Riya, a very interesting startup that evolved into like.com just moved its development team from India to the US to save money. They don’t seem to be the only one: I heard a similar story from another small startup recently. This is a perfect example of what I was trying to explain in my post “Why globalization does not mean your job will get outsourced to India.” You can’t just look at labor cost differentials: you have to look at total cost differentials.

Munjal Shah, the CEO of Riya points out in his blog that for some programmers, the salary rapidly rose to 55% of US salaries. He writes: “Bangalore wages have just been growing like crazy. To give you an example, there is an employee of ours who took the first 5 years of his career to get from 1% to 10% of his equivalent US counterpart. He then jumped from 10% to 20% of his US counterpart in the next 1 year. During his time with us (less than 2 years) he jumped to 55% of the US wage.

In the next few months we would have had to move him to 75% just to ‘keep him at market.’” Once the salary rises to 75% of US salaries, the overhead cost differences between India and the US would overwhelm the financial viability. Consider the additional overhead of managing two offices, flying between the two centers, dealing with the cultural differences, etc. Munjal writes: “The costs of having two offices, which are twelve time zones apart, is significant. People in both offices frequently had conference calls at 10pm and midnight every night (as a result the office in the US didn’t get started until noon sometimes or people rolled in tired). We were all traveling constantly. Development and communication moved slower due to the distance and teams.”

This problem is actually especially bad for startups, because:

• Lack of scale: Larger firms can compensate for Indian infrastructure problems. Public transportation is unviable? Driving takes too long? The company bus or chauffeured car will ferry you between home and office. Electricity supply is intermittent? The company has enough electricity generation capacity to last days. Startups can’t afford to compensate for these problems as effectively.
• Speed of change & high cost of errors: By definition startups
  
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