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 like.com 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.

16 Comments:

  • it's nice to finally find a very positive approach to the us-india offshore outsourcing issues... at least this time around hearing from an employer than speaks not for his own benefits is really worth the praises...

    By Blogger Geoffx, at 2:33 PM  

  • cost reduction is a major but not the sole deciding factor for outsourcing. outsourcinghas multifarious advantages and definitely a few pitfalls as well. www.outsorcerer.com/blog is a an exciting platform to exchange ideas and experience the magic of outsourcing.

    By Blogger Ishani, at 10:46 PM  

  • Great Article! Thanks! Read it with great interest. Am myself running the Indian Office of a German IT company and totally share the perspective.

    By Anonymous Andi, at 9:54 AM  

  • Yea, it is a fact that the wages are increasing, but it is not only in Bangalore. Wages are growing like crazy in other metros also. So projects with high margins only feasible in India also. Anyway, the increase in exchange rate helps the IT organization in India, but they cannot depend on it for a long run.
    ----------------------
    Fischer

    http://business.bizoppjunction.com

    By Blogger Varghese, at 3:12 AM  

  • Good informative article..thanks for sharing this post.

    By Anonymous Business Process Outsourcing, at 11:17 PM  

  • Nice article........

    Now a days most of the companies adopted this kind of strategy for maximizes profits and minimizes losses.

    Another benefit is that outsourcing allows companies to avail high-quality services. So now a days outsourcing services are most important in every business organization.

    By Anonymous Financial services, at 4:18 AM  

  • Thanks for sharing this information...
    Regards,
    back office service India

    By Anonymous back office outsourcing services, at 2:13 AM  

  • I find your site really helpful in terms of outsourcing. I’m also into outsourcing specifically to the Philippines and I will surely check your blog to gain useful information.
    You can also visit my site http://www.kathydobson.com/ for some tips and reviews about outsourcing. Thank you for your insights.

    By Anonymous Kathy Dobson, at 12:15 AM  

  • Yes, it is really amusing to find out that there is some offshore outsourcing improvement between US and India. This should at least count in the over all conditioning of the global economic deficit.

    By Anonymous legal process outsourcing services, at 3:50 AM  

  • Amazing, this will inspire others to improve competence and then go out to search the best opportunity. Good luck.

    By Anonymous solikhin kasum, at 6:57 PM  

  • This strategy isn’t as widespread as some businesses are just yet and people are still quite skeptical on the methodology concerning metrics, tracking, and other processes in determining the targeted outcome that will allow for bigger share in profits. http://www.outsourceit2philippines.com/

    By Anonymous jaredfinleto, at 11:48 PM  

  • great post.
    thanks

    By Anonymous outsourcing tasks USA, at 12:16 PM  

  • Nice article, just hoping for the best of both countries in this business. Looking forward for more interesting and informative articles. More power

    Jeanette Tan

    By Anonymous jt, at 5:50 AM  

  • This is quite true, but it would not be impossible to roll out services in cost effective manner considering the immense talent pool which India has........how much of impact it does on costs in India vis-a-vis the US depends on the dollar exchange rates and maybe some other South Asian countries provide more cost effective solutions

    By Anonymous Offshore Outsourcing, at 12:40 AM  

  • Hi, thx for the article!

    I'd say there's a possibility that many of U.S. IT companies are still following extremely old-fashioned trends.

    Why so?

    But why choose India, when East-European IT outsourcing companies provide high-quality services at lower costs?

    By Anonymous Anton Zaleski, at 11:51 AM  

  • great post the rational outsourcing blog is now in my Google reader as I have just discovered it. hope To see more great posts like this. Its true outsourcing is always changing! It used to be both cheaper in India and The Philippines. Your so correct the wages have gone up more and more the last few years. Im not to sure on India but its true In The Philippines 2011 was a crazy year for me and outsoucing 2012 will be crazier. BPO is the fastest growing industry in The Philippines its huge there now I think it will be bigger than ever soon. I always use http://www.virtualjobs.ph/ to hire my Philippine virtual assistants that is how i outsource my article writing and web design. My question to everyone is does anyone know any other similar sites out there for Indian job sites or service providers? Im looking to use more than 1 service to post jobs etc and looking to use an Indian VA

    By Blogger remoteblogger, at 8:38 PM  

Post a Comment

<< Home