Pulling the Plug on Outsourcing
Before you move part of your business to Bangalore, know this: it may not be worth it.
Jul 18, 2005
When Silicon Valley entrepreneur Ajit Deora was starting enKoo, his latest tech venture, he had to deal with one very important question: where to develop the product? The last three times he had faced that issue, the solution seemed obvious. Although Deora, 48, lives in Northern California, he offshored much of the engineering work for his startups to his native India for all the usual reasons: cheap land, cheap office space, and most important, an abundance of skilled engineers who spoke excellent English and worked for a pittance compared with their U.S. counterparts.
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, Deora 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."
Huh? Everyone knows that big U.S. firms now outsource their tech needs to India and other low-cost, high-brainpower destinations. And the same has been true of small U.S. tech companies. Last year 55% of U.S. software companies with annual revenues of $10 million or less sent some part of their development work overseas, according to a new survey by the Sand Hill Group, a tech investment and consulting firm based in San Francisco. India is by far the most popular destination, the choice of 69% of all U.S. software companies that offshored work in 2004. Another 14% chose Russia, followed by China and Canada at 9% and 8%, respectively.
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."
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, Deora 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."
Huh? Everyone knows that big U.S. firms now outsource their tech needs to India and other low-cost, high-brainpower destinations. And the same has been true of small U.S. tech companies. Last year 55% of U.S. software companies with annual revenues of $10 million or less sent some part of their development work overseas, according to a new survey by the Sand Hill Group, a tech investment and consulting firm based in San Francisco. India is by far the most popular destination, the choice of 69% of all U.S. software companies that offshored work in 2004. Another 14% chose Russia, followed by China and Canada at 9% and 8%, respectively.
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."