The Off-shoring of Off-shorers
No real surprises in this article by Sramana Mitra. It appears that the cost advantages which India and other countries have previously enjoyed are being eroded through wage inflation and the lack of key skills. The cost advantage has dropped from 1:10 to 1:3. This was always going to be the case. The real question is whether smart strategists had build in cost recovery over a suitably short timescale to enable firms to re-relocate to another cheaper location and still show a profit overall. As Mitra states, Eastern Europe is establishing itself as a strong contender for offshoring software development and many major firms have invested heavily in Russia, Armenia and other locations. This is aided by a strong legacy of science and engineering education. However, those hot-beds of development like St Petersburg are also facing huge wage inflation and a consequent erosion of their advantage.
For local firms, the only sensible strategy for the long term is to use their current cost advantages to establish a reputation for quality and to specialise. There is no long-term future in a low-cost strategy. For multi-nationals, they can never consider off-shoring to be a one-off strategy and cost projections need to take a suitably short-term approach to ensure that there remains a net-benefit to the exercise once the favoured location has lost the advantages it originally held. Chasing lowest cost is hard but there remain a number of locations around the globe where development or other activities can be re-re-relocated. And in time, the education investment plus the flight of jobs from the first wave of off-shore locations may make those competitive again.