Exchange Equilibrium

Market advantages are like puppy love.  They don’t last.

Every product and service may have an advantage, and it is your competitors’ job to make that advantage disappear.  In early markets everyone tries to out-invent the other fellow, and they continue this until there are a handful of nearly identical offerings that end-up competing on price and +1 differentiators.

This includes Bangalore.

As much as techies will hate this, we have to admit that programmer time is nearly a commodity.  All other things being equal, a Java programmer in San Jose is no more or less valuable than one in Bangalore.  Yet San Jose is the 91st most expensive place to live and Bangalore is much further down the list at 165.  Thus, the commodity that is a Java programmer has price as a key differentiator, with the Indian working for less.  Cheap labor is why Silicon Valley companies have been willing to deal with twelve hour time zone differences, cultural misalignment and accents so think that old Scottish men are intelligible by comparison.

Until now.

Like any other hot product, price rises with demand.  The demand for cheap Indian IT laborers caused a demand/supply imbalance.  This caused the price of Indian programmers to rise, often at 25% a year.  Cumulatively this has caught-up with the Indians whose success is beginning to price them out of the market.

Which is where Ireland and Mexico enter the arena.

India is now outsourcing to Ireland.  An Indian IT integrator and development shop is opening offices in Belfast to exploit the local advantage, namely workers with culture and language similar to the local buyers.  Whatever relative price advantage Indian IT once had is rapidly vanishing, resulting in on-shoring.  Granted, in this instance there will be some degree of cross breeding, with low-level and non-critical tasks still being performed in India.  Yet the desire of an Indian firm to recruit locals for IT work in markets like financial services shows there is no permanent economic advantage in price.

The same story is told differently by our friends NearSoft.  They do what many Indian IT companies do — they cut code for less.  However, NearSoft sells against Indian disadvantages, bragging about more closely aligned cultures and being in the same hemisphere as their customers.  In other words they sell all the benefits of offshoring to India without any of the head-throbbing pain.

Marketing strategy has to do largely with creating real or imagined “expected outcomes” from using a product or service.  India had one clear advantage, which was price.  With the expected outcome of Indian outsourcing (less cost but worth the hassle) going away, so is India’s advantage.  Since programmers are commodities, there is nothing that India can do to change this, so they are eliminating their disadvantages in the market by buggering Belfast. All the while Mexico tries to capitalize on those same disadvantages.

Competing on price is never a long-term strategy.  Your prices will rise, your competitors prices will fall, or someone will devise better features.  Since genetically mutating Java programmers is frowned upon, there are few ways of improving the product, thus India’s price position will inevitably erode.  Always invent, even if it is just a +1 feature.  Invention, be it new products, new markets, new segments or new features is the key to creating new value.

Until everyone clones what you did and drives you to commodity status.


Speak up! What are your thoughts?

Your email address will not be published.