By Bruce Hadley, SoftwareCEO
Bijal Mehta, founder and CEO of developer iCode in Chantilly, Va., ardently supports the notion that software companies should move part of their operations to India. OK, we know, offshore development is getting a lot of media exposure these days—but there are a few twists in this story:
- Mehta himself resisted the move for several years, because he didn't want to take jobs out of the U.S.
- Although he was born in India, Mehta's been in the U.S. since he was 15, and he wrestled with the same cultural issues that any U.S.-based entrepreneur will when setting up a foreign office.
- Mehta is not trying to sell, promote, or hustle anything in regards to India: He's not an outsourcer, and iCode has no excess capacity he wants to offload to other developers.
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iCode was founded in 1994. At that time, Mehta says, the company planned to be an entirely-U.S. company. "We saw lots of press about engineers being brought here from India, but we didn't like the idea of being reliant on U.S. immigration policies," he says.
"When the Internet happened, though, that changed everything. We realized that these talented people in India didn't need to be brought here; they could do the work from India."
In 1996, iCode opened an office in Bangalore, India, with 12 people—all developers. An iCode co-founder, who is a U.S. citizen and a native Indian, moved there to manage the office.
"At that time, we were six people in the U.S.," Mehta says. "The amount of work we needed to complete required a lot of people, but we were not funded. Over the next four years we generated $30 million in revenue with no outside funding—that's the power of India."
In other words, iCode's business model required low-cost development, and the office in India made that possible. Now that the business model is proven, investors are interested. In fact, iCode received an A-series round in 2002 of $3.9mm from Updata Venture Partners.
In addition to cash, iCode's accolades have piled up:
- The company's Everest software was a finalist for an SIIA Codie award this year.
- iCode's software received a five-star rating from The CPA Software News, and also won awards at Gartner's Retail Vision and System Builder Summit events.
- Microsoft gave iCode its "Small Business Solution of the Year" award in 2001.
None of this would have been possible, Mehta says, without the office in India. The Everest software, with a selling price around $1,500, represents 600 man-years of development, Mehta says—an insurmountable development task for a small, resource-poor ISV.
Nowadays, iCode has 250 employees in India, and the burn rate for that entire crew is just $200,000 per month. Plus, look at the company's other operating metrics: Mehta says iCode spends 7 to 8 percent of revenues on R&D—an absurdly small ratio for the U.S., where software companies typically spend 25 percent.
With the venture funding in place, Mehta says growth is now the focus, and that's why marketing and sales each consume about 25 percent of revenues—pretty typical for an aggressive growth plan. Support and implementation costs are running about 20 percent of revenues, and admin eats up another 15 percent; that leaves, in very rough numbers, about 8 percent for profit.
And, prior to the VC infusion of cash last year, iCode has always been profitable. "Last year we invested money to build a brand-new channel," Mehta says. "But for our revenues to double, we only need a 20 percent incremental increase in expenses. Revenues are now $10 million, and our run rate on a quarterly basis is $14 million. We expect 100 percent growth for the next two years."
Let's be clear: We're not talking about outsourcing here; like many entrepreneurs, Mehta wanted maximum control, and figured the best way to retain that was through setting up his own office.
"There are a lot of small services organization that you could use to get your feet wet, then see how it goes, and maybe acquire them," he says. "My vision is to have your own setup there. The highest amount of control you can have is through your own employees."
Mehta believes that iCode is a model of the offshore paradigm. In other words, it will work—may even be necessary—for all small ISVs for the same reasons that it worked for iCode:
Offshore attraction #1: You'll cut your development costs. "What would normally have required over $60 million to develop in the U.S., we were able to develop for one-quarter of that," Mehta says. "I really believe that we are the lowest expense 310-person product-based-software company in the world."
Offshore attraction #2: You can compete effectively with much larger players. Because of the reduced costs, iCode now has a "mini-ERP" product that easily matches up with offerings from much larger software companies, Mehta says.
Offshore attraction #3: You'll become more attractive to investors. "Most VCs readily embrace the offshore model," Mehta says. "Soon, I expect it to be a prerequisite to software company funding."
Offshore attraction #4: You can expand your operating hours. Thanks to the office in India, where the time is nine to 12 hours ahead of the U.S., iCode now runs multiple shifts and can respond to customer requests pretty much around the clock.
