Misadventures in Indian Outsourcing

This Massachusetts software startup was no neophyte, yet two attempts to save money by going abroad failed. Result: Code made in the U.S.A.

By David E. Gumpert

If you own a small business and are thinking of outsourcing info tech or call-center work to India, read this column before taking another step. Signs are mounting that India's outsourcing industry has become overheated -- and less competitive in important respects -- for American companies seeking the vaunted advantages of lower costs and round-the-clock production schedules. Recently, credit-card giant Capital One (COF ) decided not to renew its call-center contract with giant Indian outsourcer Wipro (WIT ), while Lehman Brothers (LEH ) and Dell (DELL ) also have withdrawn operations from India.

It's in regard to smaller businesses, however, where India's "outsourcing solution" appears to be showing the most signs of serious wear. Husband-and-wife entrepreneurs Arun and Sangita Shastry of Westford, Mass., learned this lesson the hard way when they launched totalETL, a business specializing in sophisticated desktop information-extraction tools for project managers. A decision to outsource very nearly cost them their startup.

GOOD CONNECTIONS.

  One of their initial decisions was to send the bulk of the development work for their company's first product to Bangalore, India. The duo figured such a move would give them a distinct advantage, since Arun, who emigrated to the U.S. in 1993, is originally from Bangalore. In 2001, he went back there to investigate the outsourcing option, since he already had in mind the product idea that's today the basis of totalETL.

Sangita, who was born in the U.S., also is of Indian descent. And because each had spent many years doing software consulting for major U.S. corporations, they were seasoned hands when it came to scoping out projects.

Their first step down the outsourcing path came last September, when they posted a request for proposal (RFP) on several Web sites popular with Indian outsourcing companies. They were seeking a team of around five developers, eventually narrowing the roughly 30 bidders to just 6 finalists. They then evaluated developer profiles, conducted phone interviews, and checked references.

Arun and Sangita were confident they knew what they were getting into. "We were looking for a narrow skill set," says Arun. "We wanted a team of people who had worked together. We were really careful because we wanted a company with which we could develop a long-term technology partnership, since we are planning to develop a suite of products over a period of two to three years. Down the road, we wanted support and call-center services."

THE SUN NEVER SETS.

  By October, the couple had settled on a team of five developers with a midsize Indian outsourcing company of about 70 employees. The Indian developers would each be paid between $2,600 and $3,200 per month. This wasn't the lowest proposed price, but the winning bidder seemed to be the most experienced, and its references checked out well.

Everything appeared to be in place. The idea was that the team in India would do its programming, ship the results to totalETL at the end of its working day, and two American employees in Westford would do the testing, integration, and process management while the Indian team was asleep. Then, as the world turned and the sun rose over Bangalore, the process would reverse. Says Arun: "We gave them a project plan with all the tasks."

Two weeks into the project, says Arun, "We started getting some noise from the lead [software] architect." Arun had wanted this individual to fly to the U.S. and spend as long as two months at totalETL to become more familiar with the intended product. When the estimated cost of that visit came in at $20,000 for two months, Arun decided instead to visit Bangalore, at a cost of about $5,000. Since totalETL is self-funded, the difference was no small consideration.

EXPENSIVE DELAYS.

  "This lead architect was disappointed he couldn't come to the U.S., and it started showing on the project," says Arun, who cites missed deadlines and deviations from project specifications. Within two weeks, the lead architect departed the outsourcing company, and when the outfit couldn't immediately find a replacement, Arun and his wife "pulled the plug."

By the start of November, totalETL's adventures in outsourcing had left it $11,000 poorer, while the project was "back to the beginning," says Arun.

Figuring that this initial experience with outsourcing was just bad luck, the couple once again turned to India -- only this time Arun and Sangita decided to look outside Bangalore. They settled on an outsourcer in the neighboring state of Hyderabad, with an office in the U.S., as well as what's known as a "Capability Maturity Model Rating" of 3 (out of 5), which is considered a solid indication of expertise. Amazingly, two weeks into the project, that lead architect quit, just as his predecessor at the Bangalore shop had done. To Arun, it was "a double whammy."

DUD CODE.

  Not one to give up, Arun decided to assume the role of lead architect when the second outsourcer couldn't immediately find a replacement. During that first month, "We were spending lots of time on the phone and with e-mail" to get the team in India up to speed.

As with the first contractor, warning signs began appearing once the work was due to be cranked out in earnest. Two or three teleconferences were scheduled each week, but only one of the four developers in India ever bothered to attend. Nor was the project manager ever present. More significant, the all-essential code wasn't being produced.

By the middle of January, a bit of code did appear, but Arun says it didn't work according to specifications -- an impression confirmed when he brought in a local consultant to examine the Indian outfit's handiwork. The verdict wasn't good. The U.S. consultant, recalls Arun, "said it wasn't even close." By this time, neither phone calls nor e-mail queries were being answered. Good-bye to company No. 2. "These two firms put us behind between three and four months," says Arun, not to mention costing about $40,000.

A REAL TEAM.

  The story does have a happy ending, though. After those two outsourcing failures, the couple decided to try going American. They posted online ads seeking contract programmers, and received dozens of responses. Eventually, they wound up hiring five developers at rates ranging from $2,500 to $4,000 per month -- not much more than what they had been paying in India. In return for such modest compensation, Arun and Sangita have agreed that the U.S. programmers will share in their company's growth via stock and other benefits.

"Over the last three months, we've made more progress than in the previous six months," says Arun. "This team works like a team. We give them a vision. We let them be very creative. That has helped us a lot."

Now, as the couple tries to raise venture capital backing, Arun and Sangita look back on their experience and see two main problems. First, they feel that India's outsourcing shops are stretched too thin. Observes Arun: "Bangalore is like Silicon Valley in the late 1990s. People take jobs, and they leave when someone offers them $5,000 more."

NOT THE SAME.

  Second, the outsourcing boom has placed smaller U.S. businesses a low priority with the Indian companies, since it's large corporations with big budgets that receive the primary attention. Notes Sangita: "The big corporation will hire 50 people or 60 people, while we were hiring 5."

Arun is saddened that the India he remembers from the early 1990s has changed so dramatically. "When I left, there was employment for life. I liked that about the country," he says. Sangita shares his misgivings. "Most of these [outsourcing] companies," she says, "are now spoiled rotten."

David E. Gumpert is the author of Burn Your Business Plan: What Investors Really Want from Entrepreneurs and How to Really Start Your Own Business. Readers can e-mail him at david@davidgumpert.com

Before it's here, it's on the Bloomberg Terminal. LEARN MORE