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  • Print publication year: 2005
  • Online publication date: August 2009

2 - Offshore economics and offshore risks

from Part I - The fundamentals

Summary

Three providers bid on the state of New Mexico unemployment system. Two American firms, IBM and TRW bid 12 million and 18 million USD, respectively. The winner, Tata Consultancy Services based in India, came in at less than 6 million USD.

Solidcare Systems, a Security Software Startup in Silicon Valley, has no research and development (R&D) in Silicon Valley. Instead, to stretch its 5.3 million USD in venture capital funding, all of its software engineers are in India earning much lower wages.

Philips, the Dutch electronics giant, faces strong competition from Asian producers. It claims to be saving millions of dollars by moving major parts of its technical and embedded software development to cheaper locations. Its Indian software center now houses 900 employees and is responsible for 20% of Philips' worldwide software content.

There are hundreds of such firms, large and small, all of which trumpet their offshore costs savings. Companies in the wealthy industrialized nations are dazzled by offshore programmers' low wages. Since cost savings are the dominant reason for offshoring, much of this chapter is devoted to dissecting the controversy regarding the actual costs and savings. Then, later in the chapter, we turn to the myriad of risks which companies face when offshoring.

Labor arbitrage: finding the lowest wages

A software development manager is shopping for the lowest-cost labor suppliers and is drawn to the low-wage offshore nations.