Part of BSG’s business plan has been based on an overshoot on the use of offshore development for corporate application development, and backlash to US-based development which we believe is already underway. When the offshoring wave began, the cost savings were largely obvious, but the hidden costs were largely unknown, including the rapid increase in competitiveness and wage inflation in offshore development hotbeds such as India.
Today, the WSJ published an article (subscription required per WSJ terms) on why many Silicon Valley firms are finding offshore development to be a poor choice for many projects. While the growth of offshore development will continue, it also strongly appears that a significant rebound of development investment is heading back on shore for a set of very good reasons.
Below are some interesting quotes from the article, which appear to speak for themselves:
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 …
“The wage inflation rate for engineers in India is four times what it is here” in America, says Intel’s chief executive, Paul Otellini.
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.
Hidden outsourcing costs surfaced for other tech companies as well. To bridge the geographic and time gaps, some have found they need to hire more U.S. managers to handle their Indian teams. Kana Software in Menlo Park has one engineering manager for every 25 to 50 engineers, but it found it needed one for every five to 10 engineers it employed in the Indian city of Chennai. In December 2005, Kana decided to close its Indian operation.