Introduction

Labor arbitrage is a key driver in the decision for many companies who outsource work to third-parties or set up a remote captive. There is much controversy on the sustainability of labor arbitrage 10-20+ years in the future. This report explores current market perceptions of increasing offshore wages and rapidly dwindling labor arbitrage and exposes the fallacies associated with these perceptions. The report provides projections for labor arbitrage sustainability 20+ years into the future and supporting analyses and charts. This report will assist management teams in better understanding the labor trade-offs between regions and make informed business decisions relative to labor investments. 

Scope

• This report is applicable to all geographies and industries
• This report is applicable to both buyer and supplier organizations
  

Contents

This report summarizes labor arbitrage market trends and insights to assist management in making more informed business decisions. The report draws conclusions based on a three-step sustainability analysis:

• In-depth illustration: analyzed the sustainability of labor arbitrage for offshoring of select processes from UK to India
• Generic analyses: explored expected labor arbitrage sustainability among a comprehensive list of source-destination country pairs
• Sensitivity to variations in key factors: built an understanding of the expected variation in longevity of labor arbitrage due to variations in key underlying factors. Projections were based on worst case scenarios
  

Additionally, the report discusses in detail five alternative factors which impact the longevity of labor arbitrage and provides implications for both buyers and suppliers on how to capitalize on the labor trends.

• Current wage differential: Specific to employee level, process being offshored, and source-destination pair
• Compensation increase in source country: Governed by macroeconomic factors as well as demand-supply gap
• Compensation increase in destination country: Governed by macroeconomic factors as well as demand-supply gap
• Exchange rate movements: Highly volatile and difficult to predict over a long-term horizon
• Wage differential hurdle rate: Maximum wage ratio of destination/source country which still allows for meaningful offshoring