Outsourcing: Beyond Bangalore

Companies are increasingly sending IT work to hubs outside India. They're saving money but facing a whole new raft of challenges

by Rachael King

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After 10 months of working with software developers in Bangalore, India, Bill Wood was ready to call it quits. The local engineers would start a project, get a few months' experience, and then bolt for greener pastures, says the U.S.-based executive. Attrition rose to such a high level that year that Wood's company had to replace its entire staff, some positions more than once. "It did not work well at all," recalls Wood, vice-president of engineering at Ping Identity, a maker of Internet security software for corporations. Frustrated, Wood began searching for a partner outside India. He scoured 15 companies in 8 different countries, including Russia, Mexico, Argentina, and Vietnam.

That path is being trod by a lot of executives, eager for new sources of low-cost, high-tech talent outside India. Many are fed up with the outsourcing hub of Bangalore, where salaries for info tech staff are growing at 12% to 14% a year, turnover is increasing, and an influx of workers is straining city resources. Even Indian outsourcing pioneers Tata Consultancy Services, Wipro Technologies (WIT), and Infosys Technologies (INFY), which have helped foreign companies shift software development and other IT operations to Bangalore, are starting to expand into smaller Indian cities, as well as China (see BusinessWeek.com, 11/14/06, "Patience is a Virtue in China, India IT Learns"). "Overall, in terms of productivity and quality of life, beyond Bangalore is better," says Wipro Chief Information Officer Laxman Badiga. "Bangalore is getting more crowded, and the real infrastructure is getting stretched."

So companies are setting their sights on a slew of emerging hot spots for IT outsourcing. Need a multilingual workforce adept at developing security systems and testing software? Buna ziua, Bucharest. Want low-cost Linux developers? Bienvenidos a Buenos Aires, where many companies adopted open-source software after the devaluation of the peso in 2002 made licenses from abroad prohibitively expensive. Other cities on the list include Moscow and St. Petersburg in Russia and Prague in the Czech Republic, according to consulting firm neoIT. Other hot spots include Mexico City, São Paulo, and Santiago in Latin America; and within Asia, Dalian, China, and Ho Chi Minh City, Vietnam.

The Search for Lower Costs

Make no mistake: India remains an IT outsourcing powerhouse, with $17.7 billion in software and IT services exports in 2005, compared with $3.6 billion for China and $1 billion for Russia, according to trade organizations in each country. And India's outsourcing industry is still growing at a faster pace than that of Russia and other wannabe Bangalores.

Yet many companies can't resist the lure of cheaper labor. "Ninety percent of all outsourcing deals in the market today have been structured around cost improvement only," says Linda Cohen, vice-president of sourcing research at consulting firm Gartner (IT). By the third year of an outsourcing deal, after all the costs have been squeezed out, companies get antsy to find a new locale with an even lower overhead.

But moving IT operations into developing countries like Vietnam or China can also pose big risks, such as insurmountable language and cultural differences, geopolitical instability, and the risk of stolen intellectual property. "You keep following the money, but how often are you going to move people around?" asks Cohen. Even the routine day-to-day management of an offshore team can require significant project management expertise. "If you don't have experience and don't do it well, it can negate savings," says Barry Rubenstein, program manager of application outsourcing and offshore services at IDC.

Mix of Outsourcing Locations

Plenty of providers are ready to help clients overcome those obstacles.