India’s Cost Competitiveness -
Separating the myths from the facts
Key highlights of the presentation by Nasscom dated 7th June 2006

The impact of higher utilization and scale benefits is quite significant, as it has not been achievable across other destinations, unlike India. Some of the factors that are unique to India are

Increasing capital asset utilization can significantly enhance operating profitability

Ability to scale-up is an obvious requirement as building scale across a range of (related) processes for the same client delivers greater return on investments (ROI)

Requires a wider range of skills and sufficient scale – not easily achievable everywhere

Reported estimates of wage inflation in India tend to overestimate its impact on total cost. Findings indicate the following

Entry level salaries have risen by 4-7% – which is just marginally ahead of inflation

Wage inflation varies across levels, is highest for experienced mid-level managers which form a relatively smaller proportion of employee pool as experienced middle management is in short supply or in new or emerging locations

Process management and re-orientation of organizational structures further diffuse the impact of wage inflation

Lower wage inflation figures in proposed ‘alternate’ locations mask the impact on absolute cost caused by a higher base and other employee related costs

Some of the reasons that have been cited by respondents as the reasons for India-centric firms expanding their delivery capabilities in other locations are as below

Access to specific skills, usually language ranging across continental Europe, Japan, etc.

It is becoming critical for companies to better serve markets in non-English speaking countries particularly where there are local operations of MNCs

Companies want to build a global footprint to complement India based service delivery by offering local and near-shore support to enhance outsourced process delivery and cash on the similarity of business environment, risk mitigation, etc.

Some of this is also driven by client demands / fallout of acquisitions

It is very clearly reflected from the above results post the interactions that the cost imperative is not the driver

The findings conclude that as global sourcing matures, interest in newer sourcing destinations will continue to grow predominantly to supplement India’s role as the primary base, favorable demographics and a sustained cost proposition.

India to be the leading skill-surplus destination over the next few decades

Skill and scale differential vis-à-vis alternate locations to become increasingly more evident

Room for wage inflation in India to be partly set off by declines in telecom and infrastructure costs and scale benefits

Tier-2 and tier-3 potential as a skill pool base and for expansion still largely untapped

Superior quality, information security / data protection environment

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