An 80% discount on engineering talent might still sound like a great deal—and emerging offshore tech destinations such as Vietnam and Ghana are cheaper still—but much of that advantage disappears once you factor in high offshore attrition rates and lower productivity. Deora estimates that he would have had to hire nine engineers in Bangalore to do the same volume of work that three engineers can do in Fremont. What's more, to ensure quality control, he would have had to either send an experienced U.S. manager to live in India (at an estimated annual cost of $250,000) or travel back and forth constantly, juggling development duties there with fundraising and marketing responsibilities back in the U.S. (At presstime the cheapest roundtrip flight to India from Silicon Valley cost around $2,200.)
There's more than just money at stake in this decision. "If you save money but don't deliver the product, you're missing the mark," says Gerhard Eschelbeck, CTO of Qualys, a Redwood Shores, Calif., company that sells network security products. Worried that far-flung engineers wouldn't understand his needs, Eschelbeck decided to develop Qualys's code in California, where he could keep a closer eye on his staff.
Even in a wired world, physical and cultural distance can impede business communication. Perpetual Entertainment, an online-game developer and operator based in San Francisco, ran into problems when it commissioned a Romanian art house to design 3-D lions for its new multiplayer game, the Roman-themed Gods and Heroes. The Romanians drew realistic lions that players felt were too beautiful to kill, says CEO Joe Keene, 45. Perpetual Entertainment asked for wilder, more threatening lions. Since then, Keene has learned to invest more time and resources to explain visual concepts upfront. That's important anywhere, but it's especially challenging with contractors in countries where the first language is not English. Even after he factors in those costs, however, Perpetual Entertainment still saves 65% by offshoring its character design.
"The people who love outsourcing the most are the people who don't have to deal with it," says one Wall Street IT manager with extensive experience developing software in India, who asked to remain anonymous. Those people include venture capitalists, who have reacted to a post-bubble tech economy by asking startups to do more with less money. As a result, startups are under enormous pressure to cut costs. "Capital-efficient investing is key," says Boston-based venture capitalist Whitney Bower.
Yet offshoring still makes more sense for larger companies than it does for startups. Big companies can take advantage of economies of scale and are better equipped to handle the daunting challenges of managing a global IT supply chain. That's why, now that his company is growing, Deora is taking a second look at sending some of his maintenance and quality-assurance work to India. Had that been his original strategy, he might not have survived to tell the tale.