Friday, July 13, 2007

Indian outsourcing gets more expensive

I’ve been saying for a while that there is no need to panic over the outsourcing/off-shoring of software development work to India.  As far as I am concerned the pie is big enough, it is expanding, and India is not the right place to do much of this work.  The right place is right next to the business.

Add to that economics.  India may produce a lot of computer science and engineering graduates but less than 10% of them are useful to the industry.  Of those that are there are not enough to satisfy demand, staff turn over is high and wages are rising.

Just before I left for EuroPLoP I saw this story in the FT “Bangalore wages spur reverse offshoring”.  The story even made it to the editorial column too  “Outsourced to the US”.  Basically wages are rising and the price advantage is disappearing.

As I predicted (December 2006, July 2006 and June 2007) India is pricing itself out of some types of work and it is more economic to do the work in the high-wage US or Europe.

Even if India staff are cheaper you have to factor in:

  • Communication and travel costs.

  • Additional processes, procedures, documentation, etc. which you don’t need when the guys are down the hall.

  • Delays in responding.

  • Cost correcting cultural differences, and extra costs in being specific.

It makes sense to offshore some work to India (or China, or Russia) but not all work.  You have to judge these things on a case by case basis. 

Unfortunately one side of this I haven’t accounted for before is management that believe the hype.  If you are attracted by offshoring to India you must go and do your own analysis: count all the costs, assess the risk, look at the time it will take, etc. etc. 

The unfortunate bit is I think some managers are not doing this.  They are jumping on the bandwagon when it doesn’t make sense.

More unfortunate, as far as I can tell there are far too many start-up India outsourcing companies willing to cater for unprepared managers who want to outsource.  I suspect the big, well established, companies want projects that succeed.  They will avoid work from unprepared managers looking to ride the bandwagon.

However, the smaller companies just want work.  They can’t afford the luxury of turning work away so they will accept it from even the most ill prepared companies.  So you get the unprepared working with the worst possible partners.

And that is why, some companies have great offshoring experiences and most have failures.

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