The increased cost of offshore development in India

In our weekly partner’s meeting yesterday, we ended up in a discussion about the progression of offshore development in a variety of portfolio companies. In the end, the companies that were doing the best job with development were the ones that had their own operations offshore. While a couple of our companies chose to use consulting partners to begin with due to lower upfront costs and better time to market, we found that over time (the last 2 years) that employee churn is becoming a huge problem in these consulting companies and making us less productive in the long run. For example, one portfolio company had 5 consultants from India trained for 3 months on the product. 6 months later only 2 are left. On the other hand, our companies that have their own people on the ground are better able to manage their teams and motivate offshore employees through competitive compensation and a career path. So while we are increasingly going to make sure we create our own teams in India versus use consultants, we will still not be immune to churn and the competitive nature of the economy.

The great aspect of doing business in India is that you have lots of talent. The problem is that offshore development has become so popular that the cost of doing business has increased since wages have been bid up and since employees have many job options. In the past year, SAP and Oracle and a number of other large companies have opened up offices in India or made larger commitments to developing products offshore. What does that mean for us in the future? While it is not as cost effective to do development in India today versus 2-3 years ago due to supply and demand factors, I still believe that having an offshore strategy is important as our portfolio companies still can do alot more with less. However, in the long run, given the competitiveness and cost increase of doing business in India, I am sure that many companies will increasingly look to other locales with strong talent and less competition like Belarus, Romania, Argentina, Russia, and China. I am already seeing that happen.