A New Tide in Offshore Outsourcing

Here's a startup's story that puts the exodus of U.S. programming jobs in a different light. Now, India is losing contracts, too

By David E. Gumpert

Any number of academics attempt to minimize the effects of the offshore outsourcing phenomenon by reassuring us that new jobs will take the place of the hundreds of thousands of programming, call-center, and other jobs shipped out to Asian countries. They frequently point to the U.S. at the start of the 1900s, when about half the population worked in farming. Today, only about 5% of the population farms, with all kinds of jobs having replaced farm labor.

It's difficult to imagine what the replacement jobs for today's programmers and call-center operators might be, since none of the theoreticians offer specific examples. I recently received a possible peek into the future, though, in getting to know Ryan Kinzy, who, at first glance, seems to be just another high-tech entrepreneur who has thrown his life savings into an enterprise to sell special software designed to help sales people improve their productivity.


  The future Ryan is creating is a lot different than what the academicians suggest, but the effect could be the same in that the bottom line may well be more jobs as a result of outsourcing high-tech jobs. For now, it is a future in which labor is fungible and national borders nearly meaningless. It is a scenario that may offend lots of Americans who have lost jobs to India, Russia, and the Philippines, but may also provide a ray of hope from the outsourcing phenomenon. So hear me out.

Ryan launched his company, K3 group, in Austin, Tex. 18 months ago using savings accrued from the good times in high-tech. One important lesson he had learned working in a large high-tech company immediately preceding his own startup was that the benefits of outsourcing of computer programming jobs, as currently practiced by large corporations, are often exaggerated.

"There were too many headaches in dealing with India," he says, recalling his experience overseeing such work. "We often got spaghetti code that was functional, but couldn't grow. We had no idea if delivery dates would be hit because they would freely give promises, but not results. The time difference was very difficult. The explanation, 'They program while you sleep' doesn't hold water. Too often, a problem would arise and they would respond the next day with, 'Well, we weren't sure what you wanted to do' -- and a whole day was lost, time and again. Before long we were four months behind schedule. It was also very difficult to remotely manage a project unless you had a very strong infrastructure over there of U.S.-style managers. Finally, the rising costs over there make it tougher to justify."


  You might think that when Ryan launched his own company, he would have relied on U.S. labor. And that is what he did, at first. He and two other Americans developed the initial product themselves over the first year. He brought in a fourth employee, a sales person, last October. But while Ryan may have accrued skepticism about outsourcing overseas, there was never an ideological opposition to the proposition on his part. In fact, he kept thinking about how neat it could be -- and how much money it could save his cash-strapped startup -- if he could overcome the problems he had experienced in dealing with India.

This past fall, when it was time to improve and expand K3's product offerings, an associate came up with an alternative to India: outsource to South America. The more Ryan investigated, the more he liked what he saw, and in December he took the plunge, sending work for up to five programmers to young developers in Colombia. Here is how the Colombian option compares to the Indian one:

Cost. No contest here. The cost for a managed developer in India was $3,200 per month, vs. $1,000 a month in Colombia. (A managed developer is overseen by an onsite manager monitoring progress and quality, so the cost includes part of the manager's salary.) The difference in costs is so vast that it actually allows K3 group to make money in an area not known for profits, says Ryan. "Typically, with enterprise-application software, consulting for customer specific needs just breaks even. The benefit with having a low-cost development outsourcing partner is that we can make money with consulting."

Quality. Ryan also expects that the days of spaghetti code are over. "You have to get the developers fairly young so they haven't learned bad habits," he says. This means grabbing them a couple years out of school. After a few years working for a company like K3, he says, these developers are typically grabbed by banks and other major companies, but K3 has obtained useful production from them.

Real-time communications. Colombia is essentially in Austin's time zone, "which is very very good," says Ryan. In contrast to dealing with Indian programmers, "We now find out about issues before they become problems." Moreover, Ryan and his colleagues speak with the developers in Colombia using VOIP (voice over Internet protocol). This means their conversations and conferences are free. "This keeps the costs way down," says Ryan.

Flexibility. Because K3 doesn't know for sure how its business will go this year, it can't be certain how much programming it will require from its Colombian team. But the Colombians are eager enough for work that K3 group can use anywhere from one to five programmers at any time, based on its needs at the moment.

The reason K3's approach is so intriguing is that a startup has a different mission in life from that of many large corporations -- to grow rather than to cut costs. To the extent that K3 keeps its costs down, and attracts new customers, it expands, which inevitably creates new jobs. The exact nature of the new jobs isn't entirely clear, especially since, in small companies, many people handle multiple tasks. But one thing we do know from a number of past studies is that young, fast-growing companies create many more jobs than Fortune 500 outfits.

Sure, some of the new jobs will be in Colombia, or wherever K3 group moves next in its search for low-cost programming labor. That's the beauty of virtual operations and borderless commerce. But some of the new jobs will inevitably be in the U.S.

Moreover, the K3 model has stimulated Ryan's creativity. He is now thinking of establishing his own outsourcing business -- perhaps in a tropical country, near a beach.

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.