Episode 26 - India grows up

Episode 26 – A turning point for Riya India and maybe India

Today, we made a very big decision at Riya.  It was difficult and painful but the right one.  Before I go into it, let me give some background.

In 2002, I came to India while I was CEO of Andale.  I came because like most companies, India provided us with a less expensive pool of talent than Silicon Valley did.  What I was surprised by, however, was the high quality of the talent.

When we setup Riya, Azhar and I knew India would be a big part of our strategy.  We knew that an early stage startup like Riya couldn’t really afford the extra overhead of communication issues of having a remote office unless the cost advantages outweighed the efficiency loss. 

The costs of having two offices, which are twelve time zones apart, is significant.  People in both offices frequently had conference calls at 10pm and midnight every night (as a result the office in the US didn’t get started until noon sometimes or people rolled in tired).  We were all traveling constantly.  Development and communication moved slower due to the distance and teams.  However, all of this was worth it so long as the ROI was there.

Over the next few years, we built up a great team in India by focusing on hiring only the best. I believe that this quality focus led us to build up one of the best teams in Bangalore.

Unlike Silicon Valley, however, the employees in India didn’t value stock options as much as folks do in Silicon valley.  It was understandable, however, given they had never seen a friend hit it big or seen the Google like wealth effects which occur every 5 years in the Valley.  Hence, they argued more for cash compensation.  This combined with the fact that we were going after the best in Bangalore (the most impacted city in India) increased our exposure to wage inflation. 

Bangalore wages have just been growing like crazy.  To give you an example, there is an employee of ours who took the first 5 years of his career to get from 1% to 10% of his equivalent US counterpart.  He then jumped from 10% to 20% of his US counterpart in the next 1 year.  During his time with us (less than 2 years) he jumped to 55% of the US wage.  In the next few months we would have had to move him to 75% just to “keep him at market.” 

Keep in mind that Riya are at the leading edge of this trend.  We tend to only hire folks from IIT or other top schools.  We tend to only hire the smartest folks from these schools.  We only hire in Bangalore (just too hard to have three offices).  We tend to only hire folks with a lot of experience.  These are all characteristics that are critical for technology startups, but not necessarily for a big company like IBM or a services company like Infosys who can afford to train new graduates.  I do believe that other startups in Bangalore will see the same issue in 12-24 months.

In general this wage inflation is really good for my employees and great for India.  I am so proud of the strides forward that India has made.  While others have chided Intl companies for opportunistically leveraging the cost difference, I am a true capitalist in my belief that all of the employers rushing to India in the last 3 years has increased wages and provided more opportunity than 20 years of a closed socialist leaning economy ever did.  India is a true global powerhouse now.  There is no doubt.

However, this huge run up in the wages has destroyed the ROI I referred to earlier.  So today we decided to consolidate all of our engineering and research efforts back to our HQ in California.  We are relocating many of our key folks back to the US, but there are some that we are not bringing back.  Our goal was to keep the payroll costs the same before and after the move. Because wages are still higher in the US we couldn’t bring everyone. Our revenue is growing as you can see from Episode 23, but it is not the time to increase our costs dramatically until we have grown bigger.

One of the people I will miss is an engineer who I first met almost 2 years ago named Vineet.  I still remember the first time I met him.  He literally drove on his motorcycle in a monsoon rainstorm (the worst I've ever seen in Bangalore) to meet me for his interview.  Most people were stranded by the side of the road and were not even attempting to move.  Others attempted to move and were swept off their feet by the rain in the streets.  After waiting for 10 mins past the designated time, I figured he wasn’t going to show up given the weather. I picked up my phone to call him to reschedule.   Just then he suddenly walked in the door.  He was completely soaked from head to toe.  I told him to dry off or even reschedule the interview if he liked, but he insisted on doing the interview and answering my questions right then and there.  He said, “I was late so lets not make it later.”   We sat and talked for almost an hour.  I enjoyed our conversation a lot.  I saw a conviction and dedication in him that I have not seen in many people.  Despite having wet shoes, socks, and everything else.  He sat comfortably and sipped some hot tea.  He was calm and collected.  I thought, what a determined guy and shortly thereafter we hired him.  I will miss Vineet and all of our colleagues ... very very much.

For me personally this might be the end of an era.  I spent six month a year in 2002 and 2003 in Bangalore.  I loved being here and almost bought a house.  I have some very fond memories of brunch at the Leela Palace on Sundays and partying all night at Spinn.  I dont' know how much I'll continue to be in Banglore now, but it was a great part of my life for the last 4-5 years. 

I was one of the biggest, India advocates you've ever met (I still am) but it is clear the primary business drivers of Bangalore are changing and with it the city must change.

