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.