Recently there was a story in the press about a Silicon Valley software company pulling the plug on its Indian operation. They decided to close their entire development operation and bring it back to the U.S. Some others have closed up shop quietly.

Nowadays, I am being asked this question with some regularity—“Salaries are raising fast in India; does India still make sense as the outsourcing destination?”

Current Indian salaries for developers are in the range of US$15K to $20K. Silicon Valley salaries for similar skills are in the range of $60K to $90K. When you add other costs - additional management, travel, productivity difference, communication, duplication of equipment and so on, cost in India is still less than the U.S. cost.

Projecting into the future, average salary increases in India are in the range of 15% annually. If you assume 8% salary increases in Silicon Valley, over the next 5 years, India will continue to have lower salaries.

Instead of salaries, fully burdened cost is a better metric. If you were outsourcing, vendors would charge you in the range of $40K to $50K per developer; if you were to add $10K for additional costs, your fully burdened cost will be in the range of $60K vs a range of $100 to $120K full burdened cost in the Valley.

In the case of one company who decided to bring back their development, their stated reason was high cost; turns out they had a staff of 20 to 25 developers in India and set up their own subsidiary. Subsidiaries require significant overheads—administrative staff - General Manager/Managing Director, HR Manager, Finance Manager, Office Staff, IT Staff and possibly unused office space to accommodate growth. They may have been better off outsourcing to a vendor who could have allocated overhead costs over a larger base.  If their operating structure was set up right from the beginning, cost may not have become an issue.

India continues to be the major player; but several companies have chosen to locate or expand elsewhere, for reasons specific to their situation. Is India right for you? First and foremost, examine your ability to attract and retain talent. Competition for talent is severe. This is true whether you set up your own operation or work with an outsourcing vendor. If your brand is well known vs you are an up coming organization with brand identity still being established, it makes a big difference.

Whether you consider India or any other country for offshoring, beyond relative costs, consider other factors - market potential, talent pool available, ability to attract and retain staff in your own situation, ability to scale, proven infrastructure, start up time, language skills, and availability of management talent.

Country selection is just one decision you need to make when developing your offshore strategy—others are type of organization offshore (build vs outsource), types of projects, your ramp rates, how you plan to organize, investments and how offshoring strategy supports your overall business strategy. You need to take time to establish a well thought out strategy up front. If you do not do this and the offshoring effort fails usually it’s hard to try again.

About the author:

M. M. “Sath” Sathyanarayan is President of Global Development Consulting, Inc., an advisory firm that that helps you accelerate offshoring success.  Sath has over 25 years experience in the industry; he led the pioneering effort in offshoring at HP/Tandem beginning in early 90s, was Founder/CEO of a startup and is now consultant, author and trainer; his continued thought leadership in offshoring is reflected in the book “Offshore Development and Technical Support: Proven Strategies and Tactics for Success”.  Sath can be reached at sath@OffshoringSuccess.com (408) 865-0474. To download my free report: Global Outsourcing—6 Key Strategies to Achieve Success, click here.