Labor Pool

India has many prestigious technical universities and the Indian Institute of Technology stands apart as one of the world's best. India produces over 75,000 IT graduates and 20 lacs English-speaking graduates annually. The Philippines turns out 380,000 graduates annually, but only 15,000 of have core technology knowledge. The country has cultural affinities with the U.S. and is well-versed in U.S. accounting and customer service standards and has low employee turnover.

Russia can claim the third largest population of engineers and scientists per capita but the bad news is that not many of them speak English. China's technical schools turn out 50,000 graduates annually, many of whom migrate west. Those who stay generally don't speak English. U.S. neighbor Canada to the north has solid educational system, with a qualified labor force of more than 16 million. In Ireland Relatively small; 34,000 graduates annually, 5,000 of them technical. Mexico provides U.S. companies with millions of Spanish-speaking people to staff call centres.

Labor arbitrage is simply the ability to pay one labor pool less than another labor pool for accomplishing the same work, typically by substituting labor in one geography for labor in a different locale. The outsourcing industry is now applying labor arbitrage widely; it is transitioning from a novel approach to a competitive requirement. India, Eastern Europe, Latin America, Southeast Asia, and other regions are all serving as labor markets for outsourcing of activities. Historically, companies have applied labor arbitrage to manufacturing activities. Manufacturing moves tangible product from one geography to another; outsourcing moves information.

Successfully doing this requires significant thought regarding work segmentation. Outsourcers have to break apart the work process into well-defined sub-activities that can then be assigned to different resources in different geographies. The challenge of managing across geographies heightens the importance of a careful segmentation.Additionally, labor arbitrage poses a significant challenge in managing risks (e.g., political and civil unrest, languages, currency, taxes) and in sustaining a labor arbitrage benefit as the demand for labor in a market increases.