csua.org/u/518 -> sfgate.com/cgi-bin/article.cgi?f=/chronicle/a/2003/11/16/BUGTR32G6L1.DTL
Rather than make offshoring decisions on a project-by-project basis, the decision needs to be a strategic one, said Rock, whose firm has organized 12 conferences this year that connect United States companies with overseas IT firms. Although the savings in sending IT work abroad can be substantial, they are not as straightforward as comparing salaries in India and Silicon Valley. It is true that salaries for software developers in India are a fraction of those paid in Silicon Valley. For example, software developers in Bangalore, the hub of the Indian IT service industry, make an average annual salary of about $12,000, according to a recent report from the Tech Strategy Group, a Redwood City consultancy that advises companies on offshoring. Similar jobs pay about $80,000 in Seattle and Silicon Valley, the report said. Yet salary costs are only about 50 to 60 percent of the total cost of moving work to India. Other costs, such as travel and infrastructure expenses, severance packages for laid-off United States workers and the increased time required to manage multiple development sites, result in total savings that are less than half what many executives expect. Most companies are seeing a 30 to 40 percent cost advantage, by sending work to India, said MR Rangaswami, co-founder of the Sand Hill Group, a San Francisco consultancy. That figure is in line with a recent report by the Gartner Group that pegged the savings at about 40 percent. In the meantime, the salary gap between Bangalore and Silicon Valley is narrowing quickly. Salaries for software developers and other IT service professionals are rising about 20 percent a year in Bangalore, said Rahul Sood, co-founder and managing partner of the Tech Strategy Group. Bangalore is experiencing the kind of job-hopping and salary inflation that took place at Silicon Valleys high-flying tech firms in the late 1990s, said Sood, who earned a computer degree and MBA in India and who travels there monthly. Workers who switch jobs are commanding salary increases as high as 25 percent, he said. Although that rate of increase will slow as work moves to other Indian cities like Hyderabad and Chennai, which also have tens of thousands of skilled IT workers, surging salaries will cancel out more of the cost benefits of offshoring. Given that the financial savings of offshoring, while real, are not always straightforward, the decision to send IT work overseas should be made only after a company has examined a number of key factors regarding its finances, technology, culture and management processes. Otherwise, companies may find themselves with software development offices that have salary expenses equivalent to their United States centers, plus all the expenses associated with maintaining a presence half a world away. Some companies are beginning to get savvier about the process, said BrainStorms Rock.
Other firms are turning to large Indian IT service companies like Wipro and Infosys and, increasingly, to the offshore operations of large United States players such as EDS, IBM, Unisys and Hewlett-Packard. The reason: The money saved by offshoring makes the practice attractive to companies that need to use their IT resources more efficiently. Among software companies, more than 80 percent of those resources are being used to maintain existing applications, according to a report done by Sood and his partner, George Gilbert, former head of technology investment research at Credit Suisse First Boston. Such work includes code testing to prevent bugs in new releases and fixing bugs and security holes in existing versions. However, to compete in a global environment, companies need to divert some of those resources to product innovation. Spending 15 percent of revenue on product development, as the average software company does, is not enough to drive innovation. You cant get it done within those constraints, said Sood, former leader of the North American software consulting group for McKinsey & Co. That reality is driving companies to send their IT work overseas, which in turn frees up money for new product research. Yet, like every other management strategy that becomes the flavor of the month, offshoring software development isnt appropriate for every company. Young companies or small ones whose application development processes arent mature or well-defined may be inviting disaster by shipping such work overseas, where it will receive even less control. Companies without a disciplined development process are not ready to go offshore, said Sood.
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