Sidebar: India's Cost Advantage Won't Last Forever

Computerworld - India is clearly the leader in offshore IT outsourcing today. But wages are rising, the market in India is consolidating around a handful of big vendors, and countries such as China are gearing up to compete as outsourcing centers with even lower costs. So Computerworld asked Kumar Mahadeva, chairman and CEO of Cognizant Technology Solutions Corp., about the future of India Inc. Cognizant is a fast-growing Indian IT outsourcer with U.S. headquarters in Teaneck, N.J.

Will India eventually lose its cost advantage and become too expensive? Eventually, yes. But eventually is probably a long time away yet.
Remember the size of the country and [labor] resource pool. I think India is graduating 180,000 scientists and engineers a year. The offshore segment of the [outsourcing] industry is only absorbing a fraction of that pool.
If you look at the arbitrage [or cost difference] between the U.S. and India, it's remained pretty constant. Although wages in India have risen a little faster than in the U.S., the currency has depreciated somewhat, so the ratio has remained fairly flat.
Bandwidth costs are going down very dramatically, so overall, the cost structure is pretty good.
So the arbitrage is very large for at least the next four or five years. Going beyond that, you may see what we saw in the manufacturing industry -- which started off going to Japan and then to Southeast Asia and now China [for lower costs] -- happening in India [outsourcing] as well.

How's India going to compete with those countries promising lower rates? Today, it's not an issue. The deals we're seeing are becoming much larger and more sophisticated. So in terms of scale and the types of offshore work, the companies that can really [do] that sort of work are all in India today. Even within India, it's narrowing to four or five companies, such as Cognizant, Wipro and Infosys, getting the bulk of the contracts.
So if you see other countries getting in the fray, it's probably because Infosys or Cognizant goes into China, rather than a Chinese company. We'll certainly start up something in China this year. It's just like the contract manufacturing industry moves factories [to cheaper locations] if the costs get high.

Are IBM, EDS and Accenture the big competitors for India Inc.? Yes, they are probably the ones we're most concerned about. We don't see them [as competitors] in the near term, because their capabilities are so far behind the large Indian companies that they're not winning the large deals. But if