Labor Arbitrage Seen Remaining Primary Value Proposition of Offshore Outsourcing

Fears about wage inflation, skills shortages in offshore markets "largely misplaced," Everest Research Institute asserts

February 6, 2006

Fears about wage inflation, skills shortages in offshore markets "largely misplaced," Everest Research Institute asserts

New York — February 6, 2006 — Labor arbitrage, the key cost-saving benefit of offshore outsourcing, will continue to drive offshore sourcing decisions for the next 30 years, according to a new report released today by Everest Research Institute.

This finding contradicts current industry thinking that labor arbitrage as the primary value proposition of offshore outsourcing will only be sustainable for another three to five years, according to the report, which covers the global sourcing market.

"Fears about rapid wage inflation and growing skills shortages in India and other offshore markets are largely misplaced," said Joe Fernandes, managing research director at Everest Research Institute. "Our findings show that wages are rising for a relatively small base of workers and that shortages are cropping up only in certain skill areas. These issues will eventually work themselves out as the offshore labor market continues to mature and expand into new geographies."

Key findings from the Global Sourcing Annual Report include:

The global offshore market will reach upwards of $160 billion by 2009, according to Everest, which predicts that the market will continue to grow in line with demand at an approximate rate of 33 percent a year for the next three years.

Jobs are moving permanently offshore. Jobs outsourced to an offshore location are more likely to move to another offshore market than return to their country of origin, as labor arbitrage is sustained by a rapidly developing and expanding offshore marketplace.

Non IT-offshoring, which was virtually non-existent five years ago, will represent nearly half (45 percent) of the offshore market in three years, according to Everest. While the use of third-party suppliers dominates offshore IT services, companies prefer using "captives" (internal cost centers or 100 percent subsidiary companies that serve the parent company exclusively) for offshoring business process outsourcing (BPO) services.

"The bottom line is that offshoring is becoming mainstream, with more than 70 percent of buyers of offshore services reporting savings of between 30 and 50 percent," Fernandes said. "Companies will continue to benefit from the competitive advantages of labor arbitrage for a good number of years, as the labor market continues on its global path, allowing companies to embrace offshore as a long-term strategy and not simply a short-term fix."

Everest serves provides information for corporate buyers, service providers and investors in the global business process outsourcing and information technology outsourcing marketplace.

Additional Articles of Interest

— Procurement business process outsourcing is a growing trend, but best practices for BPO success are still being written. For insights on how to ensure your BPO project meets its goals, read "Five Success Factors for Procurement Business Process Outsourcing," sidebar to the cover story "Rising to the Challenge of the Outsourced Supply Chain" in the October/November 2005 issue of Supply and Demand Chain Executive.

— For more information on procurement business process outsourcing (BPO), see the following SDCExec.com articles: