Over the last 5 years, IT wages have been rising in India.  And for good reason!  Indian programmers are now some of the most experienced IT professionals in the world.

However, if alarmist blog posts are to be believed, this signals the beginning of the end for the still-nascent IT industry in India.   When Indian salaries are higher than American salaries, the incentive to offshore is gone.

Although I disagree with this premise for several reasons (the subject of future blog posts, I guess), I thought it would be interesting to try to figure out when the (cue horror film music) ‘Death Of Outsourcing’ is gonna go down.

So I channeled my undergraduate economics degree (ceteris paribus!!!) to figure this out.

Figuring out salary rates is easy.  But, if people are acting rationally (which economic professors are beginning to realize is a rare occurrence), they will consider more than just cost. Value must be factored into our equation.

Now, value is a subjective thing, but thanks to online marketplaces like oDesk, we can use ratings to understand the general value that customers are getting from the US and India.  We’ll use numbers from oDesk as our example.

For a variety of reasons, this is an admittedly flawed example,  but it serves our thought experiment just fine.

[For those who don't know, oDesk is an online marketplace that connects people looking for IT work with those providing it, like an eBay for IT.]

According to oDesk, Indian workers are paid an average of $11/hour, whereas American workers are paid $17.50.  There is a similar differential in value.  Indians received an average rating of 4.12 (out of 5), while Americans received an average rating of 4.48.

So, using these figures, you get a couple of simple insights:

In the oDesk marketplace, offshoring still makes rational sense, and the difference in value is surprisingly low.

Okay, okay, okay, there are several reasons this is flawed:

But, this example of one marketplace is still useful, and if you allow for a greater difference in value, the implications of the equation are clear:

If salaries are going up, value better go up even more.

More importantly, salaries ARE going up.  It’s inevitable, and demand for Indian IT will continue to push them up further.   And, other IT destinations such as Vietnam are now offering reasonable alternatives for low-level work.

Indian companies will be beaten on price, but they can continue to differentiate themselves by providing stronger experience, niche specialization, and seasoned communication/management.

It will be the companies that fight the urge to cut corners and compete on price who will succeed. Focus on improving value, and the long-term view is rosy.

The real challenge does not involve CEOs and high-level executives. they are all accustomed to organizing and carrying out strategy and sales meetings virtually.

The real challenge involves project managers, programmers, designers, etc. – anyone who needs to work side by side with a colleague, sometimes for hours, on joint challenges.

At bcm, we have learned to embrace constraints.

A few years ago, we saw many of our peers attempting to mimic in-person interaction as closely as possible. Skype calling, VoIP, video technology, etc. For us, these tools proved to be great for introductions & strategy meetings, but terrible for the daily grind. Enter instant messaging.

Instant messaging is nothing like working side by side with someone. At first glance, it seems, at best, choppy and, at worst, dehumanizing. It is impossible to gauge tone, tough to pace conversations, and easy to get distracted. However, we have found that it is just plain effective.

IM conversations tend to fit the flow of computer work. You type a question, maybe test some code in your browser, and then come back to continue the discussion – all without heavy breathing on the other end while you are working away.

IM conversations preserve peace in public settings. Except for some quick tapping, they are silent, courteous to both the guy in the cubicle next to you and to your sleeping wife and baby when you suddenly remember that crucial thing you need for tomorrow at 3am in the morning.

IM conversations correct for accent issues much better than telephones do. It is much easier to adapt to the way a colleague in India or Guatemala spells something than how they say it.

IM conversations get archived. I probably check a chat transcript once every few days, to find a username/password for an app or to remember the name of the sysadmin over in Fremont I need to talk to tomorrow.

And, I hesitate to say it, but IM conversations are great for multi-tasking. That said, don’t multi-task.

For one-on-one conversations, most of the standard IM tools work excellently. I use Adium for Mac OS X, which allows me to communicate with my AOL, MSN, and Yahoo IDs seamlessly.

For more formal project and scrum meetings, we use Campfire, a tool developed by one of our software development heroes, 37 Signals. Campfire allows you to create a single destination (or a ‘room’) for project chat. We create a Campfire room for each of our projects, often meeting there at a set day and time every week. Transcripts are archived in one place, files are easy to upload and review (it’s excellent for design review meetings), and the interface is pleasingly simple. Even cooler, it integrates with basecamp, our project management tool of choice. I’ll be talking about basecamp in an upcoming post.