Pervasive Software, a U.S. vendor of data infrastructure software, this week announced it closed down its software development subsidiary in Bangalore, India, citing complexity of management of the operation, and increasing employee cost and turnover.
Industry analysts expect a number of other small software development or services operations in India of multinationals to either close down or get transferred to an Indian supplier.
A number of foreign companies have set up operations in India which do not have the optimum size required to realize the savings of doing work offshore in India, said Siddharth Pai, a partner at sourcing consultancy firm, Technology Partners International (TPI) in Houston, Texas.
Unless a company is doing work that is highly skilled or highly differentiated in India, it needs to have at least a 1000-person operation in India as the fixed costs for such an operation are high, he added.
Companies setting up offshore software development or services operations in India also miscalculate the amount of management bandwidth and effort required to make it work to their expectations, according to Pai. There are currently about 385 development and services subsidiaries of multinational companies in India, and while there are some that are very large, there are many that are too small to be viable, he added.
The move by Pervasive came in the wake of a similar decision by Apple Computer which shut down recently its month-old support center in Bangalore, which had 30 staff. "We have re-evaluated our plans and have decided to put our planned support center growth in other countries," said Steve Dowling, a spokesman for Apple in Cupertino, California earlier this month.
In a statement this week, Pervasive quoted its president and chief executive officer John Farr as saying that while the potential cost savings of an offshore development operation can be mathematically compelling, the company found that the complexity of managing such an operation, and the increasing costs of labor, employee turnover, training, and facilities in a hot market such as Bangalore make it challenging to ultimately realize those savings. Pervasive had about 50 staff in India.
Pervasive announced earlier this week hiring plans in its software development and technical support groups at the company headquarters in Austin, Texas. The company will however continue to outsource to Indian company Aztec Software & Technology Services in Bangalore.
The moves by Apple and Pervasive to opt out of their offshore operations in India do not however reflect an overall trend. Other foreign companies are expanding at a fast pace in the country. French IT services company Capgemini S.A. said earlier this month that India would be the hub for its offshore delivery of services, while IBM announced US$6 billion in new investments in India over the next three years, mainly to expand its offshore services operations in the country.