Offshore attraction #5: You will find international partners easier to come by. "Our channel partners from Australia, the Far East, Africa, and Europe readily get certified and trained in Bangalore," Mehta says. "Out of Bangalore, India, we have created over 250 customers in 30 countries."
Offshore attraction #6: Your company and your product will become more internationally adept. Thanks to the office in India, iCode is a more diverse and "global thinking" company, Mehta says. For example, the software is naturally more internationalized because of the outside-U.S. perspective and the developer's proximity to Asia and the Middle East.
Offshore attraction #7: You can use the offshore connection for more than coding. "Our vision is to gain an unprecedented competitive advantage by being the first software product company to maximize the India cost advantage for every major area of the business, not just R&D," Mehta says.
We're all familiar with the disparity in annual salaries for programmers: $10,000 in India versus $66,100 in the U.S. It should be obvious—but it's far less publicized—that you can save just as much on other positions: The average for an IT manager in India is $8,500, while his counterpart in the U.S. makes $55,000; an accountant makes $5,000 in India versus $41,000 in the U.S.; and an Indian with a financial operations title earns $5,500, compared to $37,625 in the U.S.
"Most other companies take advantage of India only after gaining critical mass in headcount in developed nations, but 80 percent of iCode's global workforce is in India. In the future, via acquisitions, we intend to acquire other small and innovative software product companies that are unable to leverage India to its maximum potential, and extend this advantage, this ratio, to them."
OK, let's say you're sold, or nearly so; how do you do it? Here are the steps that Mehta suggests, based on his own experience setting up India operations for iCode:
Offshore step #1: Come to terms with the model. "There's a fundamental shift in mindset," Mehta says. "You need to become comfortable with the whole notion that U.S. jobs are going outside." Any discomfort is based on short-term thinking, Mehta says, and he offers eight longer-term justifications for going offshore:
a) Offshore development allows you to bring greater benefits to your customers—namely, competitively-price products.
b) With an offshore presence, you don't have to bet your business on U.S. immigration rules and policies—an increased concern in the global anti-terrorist climate.
c) Offshore workers are simply a natural extension of capitalism at work; if you have doubts, look to the manufacturing industries and their reliance on cheap labor over the past 40 years.
d) When it works, you are creating jobs, not eliminating them. "Without our office in India, we would not have been able to hire 60 people in the U.S., because we would have gone bankrupt in the dot com years," Mehta says. "We actually created jobs instead of laying off the six people we had. We had a DOS-based product, and to port it to Windows we knew we needed 15 developers, and there was no way we could afford to hire them in the U.S."
e) Offshore works for companies big and small. "It is not only for the large multi-national companies," Mehta says. "It's very much do-able even for a small company."
f) It can buy you longevity. "It's very, very hard for the large companies to put us out of business now, because we have a cost advantage," Mehta says. "Maybe down the road we will acquire companies who have followed this model or can take advantage of ours."
g) It can get you back in the software business. Most small software companies, especially those with high-end products, have had to rely heavily on the sale of low-margin services in recent years, partly because corporate IT buyers aren't buying, and partly because bigger ISVs increasingly dominate their markets. With cost-competitive products, you may be able to avoid this fate. At iCode , for example, 85 percent of revenues come from the sale of software licenses.
h) It can bring otherwise impossible products to market. "Had we not done this, our Everest product never would have seen the light of day," Mehta says. "My purpose here, in talking to you about this, is largely because I've asked myself, 'How many innovations will remain buried without an offshore assist?'"
Step #2: Choose a country. India isn't the only choice for your offshore operation, of course; last week we told you about San Diego, Calif.-based Raintree Systems that has set up a development office in Estonia. (See "Growth without debt or dilution: Advice and amazing anecdotes from an ISV that's done it right.")
Obviously, however, Mehta likes India and promotes that country as the first logical choice for software companies. "There's a very large talent pool," Mehta says, "and it's more than just software engineers. You'll find experts in QA, documentation, marketing, accounting, network management, Web site development, international sales, and so on.
"Not everyone realizes that India is the second-largest English-speaking nation in the world, after the U.S., and India's democratic values match those here: There are no dictators or military rulers, and there is true journalistic freedom." Interesting fact: In the last 1,000 years, India has never invaded another country.
