Companies are increasingly sending IT work to hubs outside India. They're saving money but facing a whole new raft of challenges
by Rachael King
After 10 months of working with software developers in Bangalore, India, Bill Wood was ready to call it quits. The local engineers would start a project, get a few months' experience, and then bolt for greener pastures, says the U.S.-based executive. Attrition rose to such a high level that year that Wood's company had to replace its entire staff, some positions more than once. "It did not work well at all," recalls Wood, vice-president of engineering at Ping Identity, a maker of Internet security software for corporations. Frustrated, Wood began searching for a partner outside India. He scoured 15 companies in 8 different countries, including Russia, Mexico, Argentina, and Vietnam.
That path is being trod by a lot of executives, eager for new sources of low-cost, high-tech talent outside India. Many are fed up with the outsourcing hub of Bangalore, where salaries for info tech staff are growing at 12% to 14% a year, turnover is increasing, and an influx of workers is straining city resources.
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Yet many companies can't resist the lure of cheaper labor. "Ninety percent of all outsourcing deals in the market today have been structured around cost improvement only," says Linda Cohen, vice-president of sourcing research at consulting firm Gartner (IT). By the third year of an outsourcing deal, after all the costs have been squeezed out, companies get antsy to find a new locale with an even lower overhead.
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The move reduces costs by 60% to 75%, Gett figures, letting Optaros offer competitive pricing to customers. "We're going to where the most cost-effective talent is in the world, but it has to be feasible," he says. "It can't be where there are economic, time zone, or language barriers." In fact, Gett needs his application developers to interact directly with customers in the U.S. and Western Europe, so he appreciates that Akela workers speak English and French and are closer to the Optaros Geneva office than workers in India would be.
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Threat to U.S. Workers
And while a technically skilled global labor force is a boon to companies, the picture isn't so rosy for U.S. workers. Instead of competing with just India, now U.S. IT workers will need to go up against workers all over the world. In 2005, about 24% of North American companies used offshore providers to meet some of their software needs, according to Forrester Research (FORR). Over the next five years, spending on offshore IT services is set to increase at a compound annual growth rate of 18%, according to IDC.
The effect in the U.S. is that starting salaries in the engineering field—when adjusted for inflation—have stayed constant or decreased in the past five years or so, says Vivek Wadhwa, executive in residence at Duke University. "It doesn't make much sense to get into programming anymore," says Wadhwa, who worries that a lack of talent in certain industries, such as telecom, along with the outsourcing of research and development will erode U.S. competitiveness (see BusinessWeek.com, 11/7/06, "The Real Problem with Outsourcing"). But U.S. companies say that hiring programmers in India, who might make a fifth of what programmers do in the U.S., allows the companies to survive in a globally competitive economy.
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