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Looking Abroad to Remedy Economic Realities at Home

Business Times – by Maria Guzzo

Weak economy forces firms to find inexpensive labor overseas

OAKMONT - Jeff Pepper founded his second technology company during the height of the dot-com boom, when software engineers were in high demand and short supply.

As he ramped up Oakmont-based Eldervision Inc., he found that combination was stalling the start-up.

"There was a time when you couldn't hire a Java programmer for any price," he said.

To remedy the situation, he hired software developers outside the United States. It started when he was chatting with one of his staffers at Eldervision, a programmer from Bulgaria.

"I was joking around asking, `Are there any more like you in your home village?'" he said. "He said `Yes. There's a whole country full of people like me.'"

Mr. Pepper had never considered Bulgaria as a place for software development, but he checked it out.

"It turns out Bulgaria is the Silicon Valley of the Eastern bloc," he said. "When the Soviets were in power they were reverse-engineering American computers. They have an educated work force and a good exchange rate."

Through his research he found 40 prospective software development firms. In November 2000, he visited Bulgaria to interview candidates at six firms. Workers from the one he hired have developed much of Eldervision's product since then.

Eldervision's Internet-based service for retired adults, called Touchtown, is now undergoing field trials to gauge user feedback.

These days, companies in need of software engineers are turning to offshore developers for a different reason: the economic downturn. Hiring developers who live in Bulgaria, India, Belarus or other hot spots like Israel, Ireland and the Philippines, is far less expensive - from 50 percent to 70 percent cheaper - than hiring their counterparts in the United States.

Pros and cons

Although the offshore labor keeps American companies in the black, critics say these companies are taking away jobs from American workers.

Earlier this month, Mellon Financial Corp. reported that it will lay off 20 percent of its 1,200 information technology workers and replacing them with labor from India.

But Rajiv Enand, CEO of Wexford-based Inc., says the criticism is both true and not true.

"I'm not taking jobs away because we wouldn't be here to begin with if I had to use U.S. workers," Mr. Enand said. "I couldn't afford developers in the states."

Because he is self-funding OnlineChoice, which offers discounts on commodities like telephone and energy services, he cannot afford to pay on-site U.S. developers $150 an hour. Instead he pays Indian workers less than $20 an hour. He hired Kirkland, Wash.-based Catalytic Software Inc. to find them.

"We're focused on saving money like very other business," he said. "This has cut 40 to 50 percent of our (research and development) costs."

The Indian example

Because absenteeism is high, due in part to an unreliable Indian transportation structure and a strong demand for offshore developers there, Catalytic is creating a 500-acre town for its employees called New Oroville, located near India's tech center of Hyderabad.

The residential and office community -- built of dome construction -- is expected to house about 4,000 software developers and their families, as well as 300 support personnel for sanitation, police and fire service.

Mr. Enand said the 12-hour time difference between his workday and Catalytic's software developers' workdays is beneficial for business, too.

"While I'm sleeping they're working and when I arrive in the morning it's done," he said. "By my evening, I can leave them a voice mail saying what I need done."

There are some downsides, however, to offshore development.

"The creativity of the developer to come up with new ideas is not there," he said. "These people are just doing what you tell them to do."

Another drawback is that they're not physically here, so communication is sometimes lacking, said Eldervision's Mr. Pepper.

"The most important thing that we've discovered is that you have to have a strong project management structure in place," he said. "It's difficult to work with programmers with a different time zone, different culture and language barriers."

Though Java is Java and C++ is C++ in any language, Mr. Pepper said it's important to make sure the technical management team leading the offshore developers speaks English, and is on the same wavelength when it comes to the project goals and timetables.

ServiceWare Technologies Inc. COO Scott Schwartzman agrees.

"If you give them decent requirements, you'll get good software," Mr. Schwartzman said. "But it's garbage in, garbage out. You need good leadership."

ServiceWare has been using some offshore labor since November 2000 when Mr. Schwartzman came on board as COO.

"It was evident we didn't have enough people here in product development," he said. "We didn't have too much time to build organically."

Mr. Schwartzman hired Princeton, N.J.-based EPAM Systems to outsource the effort in software development and testing. Belarus, a former Soviet republic, houses EPAM’s cadre of 250 software engineers. He had used EPAM when he worked at Germany-based SAP AG and Boston-based Firepond Inc., two large software development companies.

He said using about three dozen developers from EPAM's Belarus office was faster and less expensive than hiring and growing from within.

"They offer multilanguage high scalability implementations and you obviously need some great people to do that," Mr. Schwartzman said. "They're like a software factory. And they're no different than India."

And India is the place most people think of when they consider offshore development work. Several firms in the Pittsburgh area are in the business of hiring out their employees in India to companies that need software developers, including Downtown-based Adroit Computer Technique and Green Tree-based Mascot Systems, which is an iGATE Corp. company.

Adroit relocated its U.S. headquarters from Boston to Pittsburgh in 2000. It employs about 185 people in India, at its world headquarters; and about 20 here in Pittsburgh.

Mascot is the granddaddy of offshore development, however, with more than 2,000 software developers working in India for U.S. and other foreign companies, according to Mascot CEO Gerhard Watzinger.

And that includes about 180 new hires since the beginning of the year.

Hiring additional help at Mascot became necessary over the past six months, he said.

"When the economy went down, more and more organizations were looking for ways to execute projects without the burden of high costs," Mr. Watzinger said. "Suddenly, India became very attractive."

Up after post-Sept. 11 drop

Prior to 2001, Mr. Watzinger said they pitched the advantages of offshore hiring. Now they're pitching Mascot's benefits over their competitors.

Post-Sept. 11 travel concerns were an issue for the firm because landing clients often means having them visit the Bangalore, India, headquarters.

"Customers still are a little uncomfortable about this because they have been without exposure to India," Mr. Watzinger said.

But a two-month slowdown has turned into a spillover in business now. In addition to having many U.S. companies as customers, Mascot programmers are hired by firms in Japan, which is currently in a recession. Other customers come from Australia and Germany.

While India is by far the leading source of offshore developers, Mr. Watzinger believes the next good supply will be in China.

To that end, Mascot is opening an office on May 9 in Dalian, a port city in northeast China that is becoming that country's Silicon Valley. Mascot will open a Shanghai office by year-end.

And while Indian developers' salaries are about $8,000, Chinese developers are an even better buy for offshore development work: They will make the equivalent of $2,000 a year. The venture is a long-term commitment for Mascot.

"China doesn't have as much experience, but everybody has an eye on China," he said. "We want to be one of the first movers." Mascot will employ about 50 people in the Dalian office to start, with developers from India heading there to train their Chinese counterparts.