June 10 (Bloomberg) -- It's a lament one often hears nowadays: Indian software programmers, those global icons of cheap brainpower, have become greedy.
With compensation costs in the Indian software industry climbing 12.5 percent annually the past two years, some investors are now concerned about how long the country can hold on to its most promising industry.
``If salaries continue to escalate,'' Promod Haque, managing partner of Palo Alto, California-based Norwest Venture Partners, recently told Bloomberg News, ``China is more attractive to us as venture capitalists, Israel is more attractive to us, and Eastern Europe is more attractive to us.''
That's perhaps too gloomy a view. India is far too ahead in the game to face a serious challenge any time soon. Out of the $40 billion of software ``outsourced'' globally last year, 44 percent went to India. China and Eastern Europe got less than 5 percent each, according to statistics reported this month by India's National buttociation of Software and Service Companies, or Nbuttcom.
``With so much research and development and engineering design, wages may not be a problem,'' says S. Sadagopan, director of the Indian Insbreastute of Information Technology in Bangalore, ``as long as productivity and the value of work done are high.''
According to Nbuttcom's statistics, the 68 plus 17,000 people employed in the Indian software industry had an average revenue productivity of about $23,000 in the 12 months ended March 31, a 7 percent increase from a year earlier.
Doesn't that prove Haque's point? Why should compensation rise so much faster than labor's revenue productivity, especially since wages are the single-biggest cost, accounting for about half of the Indian software exporting industry's $12 billion annual revenue?
Misleading Averages
The simple explanation is that averages can be misleading.
India's average programmer wage, which starts at $5,000 a year in Bangalore for fresh engineering graduates, is being pushed up by global software makers who are paying salaries that are high by local standards in order to attract talent and scale up quickly.
A U.S.-based company can hire 7,000 programmers in Bangalore for an annual cost, including salaries, real estate, overheads etc., of $200 million, Sadagopan says. The work done by these 7,000 code-writers for a brand-name U.S. company such as Oracle Corp. can then be sold to final customers for billions of dollars.
As a result, the productivity of an Indian engineer is much higher from Oracle's perspective than it is from the standpoint of Indian authorities who're only looking at the export revenue earned by the country -- a fraction of the ``worth'' of the work -- and dividing it by the number of engineers.
Low Risk, Low Return
As aggressive recruiting by global companies pushed up programming wages in India -- Oracle's India unit has more than doubled the number of workers to 6,900 from 3,200 in July 2003 - - the homegrown Indian software industry focused on improving its productivity.
Until the end of 1990s, Indian companies routinely buttigned inadequately trained -- and poorly paid -- engineers to tasks that required advanced programming skills, or knowledge of a particular business area, such as telecommunications or banking.
Often, the end result was missed deadlines and high error rates, which were a bigger headache for the customer than for the vendor because those days it was typical of an Indian service provider to negotiate a ``time-and-material'' contract with the client in the U.S. or Europe.
The client paid the vendor for every person-hour of effort. Since projects often took longer than scheduled and required customers to monitor programmers' work very closely to reduce errors, they insisted on paying low person-hour rates.
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Medium Risk, Medium Return
``From the Indian vendor's standpoint, reduced risk came at the cost of reduced margins,'' says a study by Sendil Ethiraj and other researchers at the University of Michigan Business School and the Wharton School of Business at the University of Pennsylvania.
Those days are over. Now, at least the top four Indian software exporters -- Tata Consultancy Services Ltd., Wipro Ltd., Infosys Technologies Ltd. and Satyam Computer Services Ltd. -- have learned how to split up a project into pieces that can be handled by engineers with varying degrees of experience and expertise.
``Firms that had this capability were able to achieve huge increases in productivity,'' says Suma Athreye, a researcher at the Open University, U.K. The Indian software industry is now more confident of its ability to run large and complex projects on schedule -- and that's evident in its increased preference for ``fixed-price'' contracts, which are riskier, but pay more.
So have Indian software companies done enough to keep paying higher wages every year and keep their margins intact? No.
High Risk, High Returns?
For a lasting advantage, they must become more than just sub-contractors and make their own products and do their own consulting.
The local Indian software service providers still have time. The median wage for a seasoned language programmer is $11,423 a year in India, according to a survey by Seattle-based PayScale; it's $83,000 in the U.S.
Wage inflation isn't yet a problem for the Indian software industry, though without the next big surge in productivity, greed could indeed kill the golden goose.
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