Offshoring Is Dead: How to Thrive in the New World Order

Posted by Andy Singleton on Oct 9, 2007 11:54:00 PM

The practice of “offshoring” - hiring people from countries with low wages to replace high-cost Americans – is sputtering to an end. The dollar is at record lows, and offshore economies are booming. The Internet and global economic growth have equalized wages for top software talent. Surprisingly, this has happened because offshore workers are getting richer, rather than Americans getting poorer. The transition has big implications for our economy, and for our business strategies. Low cost cannot be achieved just by selecting the right country to open an office. We have to get smarter about running truly global teams. The business opportunities no longer come from cost cutting, but from a surge in demand worldwide.

WHAT HAPPENED?

For Americans, the golden era of software offshoring lasted from about 1995 to 2005. This was the time right after the fall of the iron curtain when the dollar was strong, and post-socialist and post-communist countries endured low wages. You could hire a well-trained engineer in Russia, Ukraine, or India for about $8 per hour, fully loaded cost, as compared with $50/hour for an equivalent American. That wasn't just a marginal cost advantage. It was a big, big, 6 to 1 advantage that allowed companies to do things that would not have been possible otherwise, and fueled rapid growth in outsourcing (a code word for offshoring).

Things are very different in 2007. My supplier in St. Petersburg, Russia, reported that his labor costs are up 200% in the past two years. Talented Indians, the good guys, cost as much as Americans. When you consider that the turnover in India is much higher, and turnover costs money, Iowa beats India. As India and Russia inflated in the last four years, Ukraine became the low-cost supplier of development talent. Now, top Ukrainian developers have figured out how to charge world rates, which are about triple what they were getting from the body shops two years ago.

So, what happened in these cases? Russia's oil-fueled economic boom has driven up costs. India, once considered a bottomless well of raw talent, has had such success building an outsourcing business (and failure in providing good education to the rural poor), that it created a shortage of engineers. The Chinese economy has been growing so fast that engineers are not available for offshore work. When the pollution cleared out of the skies over Ukraine, it turned out to be a green and pleasant land, with a budding democracy, right next to the land of the rising Euro. Want a real estate hint? Some of my best developers are moving to the Ukraine.

The common thread here is global economic growth. The world economy has reportedly grown faster in the last ten years than in any other decade on record. In the cities of the developing world, cell phone towers, dust, and diesel fumes rise over the greatest building boom the world has ever seen. This creates rising demand for software talent outside the US.

WHAT ARE THE IMPACTS?

During its run, offshoring has reshaped the world economy in big ways. As the effects of offshoring slow, we should look for these trends to slow or reverse:
  • Low inflation. Inflation around the world was suppressed by the fact that goods were getting cheaper because they get made in cheaper places. That's over. Imported goods are better represented by oil, up 200% in recent years, or by developer labor. Inflation is back.
  • High corporate profits, achieved rather easily because lower costs make margins better. American companies can no longer coast on the simplistic strategy of merely moving to a cheaper place.
  • Rapid growth of exporting economies. Indian companies can no longer coast on the simplistic strategy of selling "resources" in countries with higher pay rates.
  • Limited wage growth in America. Watch out for those Indian recruiters. They're hiring here now.
The old organizational model was called “outsourcing” - finding a cheap location and building a staff there to handle some subset of centrally-planned work. It's an inefficient and obsolete model. Outsourcing is not what we do at Assembla. At Assembla, we build unified teams where every team member, regardless of nationality, can step up to handle the most important tasks that need to be done. There is no “out” and “in”. And, we find the best person for the job regardless of location.

Our software industry needs to be smarter now. In the next few years, we will focus on joining the global boom, rather than holding down costs. We will use our global networks to find the best available talent, and mobilize it as quickly as possible, to go after global opportunities.


Developers in the “offshore” world have doubled their incomes in just a few years. That amazing gain has been achieved without equivalent pain in America. There was a period of about 5 years when it seemed crazy for Americans to study software, because their wages were being set offshore at a lower level than they could get in other professions. However, software wages have recovered across the board, and people with entrepreneurial skills to weave global talent into made-in-America innovation have done very well.

We brokered our first online staffing transaction on the Assembla site last week, for which we collected a few (depreciating) dollars in an American bank. The transaction was initiated by an Indian entrepreneur, who had received a job from a bigger Indian company, and subcontracted some work to an individual in Moldova.

Now, if you want to work with smart people trapped in a low-wage economy, you have to go to places like Moldova, the home of the world's only elected communist government. But you won't find many. The total population of Moldova is smaller than a lot of Chinese cities you have never heard of. Elsewhere in the world, freedom is making people richer, fast.

Freedom can work here in America. America has attracted more than it's share of talented people, with fantastic results. Recently, the flow of talent has gone into reverse. Our immigration policy is hostile. Our civil rights record is blemished. Visitors are fingerprinted at the airport. Student visas are difficult to obtain. We may think we are protecting our land and jobs, but instead of sealing the good stuff in, we are increasingly shutting it out. It's time to open up again.

And it's time to work smarter. The global economic boom is grinding down the simple offshoring opportunity – to buy things cheaply. The opportunity that it churns out is more sophisticated – to sell goods and services on a global scale.

Topics: distributed development, software business, staffing

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