Step #3: See it for yourself. Most people in the U.S., Mehta believes, have a fairly shallow view of India. "Everyone I run into thinks India, Pakistan, Bangladesh, it's all the same thing," he says. "There's a tremendous knowledge gap. For example, India has the equivalent of New York's Broadway, and of Hollywood—all of that is there, but no here sees it.
"It's imperative that you travel there; it so unlike anyplace else. It's incredibly varied; you'll see how modern it can be, and eight feet away how poor it can be. You can't do India for the short term; it has to be a long-term strategy. You need to understand India's people, its roots, its food, its culture.
"For example, there are huge differences between north and south India: the food, the color of people's skin. You may even find that you love one region and not the other. If you're not comfortable traveling to a Third World country, then you shouldn't go—but the only way to find out is to go there at least once. I know a lot of people who say their travel to India has made them much more spiritual—if you're going to know it, you must embrace the possibilities."
At the same time, you should expect your Indian employees to know a lot more about the U.S. and its culture than your U.S.-based employees know about India, Mehta says.
Step #4: Pick a city. You'll need communications and services infrastructure for an Indian office, and for that reason Mehta suggests you're probably best off in one of the major cities: Ahmadabad, Bangalore, Bombay, Chennai, Hyderabad, Mumbai, New Delhi, or Pune.
For engineering depth, Mehta recommends Bombay and Bangalore; for affordability, he likes Pune, Ahmadabad, and Hyderabad. "Costs are about the same as the U.S.," he says. "Rents are roughly equivalent, though Bombay is higher than New York City. And in most places you have to pay 12 months upfront, and then pay the monthly rent—they call it a 12-month deposit. You do need to budget for that."
India's school system is geographically diverse, and will supply the necessary talent regardless of where you locate. "The premier engineering school is the Indian Institute of Technology," Mehta says. "The cream of the cream go there. On the business side, they go to the Indian Institute of Management; it's the equivalent of Harvard. The second tier is regional engineering colleges, and every one of the 28 states in India has them; they're all pretty much equivalent."
One terrific resource for locating in India is the National Association of Software and Service Companies (NASSCOM), an India-based organization dedicated to the creation and maintenance of a healthy IT industry. NASSCOM's Web site has an entire section devoted to doing business in India, along with links to resources, market intelligence, publications, and events.
Step #5: Set up your communications infrastructure. "I think it's a requirement that you have a point-to-point link between the U.S. and India," Mehta says. "Whatever you can do to bridge the gap is hugely important. One quote I've heard at iCode , and I like, is that as far as we're concerned, India is Indiana. The point is, from a working standpoint, it's just another state."
On your communications shopping list, you should include or at least consider video conferencing and IP phones, Mehta suggests. A good bet to find the most wired locations: Software Technology Parks of India (STPI), government-subsidized IT office centers spread throughout the country. At STPI, you'll find top-notch communications facilities, good access, and reliable power. iCode subleased its Indian office space at the STPI in Bangalore from another software company.
Step #6: Set up your administrative infrastructure. Once you decide to locate in India, you'll need local help with accounting, HR, and legal issues. "There's so much help available," Mehta says. Ernst & Young has offices everywhere, Merrill Lynch is all over the place—all the major firms have their counterparts in India.
"We found our accountant at STPI, and the accountant introduced us to our lawyer. We hired an HR person through an ad, and that HR person got us into all the right papers to recruit people.
"You don't have to scramble. Once you've made the decision that you want to do this, you will find the way. It was much harder in India 15 years ago—but now, whatever challenge you face, someone else has already faced it before."
Step #7: Find a resident manager for the offshore facility. "You'll need a trusted leader or executive or partner who fits the existing culture and has the ability to start a new venture overseas," Mehta says. "And, he or she must be willing to move to India for the long haul."
In iCode's case, that person is Sanjay Shah, a company co-founder who is now head of R&D and the managing director of the Bangalore facility. Shah was educated in the U.S., but was eager to return to India to live.
Even if you don't have such a ready-made candidate on your staff now, it isn't too difficult to find them, Mehta says. "Many Indian execs want to go back, and some—a smaller number, no doubt—may be willing to relocate to India. People who have been to India know that you can live like a king over there on a U.S. salary, complete with chauffer, chef, housekeeper, babysitters, helpers, and so on.
