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The Boys from Bangalore: How my partners and I learned the lessons of outsourcing firsthand and still kept our jobs

Oct 29, 2004| Globe and Mail | By Doug Steiner.

Starting up businesses allows entrepreneurs to look at the cost of everything. A while back, my partners and I funded a start-up to build
an on-line system that would allow investors to negotiate securities prices and trade directly with each other--simple in theory, but
hellishly complicated in practice. We figured few engineers in the world could understand the problem and program the solution.

A chance meeting 18 months ago led us to consider building the system in India -- a controversial choice. For many North Americans, the
outsourcing trend is the latest scourge of economic comparative advantage. It was created by a combination of nuisances: the internet
and excellent schooling in a country that many of us won't visit because it is too dirty, too hot, too crowded or too far away.

My partners and I were referred to software developers in the booming city of Bangalore. The company claimed to be world experts in building
software to support exchanges and trading--our claim, surely, not that of some guys in India.

We met the company's senior managers in the lobby of a boutique hotel in New York. They weren't staying there, I found out later, just
pretending to be. Mangal, the principal, was unfailingly polite and respectful, and asked intelligent questions about our little start-up.
His American partner, Greg, said he already had a sleeve-length full of U.S. sales. We checked their references. They were solid.

About six months later, we sent out requests for proposals to build the software--basically, the equivalent of a small stock exchange. We
focused our firm's skills on organizing and managing the project. Proposals came back from Sweden, Australia, Canada and Bangalore.

The cost of the Bangalore proposal relative to the others grabbed our attention: half. So did the development time: 20 weeks. To match the
Boys from Bangalore, engineers in Canada would have had to work 16-hour days for minimum wage. But could the Boys handle it? We did a detailed analysis. Australia is farther away from Toronto than India, and Sweden isn't much easier to get to. The Canadians didn't respect the new competition.

To make sure of our choice, two of our technical henchmen went to India on a tire-kicking expedition. They came back with the thumbs up,
and we gave Eric, our youngest and most advanced engineer, the posting: Live in Bangalore for the duration of the project. In June, he took his Vonage internet protocol phone (60 bucks a month for unlimited calling--we can have him on speaker phone in Toronto all day), his girlfriend and his brain to work with the experts.

Bangalore has been no cakewalk for Eric. He's learned that the law of supply and demand applies to every service in India. Taxis cost more
when it rains, and there is an unlimited supply of pesky chess-set and gym-sock vendors to trail his every move.

With less than a 5% cost overrun, the Bangalore Boys are just about finished. They've come to Canada to do quality assurance testing. Our
trade signalling and matching software have been built for less than what some of our competitors spend on yearly maintenance costs. Our Indian partners live and breathe the expertise needed to get the job done. If Ottawa required us to put a tag on our system that said "Made in India," we'd be proud to show it.

We're also realizing that Indians are ready to do more when we've bedded down for the night--settle transactions, do exception reporting, answer customer questions and write more automation
software to make Canadian capital markets work a little more cheaply and a little better. More work so we can lower the cost of investing
for our clients.

We also proved that our eight-person company can control a 30-person team efficiently half a world away, and share the jokes and the local
culture at the same time. But I'm of two minds: What about Canada's economy? The jobs lost?

The fact is, had we not had Indian engineers to go along with our Canadian idea, financing and management, the start-up would have put
our investors at greater risk. And we haven't fired anyone here or moved jobs overseas. Outsourcing is an unstoppable trend. We'd happily
raise prices if you want an all-Canadian service, but we'd also want government protection from cheaper foreign rivals.

And the system itself? We have to run it here. Government red tape makes it virtually impossible to outsource Canadian markets to India--and we're really happy about that. Otherwise my investors would pack my bags for me or, more likely, give my job to someone smarter and cheaper than me half a world away.

Doug Steiner is a managing partner in Venturion, VGI, a Bay Street investment fund. He can be reached at dsteiner@...