High-tech start-ups feel push to outsource

By Beth Healy, Globe Staff  |  September 23, 2004

Venture capitalists have a pressing new question for high-tech entrepreneurs who come looking for money: What's your India plan?

While large American companies have drawn the most attention for shifting jobs to cheaper overseas markets, the practice has quietly taken hold among start-ups as well. It's a trend that financiers of young technology companies say is inevitable. But they also admit it's controversial, and likely to rock a sector that Boston relies on for jobs and a vibrant economy.

''It's the invisible hand," said Ramanan Raghavendran, a managing director of TH Lee Putnam Ventures, a $1.1 billion dollar venture fund, referring to the corporate world's inexorable search for low-cost labor. But, he acknowledged, ''That's not a compelling answer for the 35-year-old software engineer who's out of a job."

Speaking to a group of venture capitalists and business executives at a Harvard Club dinner on Tuesday evening, Raghavendran said that Boston-based TH Lee is urging the companies it invests in to ''build offshoring into the business plan from day one." If management doesn't ''get it," Raghavendran said, ''venture firms need to drive the thinking" about hiring offshore.

Increasingly, young companies are getting it. Many say they have no choice, if they want to be competitive in selling software, telecommunications equipment, and services. They can get an Indian employee for $21,000 in Bangalore or Hyderabad who would cost three or four times as much in Cambridge, Waltham or Silicon Valley. And the foreign workers are highly productive, people who manage them say.

IMlogic Inc., a three-year-old instant-messaging company in Waltham, opened a research-and-development office in Pune, India, in April. One-third of the company's 45 engineers are there.

Milan Shah, vice president of engineering at IMlogic, said the venture firms that invested $34 million in the company have encouraged IMlogic to set up shop in India, in order to grow quickly without spending the sums of money start-ups routinely did in the bubble years. ''This allows us to control the expenses," Shah said, ''without going through the obvious pain of having to hire, fire, and make team changes internally."

It's been common on the West Coast for more than a year for young companies to hire firms in India to do software code-writing, testing, or customer support. But on the East Coast, venture capitalists and start-up executives are not shouting the new buzzword, ''offshoring," from the rooftops. Many are secretive about the subject, especially in the current political climate; Democratic presidential candidate John F. Kerry has blamed the slow economic recovery, in part, on the government's failure to keep US companies from sending jobs abroad.

Mark Zandi, chief economist at Economy.com, a West Chester, Pa., research firm, agrees that new hiring is slower than expected because of offshore activity. He said work will return to the nation over time, as wages rise in developing countries, and as foreign companies look to hire skilled American workers. But, Zandi said, ''Right now and for the foreseeable future, we're probably losing more jobs than we're gaining in this process of globalization."

According to the US Department of Commerce, American companies paid for $77.4 billion in outsourced services from foreign companies last year, including those that staff call centers and do data entry, up from $8 billion in 2002. Forrester Research in Cambridge predicts that 3.4 million US jobs, and $136 billion in wages, could be moved offshore by 2015.

Venture capitalists are increasingly part of that story. Silicon Valley Bank, which works with VCs and start-ups, just opened a Bangalore office. Oak Investment Partners, a Westport, Conn., venture firm, has a partner in India, part of whose job is to help portfolio companies set up shop there. And giant businesses are being built to provide workers for small and large companies that want to have a presence in India. Symphony Services Corp., a Waltham company in the TH Lee Putnam portfolio, has 100 employees in the United States and 1,300 in India. It plans to hire another 500 by the end of 2004. Symphony gave its employees 12 percent raises this year, chief executive Gordon Brooks said. Even if that continues for a decade, Brooks said, it will be less expensive to hire people in Bangalore than in the states.

Like it or not, Brooks said, there's no bucking the offshore economics. ''It's math," he said.

At Commendo Software Inc. in Fremont, Calif., chief executive Reynaldo Gil was en route to make a pitch to venture capitalists yesterday. He has a half-dozen employees at his start-up firm, and he pays several outside people, including a few in India, to help get his mobile-data product off the ground. He thinks his low-cost approach to developing the software will help attract the $3 million to $5 million first round of venture funds he's looking for.

''We've been using outsourcing almost from the outset," Gil said. ''Capital is very expensive, and investors want to minimize their risk. As an entrepreneur, you have to bring your product to the market in the cost-effective manner."

Eventually, Gil said, he'll be able to hire more people locally, by being careful with money now. As for the near term, he said, ''People focus too much on lost jobs."

Venture capitalists and other proponents of the offshore trend also downplay concerns about the loss of jobs, insisting that the work being sent to India -- and increasingly to China, Canada, Ireland, Eastern Europe, and the Philippines -- is low-level. Americans will get better jobs, they say, if companies are able to save money on the ''grunt work."

At IMlogic, Shah said, ''There is wall painting and then the artists. The wall painting might be outsourced to India."

Kenneth P. Morse, senior lecturer at the MIT's Sloan School of Management and managing director of the school's Entrepreneurship Center, said, ''I think this means less software drudgery and more really cool software jobs."

However, the so-called drudgery, such as writing code and testing software, were jobs that paid good money just a few years ago to college graduates and others launching high-tech careers.

Tom Cole, a general partner at Trinity Ventures in Menlo Park, Calif., said there's no question that good jobs will be lost. ''It's very wrong for Americans to assume that the best jobs are here, and all the grubby jobs can be done by the rest of the world," he said. ''There are a lot of highly educated people all over the world who can do these jobs. I think we have to be OK with that."

Beth Healy can be reached at bhealy@globe.com.