Business trends are fickle. They are difficult to predict. But with the right data and analyses, they can be foretold, just like everything else that's unpredictable. In case of a new area such as offshoring, where equations are constantly changing, such predictions are always welcome.

Everest Research Institute's Offshore Market Report reveals that if current conditions persist, labor arbitrage will sustain in most offshore destinations for 30 years or more. The exceptions being Ireland where arbitrage with the US will last for three to five years, and Canada, and Czech Republic where it is expected to last for 8-20 years. Considering the brouhaha around wage inflation and dipping labor arbitrage, these findings are bound to gather a great deal of curiosity. And quite a few questions. But, Everest is confident of their findings and very much aware of the skepticism surrounding this issue. It is one of the reasons why they chose to study it further.

Elaborating about the research report, market research analyst, Everest Research Institute, Sheetal Bahl says, "Sustainability of labor arbitrage depends on a multiple set of factors. First of all, it depends on the existing wage differential between the source city and destination cities, which is different for different processes, skills and so on. Secondly, it depends on wage inflation in the source city and wage inflation in the destination city. Thirdly, it depends on the exchange rate differential, and finally on what is called the hurdle rate."

Everest defines hurdle rate as the maximum wage ratio of a destination country, beyond which the single most important attribute of the offshoring value proposition-cost savings-is lost. For example, if Indian wages reach 70% of the US wages-right now they are only 15-20%-offshoring to India might no longer be profitable for companies in the US. However, one could easily argue that, given the dropping cost of telecommunications and the increasing efficacy of online collaboration tools, hurdle rate may be much higher.

So the research looks at all these factors, also keeping in mind the worst case. Even though they strongly believe that the worst case is unlikely to occur, the report does predict the number of years labor arbitrage will sustain even if a lot of things don't go as planned.

Bahl adds, "We conducted an extensive analysis, typically of the last five years. We also did a fair amount of secondary research, talked to service providers and tracked some other research reports."

Wage inflation in India has been reported to be 15-20%, particularly within middle management positions. On the whole, wage increases differ by process and level, with overall increases being much lower than commonly reported figures. Historically at least, the depreciation of currencies in destination countries has compensated for this, but going forward, is this less likely? Bahl feels that concerns about wage inflation at the middle management level will disappear with time, when the pool of employees at this level increases, stabilizing the situation and settling inflation. The concern according to him is about entry-level employees.

As for the weaker currencies getting stronger, there seems to be little such possibility. Bahl explains, "In general, theory dictates that the currencies of developed nations will continue to strengthen against the currencies of developing nations."

However, there are swing factors that could potentially go against offshoring. Take for example, market research firm Gartner's report, which warns about a labor crunch and rising wages possibly eroding as much as 45% of India's market share by 2007. Then there is talk of political backlash, which could, and probably would be a factor in determining the outflow of jobs.

Even though there's a very optimistic case for offshore destinations, in the eventuality that labor arbitrage does disappear, countries such as India still need not worry. Bahl warns against the tendency to equate sustainability of labor arbitrage with sustainability of offshoring. He explains with the example of productivity, how the offshoring value proposition is becoming stronger. "We have seen from our engagements that productivity improvements are becoming substantial. Some of our clients have over an annualized basis seen 10% year-on-year improvement. In many cases, productivity improvements offset wage inflation. Our viewpoint on sustaining of offshoring is even stronger than our viewpoint on sustainability of labor arbitrage. This is because we believe labor arbitrage itself is not a concern, and also there is enough else going on for offshoring," he explains.

So all in all, the offshoring growth is anything but short-lived. Countries such as India, the Philippines and others, have attractive qualities beyond low-wage professionals for companies that want to offshore their operations. India for example, in its 15 years of offshoring, has developed a stable of world-class IT services providers that can save foreign companies the trouble of setting up their own offshore centers. And it has a large supply of qualified talent in areas outside IT, such as R&D, finance and accounting, call centers, and back-office administration.

Anuradha Kher