Outsourcing: Silicon Valley East

During the height of the dot-com boom, Dan Scheinman was one of Silicon Valley's most popular tech execs. As the chief of mergers and acquisitions for Cisco Systems, he couldn't go to a party without being besieged by entrepreneurs eager to sell their business to the deep-pocketed tech giant. Now Scheinman is once again the toast of dinner parties, but he's being pitched on new properties over tandoori chicken and Darjeeling tea in Bangalore. For Cisco, India is the new frontier, where it's investing $1.2 billion to build a gleaming R&D campus that will employ 3,000 people. "Bangalore feels like the center of the technology world," says Scheinman. "There's a level of chaos, energy and a sense that anything is possible."

Not long ago, what seemed most possible was that India would steal the jobs of American workers. But as George W. Bush visits there this week, he'll find a maturing economy that is no longer all about call centers and basic tech support. Now big American investment banks and drugmakers are joining tech firms on the passage to India. R&D centers are springing up so fast that there's now a shortage of Indian engineers. And the stigma of outsourcing jobs to India is disappearing. American companies once afraid to put their names on the doors of their Indian offices now issue press releases touting their latest investments there. "American firms have gotten over their anxiety about India," says financial-services consultant Harrell Smith of Celent Communications. "Now the new anxiety is if you're not in India."

What happened to the outsourcing backlash? It has been muted by the fact that India didn't suck Silicon Valley dry after all. Actually, U.S. tech employment is growing. There are 17 percent more tech workers in the United States today than back in the bubble days of 1999, says a new study by the Association for Computing Machinery. And the Bureau of Labor Statistics predicts that the U.S. economy will add 1 million tech jobs over the next decade, a 30 percent increase. "Everyone was worried about the offshoring bogeyman," says Moshe Vardi, an author of the ACM study. "But the big whoosh of jobs to India never happened.'' Indeed, that gush slowed to a steady stream once American companies realized it's tough to set up shop in a country with bad roads and a patchy power grid. Lately, American consulting firms that once predicted runaway growth in outsourcing to India have been slashing their estimates by half or more. Now American companies are hanging on to the high-skilled work that requires face-to-face interaction, while everything that can be done "over the wire" gets shipped offshore.

India remains the No. 1 destination for that work for a growing number of American industries. With cost pressures never greater on American business, India's rock-bottom wages just can't be ignored (not to mention its well-educated work force that speaks English). The average annual income in India is just $737, versus $42,027 in the United States. Even a college-educated Indian worker earns one fifth what his American counterpart does. And he's willing to put in 12-hour days, six days a week. That's why U.S. companies are expected to employ more than 1.5 million service workers in India by 2008, a threefold increase from today, according to McKinsey & Co. "When India was the new trend, companies had a gold-rush mentality," says Global Insight chief economist Nariman Behravesh. "Now companies are taking a more mature, sober attitude." Just like the Indian economy itself.

With Brad Stone

© 2006