revenue growth in North America, but in some cases not without seeing some challenges to their profit margins.

One consequence has been a marketing surge by Indian firms in Europe, where local currencies have held up against the rupee. In 2007, many of the top 20 Indian IT services firms achieved higher revenue growth in Europe rather than North America.

More recently, sterling has begun to weaken against the dollar, meaning that Indian service providers face greater margin pressures in the UK. Such challenges threaten providers’ largest source of business in Europe.

The change has prompted speculation that the IT industry will soon reach a point where the low-cost advantage enjoyed by India’s offshore service providers will shrink to a level where their revenue growth will disappear. An extreme view sees the advantage enjoyed by Indian firms vanishing completely.

Proponents argue that wage inflation, high attrition rates and increasing headcount growth in higher-cost regions such as Europe will reinforce the currency shifts to push Indian prices into line with European outsourcers. But will it?

Work by Forrester Research suggests not. A forthcoming report examines the factors involved, such as the wage inflation rates among software programmers employed by indigenous IT services firms in North
America and Europe, compared with employees working for Indian firms.

The research also evaluates Indian firms’ efforts to improve productivity in areas such as application development and maintenance services.

Forrester’s analysis shows that a typical programmer in North America, ear ning about $82,000 (£41,000) annually today, will likely earn upwards of $100,000 (£50,000) by 2012.

By contrast, an equivalent programmer in India today earns between $10,000 (£5,000) and $15,000 (£7,500). When adjusted for currency effects and offshore overheads, the cost to the client still amounts to no more than $20,000 (£10,000).

The research shows the final figure will be no more than $25,000 (£12,500) by 2012. Even with higher currency impacts, greater Indian wage inflation and no productivity progress, the Indian programmer’s cost to the client would be less than $50,000 (£25,000).

Several IT executives in Europe assume economic factors will take Indian service providers out of the game, leaving the local services industry to consolidate their dominance.

Forrester’s research makes such an assumption seem like wishful thinking. Instead, it is far more probable that India’s offshore impact will stay, and all of us in Europe need to plan accordingly.

Andrew Parker advises sourcing and vendor management professionals for Forrester Research and is joint global leader of the team that delivers research and consulting.
Several key studies from the Forrester sourcing and vendor management team are available to Computing readers free of charge at www.forrester.com/computinguk