With all the brouhaha about outsourcing last election season, I thought this article provided an interesting snapshot of what techie outsourcing looks like today -

Silicon Valley has helped power India’s outsourcing boom by shifting technology jobs to that country. Three months ago, Munjal Shah reversed a bit of that shift.

Shah, who leads a California start-up called Riya Inc., had opened an office in India’s technology capital of Bangalore in 2005, hiring about 20 skilled software developers. The lure was the wage level: just a quarter of what experienced Silicon Valley computer engineers make.

Then Indian salaries soared. Last year, Shah paid his engineers in India about half of Silicon Valley levels. By early this year, it was 75%.

75% of an average US Engineering salary goes FAR in India. Nevertheless, the big picture point remains true — salaries eventually normalize around productivity and, given the fiercly competitive global tech market, infinite pools of 3rd world workers aren’t exactly lying in wait (of course, the right policy mistakes can make this happen, but let’s not go there for now). It is, on the otherhand, pretty impressive and a testament to modern tech + capitalism that it’s happened this fast.

My company, Roundbox, has some similar, interesting anecdotal experience with outsourcing…

We started our operations ~3 yrs ago with an offshore office in India which was ultimately staffed up to about 10-15 folks. And, we also eventually closed down the office for very similar reasons to Munjal Shah @ Riya and the reasons documented in the article —

  • Cost: It wasn’t much cheaper than having folks in the US. As a venture funded startup, much of the attraction to outsourcing was, obviously, about getting the most mileage out of precious working capital. And it was getting more and more expensive every 6 months -
    Nasscom puts wage inflation in its industry at 10% to 15% a year. Some tech executives say it’s closer to 50%. In the U.S., wage inflation in the software sector is under 3%, according to Moody’s Economy.com.

    …an average $5,000 annually for a new engineer with little experience — the experienced engineers Silicon Valley companies covet can now cost $60,000 to $100,000 a year. “For the top-level talent, there’s an equalization,”

  • Churn: The massive boom in Desi tech meant that turnover rates for employees was becoming greater than even Silicon Valley. For complex tech, turnover KILLS.
    Pervasive Software Inc. in Austin opened a Bangalore unit in 2004 and hired 45 people. But soon its annual turnover was more than 25%, says the company’s CEO, John Farr. The company kept investing in training workers only to see them leave.
  • Name Brand Hiring: For a variety of reasons, there’s a strong preference for namebrand MNC’s amongst the tech talent in India and, as a new and thus unknown tech company, we couldn’t compete against the Wipro’s, Google’s & Microsoft’s when it came to hiring. In the US, on the other hand, quite a few young, ambitious folks would rather try their luck with a startup vs. going to IBM. Eventually, perhaps, Indians will feel, as their silicon valley brothren do, that “I can get a job at IBM anyday” but until that level of security is felt in their bones, risk tolerances won’t be where it is here in the valley.
  • Quality: Perhaps most controversially, the quality just wasn’t all there. Many of the folks were no doubt fantastic, but too many of the famously touted “500,000 tech grads a year” were a notch or 2 below many vo-tech educated folks here in the US.
    In a 2005 study, McKinsey & Co. estimated that just a quarter of India’s computer engineers had the language proficiency, cultural fit and practical skills to work at multinational companies.
    But in our case, it wasn’t just language but actual core computer science. The ones who were truly as good as the folks we had in the US could easily command… a US-level salary. Return to square #1.
  • Communication: Famously, outsourcing works great if your product specifications are tightly defined, with crisp clear milestones and well understood, a priori, secondary requirements. Just about every one of these simply ain’t the case in a startup tech environment. When your requirements can’t be clearly stated, management overhead grows exponentially… and once again, in a startup, lack of overhead is supposed to be your competitive advantage -
    Kana Software in Menlo Park has one engineering manager for every 25 to 50 engineers, but it found it needed one for every five to 10 engineers it employed in the Indian city of Chennai.

While there are tons of examples otherwise…. at least in our limited experience, outsourcing to India didn’t work out. Perhaps there were little tactical things we could have twittled with to eventually find an arrangement that could work but, alas, we didn’t have time….

Moral of the story - global trade and old fashioned econ 101 has created a pool of folks in India who make some pretty serious dough - even by US standards.