US-based Apple Computer and software maker Pervasive have been joined by Powergen, a British subsidiary of German energy supplier E.ON, in announcing the closure of their centers in India's technology hub of Bangalore.
"The potential cost savings of an offshore development operation can be mathematically compelling," said John Farr, president and chief executive officer of Pervasive Software. "However, we have found that the complexity of managing such an operation and the increasing costs of labor, employee turnover, training and facilities in such a hot market as Bangalore makes it challenging to realize those savings," Farr said.
The National Association for Software and Service Companies (NASSCOM), India's premier software body, said that salaries of freshers had shot up between 11 percent and 15 percent in the past few years while wages for senior managerial positions had risen by a whopping 30 percent.
Analysts said that labor arbitrage for India existed only at the entry-level where engineers earned about $9,000 a year - about one-seventh of the wages being paid to their counterparts in the United States.
Consultancy firm Stanton Chase International said that salaries of managers with 10 to 15 years experience in the US was between $100,000 to $150,000 (Rs6.7 million) while in India they were paid at least Rs10 million.
"During the start of the technology boom [in 1993] the top management people were paid about Rs3 million," G.C. Jayaprakash, principal consultant of Stanton Chase, said. "The most worrying factor [for foreign firms] is the steep increase in salaries.
"Big companies such as Cisco, Motorola and others are only hiring freshers and at lower managerial levels. This is for the simple reason that IT managers from the US can be accommodated at a much cheaper rate," he said.
Other than steep salaries the quality of manpower is also proving to be a challenge for technology firms.
Powergen announced last week that call centers in India would no longer be answering telephone calls from its customers due to complaints about the poor standard of service.
Leo Puri, director in India of McKinsey and Company, said that the industry and the government needed to find ways of producing more "employable" talent for the industry.
According to NASSCOM more than 3 million graduates pass out of colleges every year and India produces 400,000 engineers annually but "of this only a very small percentage is employable."
"Rising salaries ... is a long-term threat to the industry. In terms of competitiveness it will hound the industry in the next three to five years. That does not mean we must sound the alarm bells just because a handful of firms leave," Puri said.
India continued to remain competitive compared to the Philippines or Vietnam as labor arbitrage was only a secondary driver, he said.
"We have the capability to put together large quality oriented business processes and have a track record of innovation. India can still deliver a huge cost benefit and it will continue to do so for the next 15 years," Puri said.
India's software and outsourcing revenues are projected to grow between 27 percent to 30 percent in the current financial year to between $29 billion and $31 billion, according to NASSCOM.
Anant Koppar, president of Mphais Technologies, an outsourcing firm that was acquired by US giant EDS earlier this month, said that the middle-level salary increase was mainly due to "supply constraints."
"We need to look at the people coming out of the institutes and make them industry-ready. These engineers and graduates have to be tuned in to industry's needs," Koppar said.
"The moment you have more people with skills the salary levels will come down. Salary costs account for almost 60 percent of the total costs of a firm," he said.
NASSCOM said that it expected a shortage of 500,000 people in the outsourcing sector in the next four years.
Sunil Mehta, vice-president of NASSCOM, said that despite the hurdles India still dominated the outsourcing industry and domestic and multinational companies operating in the country were turning profits.
"Those companies which employ fewer people and do not take advantage of economies of scale are the ones that are facing problems," Mehta said.
© 2006 Agence France-Presse
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