Outsourcing to India: Top five Mistakes
1. Outsourcing will reduce cost of my product release
At some point or another in the life of a startup, the question gets asked: why dont you outsource your development to India (or China)? And ofcourse everyone on the board talks about how this would save money and reduce the burn rate.
These days my advice to most companies is don’t do it. For most companies the length of the development cycle more than doubles when they outsource, because of the communication overhead and the distance eliminating hallway conversations and face to face interaction. So even if you reduce your engineering burn to 1/3 (which is roughly what it works out to be), the total cost of the product is increase in cycle time * burn = only 2/3rd of the original cost.
In addition it also slows you down, which coupled with the fact that you are spending some money on other functions also, may cause the total cost over a product cycle to achieve the same results be higher than without outsourcing.
2. We will do joint projects
One of the most common pitfalls is people say lets get a few people at a outsourcing vendor to be part of this project. This ican be a fatal mistake. Defining the boundary between the team in India and US is a very key part of ensuring success. The boundary should be drawn to minimize communication and dependepency: crossing the 12 hour time difference introduces inefficiencies. The only cases where it seems to work is where the Project Manager is really good and extremely detail oriented.
3. Microsoft, IBM are moving thousands of jobs, it should work for my company also
The dynamics of outsourcing are changing rapidly. I heard recently there was a rally in Bangalore to protest against jobs moving to China from Bangalore. The reality is that costs in India have risen substantially (as happened in Israel a decade ago). Real-estate today costs more in Bangalore than Silicon Valley, so does electricity. Good people cost about 60,000 USD. — which is not much different than North Carolina.
For companies like Microsoft and IBM it makes a lot of sense as their cost of employee in the US is about 200,000 – 300,000 USD per year, because there is usally a high overhead in addition to salaries in big companies.
But for a startup, where the overhead is minimal the equation has changed dramatically over the last few years.
4. It is just an engineering thing
There are companies with 50-100 people in India, where the CEO has never been to India. Even if these people are employees of some outsourcer, this simply boggles my mind. If you are going to outsource especially in software, these people are part of your future. They need to see the executive team often and require communication about the company as much as the folks in the US. If you are not prepared to travel as a CEO don’t outsource.
5. Let’s try it for six months
Outsourcing is a long term investment. If you go in with a six month philosophy it will become a self-fulfilling failure. It is the wrong thing to do, when you are out of cash to extend your runway. It is a long term thing, which requires investment of time and energy to succeed.
Add comment December 13th, 2006
