Have you looked at the exchange rate with the rupee recently?
PACIFIC Exchange Rate Service
© 2007 by Prof. Werner Antweiler, University of British Columbia, Vancouver BC, Canada.
Time period shown in diagram: 1/Jan/1993 - 4/May/2007 - Click here for larger graph
If you look at the right side of the graph, you'll notice that the dollar really began a nose-dive starting around mid-2006 and continuing to this day (May, 2007). This is a drop of more than 12% in less than one year.
If the dollar keeps falling (relative to the rupee) at this rate, then how much longer till there is no labor savings from outsourcing work to India?
Well, it depends on the kind of work and how much labor savings is currently expected. Conventional wisdom is that Indian labor is 1/10th the cost of American labor. So, the dollar would have to fall 90% until parity is reached.
But as we know, conventional wisdom can sometimes be misleading. I mean, it depends on the kind of work, and also there are other costs related to outsourcing which typically are not mentioned.
For example, as of last year, it is my understanding that the savings from outsourcing software work to India was only about 40%. This is because there's lots of complexity when outsourcing work that requires detailed communication about requirements.
Even when Microsoft kicked off their outsourcing campaign in 2003, their executives optimistically projected savings of only about 50% (nowhere near 90%).
The New Global Job Shift - Business Week - February 3, 2003
In a recent PowerPoint presentation, Microsoft Corp. Senior Vice-President Brian Valentine --the No. 2 exec in the company's Windows unit-- urged managers to "pick something to move offshore today." In India, said the briefing, you can get "quality work at 50% to 60% of the cost. That's two heads for the price of one."
But 3 years later, some of the initial excitement had worn off, as evidenced by these words from a former Oracle executive:
Bringing the jobs home (A software CEO says 'backshoring' makes economic sense) - Fortune - May 17, 2006
And that's not all. Fields notes that software development is a collaborative process that works best when everybody involved--designers, programmers, project managers--is together under one roof. "If your team isn't closely bonded, you'll see more rewrites, more performance issues, and more delays," he says. "For us, having the designers and architects in California and the programmers in India has actually meant longer delivery times and higher costs."
Some companies may be "backshoring" their call centers.
Call Center? That's So 2004 - Business Week - July 28, 2006
It's all part of an ongoing assault on the bottom of the outsourcing biz. Although they're the least profitable piece of it, call centers are no snap to operate. As the industry has heated up, with multinationals and locals alike hiring by the thousands, wages have increased and qualified workers have become scarce. In many shops, some 60% of staffers quit in the first year. Worse, these problems seem to afflict call centers more than higher-level outsourcing work. "The business is a hard nut to crack," says Rashesh Shah, chief executive of Bombay investment bank Edelweiss Capital. That has led to some high-profile departures. In June, Apple Computer Inc. pulled the plug on a call center in Bangalore due to the high cost of operating in India. Two months earlier, British utility Powergen cited rising wages when it withdrew from a contract with call center operator Vertex Data Science.
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So does this mean that call center jobs will make their way back to Peoria or Poughkeepsie? A few might. While outsourced call centers are here to stay, some are likely to migrate to locales closer to the markets they serve. That means smaller European countries, Canada, or less expensive areas of the U.S. might find some jobs returning.
The CEO of Jet Blue prefers to route call-center work out of the homes of Utah residents rather than to outsource to India.
Homesourcing at JetBlue
"We will never outsource to India. The quality we can get here is far superior... [Employers] are more willing to outsource to India than to their own homes, and I can’t understand that. Somehow they think that people need to be sitting in front of them or some boss they have designated. The productivity we get here more than makes up for the India [wage] factor."
But definitely, right now, executives perceive big savings (however real those savings are) in a lot of areas, such as software, graphics design, financial analysis, R&D, etc (i.e. as you know, most everything that isn't nailed down here.) And certainly those savings will vary depending on the kind of work as well as many other factors.
But with that long discussion out of the way, I'm going to assume that the savings are around 40%. So, with that assumption and with the additional assumption that the dollar will continue to fall at the rate is has fallen over the last 10 months, then I calculated there's only 2.3 years left of outsourcing to India.
