A Monsoon of Economic Activity in India Undercuts Sourcing’s Foundation

It is not a new phenomenon, but one that has been gaining strength over past five years;  companies from the US and the UK are pulling stakes and …

It is not a new phenomenon, but one that has been gaining strength over past five years;  companies from the US and the UK are pulling stakes and moving their operations home from India. With a perfect storm of inflation, wage increases, bad customer service, accented English and rising unemployment at home the once cost-effective market is no longer the attractive offshoring destination it once was.

In a March interview with a TV station in India, Nitin Sethi, the India practice leader at the global human resources company Aon Hewitt, said, “Historically when India Inc got down to working out salary increases, inflation wasn’t a factor. The factors mainly were growth, about which way the GDP is heading and the GDP numbers were increasing by about 6% to 8%.

Hence, salary increases were doing well. This is the first time that inflation is beginning to play on the mind of a lot of people when they calculate salary increases. It is still not a factor when it comes to pinning down a number and saying that inflation will definitely play a role in salary increases because inflation has also been pretty volatile over last few years. So, at the moment it is only about company budgets, about how companies are doing and how the sectors are performing, also employee performance. However, inflation is a concern though it is not getting factored into compensation at the moment.”

Wage Rise

Motivated mainly by customer complaints about poor service, and the distaste clients have about having to speak with someone out of their country, the British finance giant Santander announced on July 8, 2011 that it will move its call centers back to the UK from India. According to the results of the 15th Annual Salary Increase Survey conducted by Aon Hewitt, wages in Indian are expected to rise from 11.7% in 2010 to 13% this year. The survey also found that Indians employed by the services sector expect a 14% annual raise, and up to a 40% increase if they change jobs.

There is also a considerable cost differential between training in the developed and developing countries which tips the balance in favor of Western Europe and the United States, especially at a time when costs in the UK are decreasing and there is a growing Rural Sourcing effort in the US. The calls once answered in Mumbai, Pune and Bangalore will soon be answered in Glasgow, Leicester and Liverpool.

Satander is not the first British company to repatriate its call centers. New Call Telecom , a provider of home telephone services, broadband and low-cost international calls, left India due to cost considerations. Nigel Eastwood CEO of New Call, said, “Salaries in India aren’t cheap anymore, add to that the costs of flying out there, hotels and software and the costs are at an absolute parity. In the UK we will pay more workers minimum wage.” Not only is there a demand for higher salaries, the Indian work force reputedly job-jumps frequently. Voice based call centers see annual attrition rates of 25% to 30%, adding to the overall cost of doing business, according to Arup Roy, a research analyst at Gartner.

Even Indian firms such as Tata Consultancy Services and Aegis Communications (a subsidiary of India’s Essar Group, a metal, telecom and metals conglomerate) have moved operations to the US, citing a desire to be closer to their customers as the motivating factor. Aegis Communications employs approximately 5,000 people at nine US call centers, with a goal to triple the number to more than 15,000. Many of the employees don’t even realize that they are working for an Indian company.

The Downside of Rising Demand

Mercer India Monitor released recently the results of their quarterly survey of HR budgets and inflation. The HR directors of 91 firms across various industry sectors participated and findings show that 84 percent of respondents expect business performance to increase significantly in 2011, and they are planning to aggressively recruit new employees for new positions and attrition backfill, even when facing what they perceive will be a 12.7 % wage hike. However, the survey also showed that employees in IT and Telecom sectors are expected to receive a relatively lower salary increase at 11.8 percent as compared to other industries.

Shamita Chatterjee, Mercer’s India business leader for information product solutions, said, “On the backdrop of a growing economy, overall expectation on business performance is still quite positive with various industry sectors experiencing good growth. This trend explains the return of the war for talent with an increase in salary increments, hiring and an increased proportion of employee salaries in the HR Budgets in 2011.”

“We witnessed early signs of resurgence in India, and this translated to improved strategic spending on employees – through salary increases, incentives and hiring,” said Sandeep Chaudhary, Regional Practice Leader, Compensation Consulting, Asia Pacific, Aon Hewitt. “Traditionally, salary increases in India are directly linked with the level of economic activity and talent demand and supply, but this year rising inflation also is playing a role in determining salary increase budgets. Double-digit increases will continue for the next several years and are expected to be in the range of 12-15% across industries. This positive growth estimate is owing to sustained increase in domestic consumption, investment in infrastructure, continued momentum in services and efforts towards fiscal consolidation.”

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