The Rational Outsourcing Blog

Monday, June 04, 2007

Startup moving from India to the US to save money! (no, this is not a typo)

Riya, a very interesting startup that evolved into just moved its development team from India to the US to save money. They don’t seem to be the only one: I heard a similar story from another small startup recently. This is a perfect example of what I was trying to explain in my post “Why globalization does not mean your job will get outsourced to India.” You can’t just look at labor cost differentials: you have to look at total cost differentials. Munjal Shah, the CEO of Riya points out in his blog that for some programmers, the salary rapidly rose to 55% of US salaries. He writes:
“Bangalore wages have just been growing like crazy. To give you an example, there is an employee of ours who took the first 5 years of his career to get from 1% to 10% of his equivalent US counterpart. He then jumped from 10% to 20% of his US counterpart in the next 1 year. During his time with us (less than 2 years) he jumped to 55% of the US wage. In the next few months we would have had to move him to 75% just to “keep him at market.”

Once the salary rises to 75% of US salaries, the overhead cost differences between India and the US would overwhelm the financial viability. Consider the additional overhead of managing two offices, flying between the two centers, dealing with the cultural differences, etc. Munjal writes:
The costs of having two offices, which are twelve time zones apart, is significant. People in both offices frequently had conference calls at 10pm and midnight every night (as a result the office in the US didn’t get started until noon sometimes or people rolled in tired). We were all traveling constantly. Development and communication moved slower due to the distance and teams.

This problem is actually especially bad for startups, because:
  • Lack of scale: Larger firms can compensate for Indian infrastructure problems. Public transportation is unviable? Driving takes too long? The company bus or chauffeured car will ferry you between home and office. Electricity supply is intermittent? The company has enough electricity generation capacity to last days. Startups can’t afford to compensate for these problems as effectively.
  • Speed of change & high cost of errors: By definition startups like Riya have to move exceptionally fast. Business models can change overnight and every major bug can threaten the survival of the company. In such a fast moving environment the communication overhead of a split operation becomes even more problematic.

Munjal points out an additional factor for why the Total Cost of the Indian team grew so rapidly for them:
Keep in mind that Riya are at the leading edge of this trend. We tend to only hire folks from IIT or other top schools. We tend to only hire the smartest folks from these schools. We only hire in Bangalore (just too hard to have three offices). We tend to only hire folks with a lot of experience. These are all characteristics that are critical for technology startups, but not necessarily for a big company like IBM or a services company like Infosys who can afford to train new graduates. I do believe that other startups in Bangalore will see the same issue in 12-24 months.

Is this trend dangerous for India’s future? Not so. In the short-term, some of the outsourcing business will move to Tier 2 and Tier 3 Indian cities where the costs are lower and the infrastructure under less strain. In the long-term, if low margin IT outsourcing becomes untenable, Indian entrepreneurs will have to move towards more profitable packaged software businesses. See the second half of my earlier post “Why a US ban on offshore outsourcing is the best possible thing for India!” for how this might play out.

Munjal has a great perspective on this as well. He writes:
In general this wage inflation is really good for my employees and great for India. I am so proud of the strides forward that India has made. While others have chided Intl companies for opportunistically leveraging the cost difference, I am a true capitalist in my belief that all of the employers rushing to India in the last 3 years has increased wages and provided more opportunity than 20 years of a closed socialist leaning economy ever did. India is a true global powerhouse now. There is no doubt.

I could not summarize any better.