Why small business must hire offshore

Will the small business sector--the nation's largest creator of new jobs over the last decade--become the biggest outsourcer to foreign countries? They may be left with little choice, notes John A. Challenger, CEO of the global outplacement firm Challenger, Gray & Christmas, Inc., Chicago.

"It is a matter of survival for these firms, especially those in the information technology sector where the company's highest costs can be payroll," he explains. "One venture capitalist even told our researchers that it would be virtually impossible to start a new IT or software company in Silicon Valley without offshore outsourcing." Small business could lobby to gain an exemption from the proposed Federal legislation seeking to curb American companies from shipping work overseas.

"Small business, defined as those with 500 or fewer employees, could argue that, as they are the No. 1 creator of jobs, and as they too are competing in the global marketplace, an exemption to the proposed law would also gain domestic jobs as they out-compete foreign firms on the basis of superior American-made product quality, service, and price," Challenger suggests.

In fact, Warren Weiss, general partner at Menlo Park, Calif.-based Foundation Capital, relates, "There's no way you can have a Silicon Valley company without outsourcing. You simply cannot make the numbers work."

That sentiment was echoed by Venetia Kontogouris, managing director for Trident Capital, based in Westport, Conn., with offices in Palo Alto, Calif. "It is far too expensive today to start a technology business in Silicon Valley without outsourcing. The economies of salary simply do not make it possible. Companies can go to India and get highly skilled workers with PhDs for the equivalent of $15,000 to $20,000 per year. You can have a team of five to six programmers in India for about the same cost as having one or two in Silicon Valley."

The need for cost containment has increased in recent years as venture capital firms become more frugal with their investment dollars. Before the dot.com collapse, it was common for new companies to receive as much as $15,000,000 in the initial round of venture capital funding. Today, most get $3,000,000 or less for the first year, which means they only can spend about $250,000 per month.

A cost analysis by one Silicon Valley employer, Solidcore Systems, calculated the cost of keeping one tech employee in Silicon Valley at $15,000 per month, which includes salary and benefits, hardware, software, taxes, and real estate costs. In New Delhi, India, a worker with the same skills and responsibilities costs the employer $2,500 per month. By sending 10 jobs to India, a start-up can slash $1,500,000 from its payroll.

Cost savings is not the only factor that makes offshore outsourcing so attractive, according to Kontogouris. "Offshoring is extremely valuable in terms of its ability to expedite product development, particularly in information technology and back-office software production. A company based in Palo Alto, for instance, has access to a 24-7 workforce."

Mark Heesen, president of the National Venture Capital Association, Washington, D.C., maintains that a company incorporating offshore outsourcing into its business plan inevitably is going to be more attractive to a venture capital firm, because it figures to see a faster return on its investment.

"If a company can bring its product to market faster and cheaper through outsourcing, it is naturally going to win out in the competition for limited funding dollars," adds Challenger.

Kontogouris expects that more and more investment will be directed to American firms that outsource services to Asia. Furthermore, she predicts that the next major area of investment will be in companies that plan to develop and sell products and services to the Asian markets--China and India in particular.

"The creation of these information technology jobs in India is forging a new consumer class, one that wants and needs all types of products, from software to kitchen appliances," says Kontogouris. "There are a lot of opportunities. The investment money is likely to flow to the companies that plan to tap these opportunities."

It is only going to get easier for companies of all sizes to send business operations and functions overseas, as the cost structure of establishing and maintaining Internet connectivity between the U.S. and Asia used to be very expensive, but has fallen dramatically.

As prices drop, more companies will join the ranks of offshore outsourcers. One group estimates that the value of business process outsourcing will rise to $24,300,000,000 by 2007, up from $1,300,000,000 in 2002. By 2015, 3,400,000 white collar jobs are expected to be sent to foreign lands, contends the research firm Forrester, Inc.

As more money and jobs migrate overseas, there is increasing worry within the U.S. that jobs here are being destroyed permanently. The trend of increased outsourcing among small businesses is especially troubling since these firms, up until now, have been responsible for 73% of the job creation in this country.