A tight labor market and rising salaries in India led Gartner earlier this year to suggest that Indian companies might need to evaluate the use of Tier 2 and Tier 3 service providers -- or even those located in other countries -- to supplement their staffs.
So is it really so surprising that a startup called Riya has decided to relocate its development team from India to the U.S. to save money? OK, it's a little surprising.
To date, it's been more common for Indian companies looking to reduce labor costs to look to places like Eastern Europe, Latin America and China. Those establishing operations in the U.S. -- like Wipro, which plans to open at least two software development centers in the States -- tend to cite business and communication benefits other than cost.
But as noted in a blog on CIO.com, Riya's CEO found that, over the past two years, the salary of one of his programmers rose to 55 percent of an equivalent U.S. programmer's salary. Not only that, but Riya would need to further boost his pay to keep him from leaving the company.
When Indian salaries reach 75 percent of those paid to U.S. employees -- the point at which Riya and other companies are finding themselves -- the labor arbitrage is no longer enough to justify performing work in India. Added management and travel costs cancel out the cost difference.
Riya's CEO says that he could reduce his costs in India by hiring workers in more rural areas, but he doesn't want the costs or hassles of maintaining multiple offices. Unlike multi-national service providers like IBM and Unisys, he also hires only experienced workers in order to minimize training costs.
The author of the CIO.com blog, BeyondCore CEO Arijit Sengupta, says that startups like Riya have an especially tough time with long-distance software development. Unlike their larger counterparts, they generally don't have the financial reserves to compensate for infrastructure issues or to respond to the cost of errors.
Indeed, as I noted in an earlier blog that cited research from Columbia University's Amar Bhide, tech startups are notably reluctant to offshore strategic tasks like product development.