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That didn't take long

I've been offline in terms of blogging for the past few days due to some travel, lots of work, and the 4th of July.  So, I'll try to catch up on a few things today.

In the Wall Street Journal on July 3rd (link here, behind their subscription wall), there is an interesting article on the second thoughts about outsourcing technology jobs to India.  In short, wages in India have escalated dramatically, in many cases eliminating the cost difference between India and Silicon Valley.  Here are a couple of quotes:

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.

Mr. 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, Mr. Shah paid his engineers in India about half of Silicon Valley levels. By early this year, it was 75%. "Taking into account the time difference with India," he says, "we weren't saving any money by being there anymore." In April, Mr. Shah shut down the Bangalore office and offered half of its engineers a chance to move to San Mateo, Calif., with work visas.


Several years on, the forces of globalization are starting to even things out between the U.S. and India, in sophisticated technology work. As more U.S. tech companies poured in, they soaked up the pool of high-end engineers qualified to work at global companies, belying the notion of an unlimited supply of top Indian engineering talent. 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.

The result is increasing competition for the most skilled Indian computer engineers and a narrowing U.S.-India gap in their compensation. India's software-and-service association 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.

Rafiq Dossani, a scholar at Stanford University's Asia-Pacific Research Center who recently studied the Indian market, found that while most Indian technology workers' wages remain low -- an average $5,000 a year 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," he says.

That means that for a large swath of Silicon Valley -- start-ups and midsize companies that do sophisticated tech work -- India is no longer the premier outsourcing destination. While such companies make up just a fraction of India's outsourcing work, they had been an early catalyst for the growth of India's information-technology business and helped the country attract other outsourcing clients.

So, the market forces work quickly.  I was never overly concerned about outsourcing to India because I expected this sort of normalization to occur.  In my personal experience, start-ups haven't gained real advantage from outsourcing unless they could identify a team with a specific talent, had a pre-existing relationship with a team that gave them some loyalty, or managed to find a team in a market that was not growing quickly.  For example, one company I work with has an outsourced development team in Russia that has very specific technology skills.  This team is loyal to the US entrepreneur and probably has few options for other jobs.  So, the market for their talents is more constrained.

Everyone rushed to India, and competition for talent became fierce.  Also, turnover in Indian outsourcing firms can be very high.  An investment in training can be wasted as the people will switch jobs for a large increase in salary.

Bottom line: Don't blindly outsource.  Instead, develop a relationship with a unique team that will stick with you and are not as likely to be poached by others.  Make them part of your team.  And, don't be surprised if their wages have to go up faster than their US counterparts.  Also, expect to spend some significant time and travel in managing this remote relationship to ensure you continue to get value from your up-front commitment.



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