Monday, December 25, 2006

Are you paying too much for offshore resources?

I was recently in Bangalore and Hyderabad on work as well as vacation and stumbled across something very interesting. While looking through the financials of each of the top 3 offshore providers, Infosys, TCS and Wipro I noticed their incredible margins and revenue growth for '07.

More interesting than their phenomenal revenue growth was their margins. Given all we hear now from offshore teams is that costs are rising and retention is so hard, these companies are showing stronger margins than ever before. Either their billing rates have been going up steadily and/or they are finding ways to reduce or keep their costs steady. Perhaps, they are doing a bit of both.

What is interesting is that there is a large resource pool in the Tier 2 cities or perhaps even the Tier 2 or Tier 3 colleges that is willing to work harder and meet commitments at a much lower cost than what is widely known to most clients. These companies seem to be tapping into this pool quite effectively.

If you are headed down the path of offshoring and have the right connections, you should explore companies that offer resources based out of Tier 2 cities. If you are committed to offshoring, at the end of the day, you will spend tons of time and sleepless nights providing detailed specs, managing offshore projects and spending time and money on QA. Of course, once your team has learnt your product/system and is trained, you will see benefits that will justify all your initial pain. If the pain remains the same, why not maximize your cost savings? This line of reasoning works only if the work entails simple coding typical of business applications and not some complex engineering tasks such as chip design or complex algorithm development.

Bottom line - there is a huge talent pool that is outside the Tier 1 cities in India that is untapped and offers tremendous opportunities to clients and software service providers that will not go unnoticed for long. While I was aware of this in the past, it hit home when I saw it first hand!

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