Offshore not just for big players

Small firms will join the move to send jobs overseas, and be rewarded with startup capital
By John Challenger
|Canadian HR Reporter|Last Updated: 07/28/2005

Outsourcing work to overseas firms is normally something only big companies do, right? Actually, it is the small business sector that may one day become the largest outsourcer to foreign countries.

Small firms may be left with little choice — it will be a matter of survival, especially for those in the information technology sector where a company’s highest costs can be payroll. The movement towards increased offshore outsourcing can, perhaps, be best seen in Silicon Valley where companies and start-ups of all sizes contain costs through outsourcing. In fact, it would be virtually impossible to start a new IT or software company without offshore outsourcing.

“Companies can go to India and get highly skilled workers with PhDs for the equivalent of $15,000 to $20,000 (US) per year. You can have a team of five to six programmers in India for about the same cost as having one or two in Silicon Valley,” said Venetia Kontogouris of Trident Capital, in Westport, Conn.

One firm in Silicon Valley, Solidcore Systems, calculated the cost of keeping one tech employee in Silicon Valley at $15,000 (US) per month, which includes salary and benefits, hardware, software, taxes and real estate costs. In New Delhi, a worker with the same skills and responsibilities costs the employer $2,500 per month. That represents a savings of $150,000 per year. By sending 10 jobs to India, a start-up can slash $1.5 million from its payroll expenses.

The need for cost containment has increased in recent years as venture capital firms become more frugal with investment dollars. Before the dot-com collapse it was common for new firms to receive millions of dollars in the initial round of venture capital funding. Today, most ventures receive perhaps one-fifth that much for the first year, which severely limits their spending.

Cost savings is not the only factor that makes offshore outsourcing so attractive. Offshoring is extremely valuable in terms of its ability to expedite product development, because it gives North American firms access to a 24-7 workforce.

Companies incorporating offshore outsourcing into their business plans are inevitably going to be more attractive to venture capital firms, because they will see a faster return on their investment. If a company can bring its product to market faster and cheaper through outsourcing, it is naturally going to win out in the competition for limited funding dollars.

More and more investment will be directed to North American firms that outsource services to Asia. Not only that, but the next major area of investment will be in companies that plan to develop and sell products and services to the Asian markets, China and India in particular.

The creation of these information technology jobs in India is forging a new consumer class, one that wants and needs all types of products, from software to kitchen appliances.

It is only going to get easier for companies of all sizes to send business operations overseas. The cost of establishing and maintaining Internet connectivity between North America and Asia used to be very expensive, but has fallen dramatically. As prices drop, more firms will join the ranks of offshore outsourcers.

As more money and jobs migrate overseas, there is increased concern that North American jobs are being permanently destroyed. The trend of increased outsourcing among small businesses is especially troubling since these firms, up until now, have been responsible for 73 per cent of the job creation in the U.S. Statistics Canada’s most recent figures show small businesses create 70 per cent of jobs.

Small businesses could argue that as they are a major creator of jobs and as they too are competing in the global marketplace, outsourcing overseas would also mean a gain in domestic jobs as they out-compete foreign firms on the basis of superior North American product quality, service and price.

However, as certain kinds of jobs dry up here, there is no reason to think that our talented workforce will not deploy its skills in new directions and endeavours. The cost savings and efficiency gains achieved through outsourcing will in fact free up resources that can be used for innovation and to expand other areas of business, thus creating new opportunities and jobs in North America.

For such a workforce shift to be successful, an entirely new approach to education will be required, one which promotes lifelong learning with a strong emphasis on technology.

What’s needed is the development of programs that encourage companies, schools and other government entities to offer skills training and tuition reimbursement to adults throughout their lives. Education needs to embrace the diversity that globalization will bring with it by focusing on international studies, including foreign language and cultures.

In the “new new economy” the biggest winners in the job market will be newcomers to North America, highly educated, with roots in Asia, Africa, the Middle East and Latin America, matching the diversity of the increasingly global marketplace. They will stand out and offer leadership and exceptional skills, such as the ability to speak and write a second, third or even fourth language.

John Challenger is the chief executive officer of outsourcing firm Challenger, Gray & Christmas. He can be reached at (312) 332-5790.

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