Another Contra View on Software Development Offshoring

8 Jul ’05

Via Fortune, another contrary view on the wisdom of offshoring software development, at least to Bangalore. Some interesting quotes:

But when the time came to develop his new product, a software-hardware package that lets users access their computers from anywhere in the world via the Internet, [Ajit] Deora [of enKoo] realized that Bangalore wasn’t quite the bargain it used to be. So he rented office space in Fremont, Calif., hired three engineers, and set to work, spending $500,000 over 14 months to develop a working prototype. He estimates that in Bangalore he would have spent as much as $1.5 million. “India has changed a lot in the last ten to 15 years,” says Deora. “You can’t be a small-time operator there anymore.”

Yet office rents in Bangalore now rival those in many midsized American cities, according to Ton Heijmen, senior advisor on offshoring at the Conference Board in New York City. And the Indian labor market is less of a bargain nowadays. Multinational tech companies such as Dell, Intel, and Microsoft have built big development centers in India during the past few years, sparking a talent war that has driven Indian tech salaries from around 10% of U.S. wages in 2000 to perhaps 20% today. “It’s like Silicon Valley in 1999,” says Mark Heesen, president of the National Venture Capital Association in Arlington, Va. “People are constantly hopping from company to company for more money or stock options.”

An 80% discount on engineering talent might still sound like a great deal—and emerging offshore tech destinations such as Vietnam and Ghana are cheaper still—but much of that advantage disappears once you factor in high offshore attrition rates and lower productivity. Deora estimates that he would have had to hire nine engineers in Bangalore to do the same volume of work that three engineers can do in Fremont. What’s more, to ensure quality control, he would have had to either send an experienced U.S. manager to live in India (at an estimated annual cost of $250,000) or travel back and forth constantly, juggling development duties there with fundraising and marketing responsibilities back in the U.S. (At presstime the cheapest roundtrip flight to India from Silicon Valley cost around $2,200.)

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