"But you have got to have someone who wants to do it. There are lots of Indian execs who have come to the U.S., built expertise and maybe their fortunes, and now want to go back—maybe they want to raise their kids there. Those people who understand both cultures are in extreme demand."
In fact, recruitment events sponsored by The IndUS Entrepreneurs and Silicon India have become fever-pitch matchmaking affairs for U.S. software companies eager to establish a presence in India. "Our HR manager went to one," Mehta says. "It was a sold-out event. She was there because we ourselves are looking to fill a head of tech support position over there."
Step #8: Tune up the rest of your team. This comes in four parts:
First, you need to get everyone on the same page regarding offshore workers. "Even when the CEO gets it, it takes effort to have other people in your company understand it," Mehta says. "It's too big to ignore, but you can't just expect people to say, 'OK, let's do it.' The whole company has to come to terms with it.
"When we hire someone new, the first thing we look at is whether the job can be done in India; we demand that our managers provide a justification for not doing it there. The face-to-face jobs, for example. customer implementation—those are the kind of jobs we try to keep here in the U.S.
"When we're talking about hiring an Indian employee to work for U.S. manager, I like to tell our managers, 'You can't touch the person—but I don't' think laws are too friendly with that anyway.'
Second, you'll need to make sure middle and senior managers are willing to travel back and forth between India and the U.S. at least once a year. "It's a big eye-opener," Mehta says.
"Our intention is to have someone from senior management always there. Ideally you'll have a senior exec whom you can hire from there, or move there; you have to have an anchor there." About 10 members of iCode's U.S. staff have traveled to India and most will go back yearly for tours of duty lasting from two to four weeks.
In addition, 15 percent of the people from India have come to the U.S. for visits of one to three months. "That really helps build relationships, understanding, and communication links," Mehta says.
Third, hire people who will adapt to the offshore model easily and nurture its expansion. "Management and employees at every level should include people with a high 'cultural diversity quotient,'" Mehta says.
"Are they well-traveled? What are their thoughts on the global economy? Have they been to developing nations? What is their exposure to multi-cultural environments? We have found that the people who are easiest to fit in and adapt are those who have diverse exposure of some kind: maybe they are married to a foreigner, maybe they have traveled extensively."
Fourth, you'll probably want to extend your cultural awareness training to behavioral topics. "Americans are not as tactful as Indians," Mehta says. "An American manager of an Indian employee may need to tone it down, and encourage employees to speak their mind.
"It requires finesse; people open up to you with time. The biggest feedback I get about people from India is that they are very nice; you will not find rude people there. Indians do not like cursing, especially in front of women. When I took my wife to a comedy club in L.A., she was appalled."
That doesn't mean, however, that all Indians are introverts. "You don't get exposure to the extroverted sales types, because the H1B program didn't allow that," Mehta says. "What you see here in the U.S. are the Indian engineers, who generally are introverted, just as American engineers are: Whatever your culture is, don't expect people to just 'get it'—it will require writing a value statement and communicating it clearly."
Step #9: Follow other leaders and their best practices. Among the Indian software and services companies that Mehta picks as worthy of emulation: TCS, a $1-billion division of Tata Sons, the holding company of the $10.4 billion Tata Group, India's best-known business conglomerate; Infosys, a custom software developer and e-commerce consultant with revenues of $754 million; and Satyam Computer Services, a $459-million IT services firm with operations in 45 countries.
In addition, Mehta suggests you keep your eyes on the hundreds of multi-national software companies that have established a strong presence in India, including Adobe, IBM, Microsoft, Novell, Oracle, and SAP.
One of the best ways to keep up on the activities of these companies, as well as smaller players in the India technology scene, are through publications such as Silicon India Magazine and India's leading newspapers, the Times of India and the Economic Times; all three are available online.
If you'd like a little more background reading, Time magazine published a good story in October 2003 about the movement of jobs to India: "Where the Good Jobs Are Going." Several software and high-tech execs and industry analysts are quoted, not all of them happy about this trend—but the conclusion is pretty consistent: For software companies, a "level playing field" now requires that you have some team members who are outside the U.S.