Labor arbitrage works well only when there is a comparative advantage and that does not only mean price. India does not have a broad comparative advantage in web design and development (which is what I assume your company does. This is the reason its all about ’services’ that are offshored rather than seeing products or a myspace being developed. So you might have better success in doing the creative onshore and then getting the ’service’ of it actually being built offshore ie this is the layout I want. Build it with flash here etc etc etc.

Of course as you correctly pointed out about price convergence. In 2003, the Indian call-center and IT workers were making about one-tenth what their American peers did. Now, just four years later, we appear to be up to one-fourth. So go to Estonia or some other offshoring destinations. Offshoring, ultimately is a short term play for quick savings, and by short term, I mean (depending on the industry) 5-30 years.

Or you just didn’t identify the right person. Just as in America you would interview and identify the ‘right’ person. the same thing holds true offshore. A contractor is a contractor is a contractor is being shortsighted. Skill sets matter and IIT’s are technical institutes - so hiring and IIT guy for web development isn’t probably the right choice. Thats like hiring a Art history major for accounting - which is not to say it can’t work but the odds of it working are higher. If the onshore contractor had the same percentage of ‘defects’ you costs calculations would dramatically change. So your comparison is between (and I’m making an assumption here) someone who you’ve worked with previously and does this for a living by choice and inclination. They know how you work, what you want and the local market vs someone who has n idea how you work, does not know the local market and who hasn’t been interviewed personally.

So the quality argument is kinda specious - like I bought the best pen available why can’t I draw.

Offshore smart and it might work. Going to a ’sofware’ company isn’t probably the best option since you pay the much higher rate due to the company overheads. How about trying the local classified ad’s, get some freelancers, paying them $3 an hour, communicating through Skype. It might actually work better. Sure there might be more defects and time but now you have upto 7 hours of ’savings’ to pay with and as you work longer (and better) together the percentage of ‘defects’ will drop.

Local: 80 X 21 = 1680
Offshore: (160 * 15) + (40 * 21) = 3240.

This is cost. If you didn’t offshore you’d have to have the local contractor do 80 hours of work. So you actually save 40 hours. Adding in the incremental benefit of those hours

= (40 * (125-21)) = 4040

Quoted and billed to the client: (125 X 80) = 10000

Profit local = 10000 - 1680 = 8320
Profit offshore = 10000 - 3240 + 4040 = 12360.

Ofcourse, technically this isn’t right too, since if you actually realize this profit then you’d be double counting.

As I said skill sets right!!! Leave the opportunity cost calculations to the Finance guys and the Economists :).

Profit offshore = 10000 - 3240 + 4040 = 10800

We’ve actually tried offshoring a few ways - we have, in fact, gone directly to locals, and in a couple cases it worked great until each, in turn, either disappeared or did something a little wacky. Also, we did turn to other locales–our “last straw” was in Belarus.

“A contractor is a contractor is a contractor is being shortsighted” is also very true. We were pretty targeted, however, and we said “no” to a fair number of contractors. And our IIT guy had 5 years demonstrable experience in web development prior to working for us.

The question of “why didn’t it work for ArcStone?” is still very much open I think, and additionally we may be partly to blame, but I’m still very uncertain that a company of our size, with the clients we have, could pull it off to any useful gains. And while I am still confident that offshoring should only be done cautiously, slowly, and with low expectations (I think you agree here?), you’re right about several things which I will certainly account for in any future argument I undertake with regards to offshoring.