Download the Spreadsheet - www.editgrid.com/user/quequeg/OutsourcingToIndia.xls
View & Edit with EditGrid - www.editgrid.com/user/quequeg/OutsourcingToIndia
But of course, our central planners (a.k.a. central bankers) are going to try to stop that from happening.
For example, there has been much criticism about how the Chinese central bankers manipulate their currency in order to get an unfair trade advantage. Despite the growing trade deficit, they kept their exchange rate completely flat during most of the last decade (but recently they have allowed it to rise a little.)
But in some ways, the Indian central bankers are worse, because they had an explicit goal of devaluing their currency by 5% per year during the 1990s. In fact, by 2002, their currency had fallen 40% during the preceding 10-year period. This 40% represents just about all the savings from outsourcing software development.
Morgan Stanley - Global Economic Forum - July 17, 2002 - (This article is no longer available on-line.)
Since the rupee was made convertible on the current account in March 1993, the Central Bank has overseen a steady depreciation of 5-6% per annum, on average. In fact, in the last five years, the rupee has depreciated by an average rate of 6.3% per annum.
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We believe the Central Bank will find it increasingly difficult to follow its past policy and fight market forces.
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We believe that it will become increasingly difficult for the Central Bank to pursue its past policy of a steady 5% per annum depreciation in the rupee over the next two years.
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...the manufacturing sector ... has traditionally relied on rupee depreciation to offset reductions in import tariffs
Also, our own Federal Reserve tries to keep the dollar strong.
Still, there's a limit to what the central bankers can do. Indeed, during the year 2002, Morgan Stanley predicted that the Indian central bank would "find it increasingly difficult ... to fight market forces."
We believe the Central Bank will find it increasingly difficult to follow its past policy and fight market forces.
If you look at the chart at the top of the diary, you can see that the dollar started dropping in mid-2002, just as Morgan Stanley predicted.
Of course, currencies fluctuate quite a bit. And most likely, the dollar will bounce back, at least for awhile.
If I make a more conservative estimate based on how quickly the dollar has fallen (relative to the rupee) since 2002, then it will be around 14 years before the dollar drops 40% from its 2006 level. So, that's small comfort.
But I'm rooting for the rupee. Down with the dollar! I hope it continues to fall at the pace we've seen over the last 10 months.
The following chart shows the dollar as it relates to a whole basket of currencies. Right now, it's hovering at the 80 level, which is the level from which it's bounced about 4 times in the last 2 decades. Some speculate that this is the year, we're breaking through the 80 level. Dollar crash this year?
Of course, there's a downside to a dollar crash: high prices for gas, retail goods, etc. Also, the Fed would raise interest rates. But it's better that the dollar falls now (rather than later), while we still have some of our economy left to offshore. The sooner it falls enough to make offshoring prohibitively expensive, the sooner we'll stop the bleeding of industry (which once lost, may be hard to recover).
Also, those smug executives at IBM would get their comeuppance if they were to discover that all their money spent investing in their latest outsourcing initiative did not even yield one dime of ROI, because of this dramatic drop in the dollar.
IBM to layoff 150,000? - May 4, 2007
Though it's unknown what will happen to the dollar, in the meantime, there are some actions we can take to reduce outsourcing. For example, we can pressure our politicians to reduce visas like the H-1B visa, which is also known as the "outsourcing visa" (and at the same time, we should try to stop the creation of any new visas like the F-4 and the Flake proposal to staple a green card to every diploma).
Outsourcers corner market for U.S. skilled worker visas - International Herald Tribune - April 12, 2007
"It has become the outsourcing visa," the Indian commerce minister, Kamal Nath, said by telephone this week while attending global trade talks in New Delhi, at which India is pushing the United States for a larger H-1B quota.
"If at one point you had X amount of outsourcing," he said, "and now you have a much higher quantum of outsourcing, you need that many more visas."
Reduce guest worker visas ........... U.S. House ........... U.S. Senate