25 - Million mice, 24 - Land Invasion, 23 - Nuclear Power Plant,
22 - Fast iteration , 21 - Like.com prognosis , 20 -Launch Video and More , 19 -PR Coverage of Like , 18 - Like.com Launches , 17 -Pre launch , 16 , 15 , 14 , 13 , 12 , 11 , 10 , 9 , 8 , 7 , 6 , 5 , 4 , 3 , 2 , 1 .

Comments

[Jacob]

This was clearly a big decision. Having just returned from a year in Blore, I can identify some of the issues faced. There's no denying Bangalore is a good place to startup, providing it fits. It may be easy to overlook the knock-on costs of 'outsourced' operations because of the benefits, but if those benefits are eroded as they are being so by the rocketing costs, then something has to give. I do think more companies will rationalise this and drop or scale-back their development operations in time if they don't stabilise, which may mean a step back for India in its growth of leading-edge development, but probably not so BPO where inflation may be more stable due to the lower skill requirements.

To the previous commenter, who's remark has vanished, I don't think Munjal is blaming India, and although he could be blamed for his decisions, things change, sometimes too fast to be comprehended, and you have to adapt. Riya appears to have answered that call, and I would hazard it was the right one for its stakeholders.

[/pd]

Munjal, Nice post. I have to agree that b'lore is the hotbed for growth in the dev sector. However, there are other places like Kerla and Coimbatore which is also growing fast too.

During my Visit in Dec/07 - I found that the traffic was crazy.. to get to Brigade road from wheeler rd ext took me over 45 min. and that's only like 4.2km ride.. so Bangalore has to do something or they will find themselves being outpaced by Chennai / HYD /KERLA etc..

Its competitive markets and not sure if you know, Bangalore's locals kinda twitch when they met people from other cities who have moved there. It's like they are treated as "outsiders". That atitude needs to change ...

[Prashanth Susarla]

Hi Munjal!

This is Prashanth Susarla. I was employed at Andale (I joined just around the time you stepped down as CEO) between 2004 and 2005.

For a while now, some friends of mine and me were debating whether the current salaries being enjoyed by the likes of us and many others are sustainable or not. It's common knowledge that startups are usually the highest paying of the lot in cities like Bengalooru, because of the very reasons you mentioned (tending to hire experienced, smart people from top colleges so that they can get on with the job from the first minute). The market will eventually have its say and there will be some stabilization in the long run, partly due to the tough but sensible measures such as the one you have just taken w.r.t. Riya. There may be other ways to deal with this issue but shutting down India ops is definitely one way out.

However, I would like to point out that there's a reason for such a crazy growth in salaries and the rampant consumerism on display here (one leads to the other and it's a vicious circle now). And one needn't look beyond the second last paragraph of your blog post to find out why :).

Cheers, and I wish you and Riya all the best!

[Munjal Shah]

Jacob, any comments that don't have a valid email address and site are usually deleted by me. I is part of my comment policy which I put in place and published on this blog a while ago.

Prashant - I agree that the consumerism is also driving this as well. I've been shocked by the number of really expensive cars on the streets in just the last 5 months.

/pd - traffic here is an issue and one impacting employee productivity. If you have to drive 2 hours to get to the office each day you are going to be exhausted.

[Shankar Balasubramanian]

I think outsourcing started out because it was cheap, I am not sure it is the same reasons anymore. It is availability of talent. There are companies in Israel and they will remain there because the work they do is in par with with any work in the US and the cost is the same as US. They will need those centers because you cannot find the same talent in the US.

As long as Indian engineers continue to be as productive as US engineers, then even with the cost increases it will sustain. Whatever cost one incurrs for a remote center has to be justifiable with productivity.

Cost = salary + overhead of remote management.

If this cost exceeds or equals a US salaried engineer then it better be justifiable along these lines:

1. the person as productive as the cost of an US engineer.
2. You cannot find the same talnet in the US.

As long as the above two are true, ROI measure should hold water.

[Prashant]

Munjal

i think you should not have made this post . not in such colorful detail .

It's a sad news for me .i meet Tara,Vineet, Sandeep Gain and few other from Riya at BarCamp Bangalore They were nice guys . i know the condition in Job market so i know that all of them will be getting a new [may be better paying ] job soon . but everyone who will read this will be afraid to work in a startup .

Its true that in India folks don't value stock option . we struggle with this issue at our company and i will not be surprised if one of these days any prospective candidate quote an example of Riya while negotiating compensation to undervalue our stock offering .

Inflating salaries and unrealistic expectation are an issue for sure .but i don't think that its an
unsurmountable thing . there is a way out .

I admire Riya as much i admire it yesterday but for the reader of this Blog i would like to make some points which may put things in perspective

# 1 India is not Bangalore .like US in not just SV. there is life beyond this city in india .look at other cities.
# 2 Hiring people with 3-4 year will be always risky than hiring Fresher . in india people get married after 3-4 years of job . than there are kids ,house ,car,EMI,Health of parents and looming danger of upcoming crash2.0 . They need reassurance and security . instead no fresher will crib about this and if your startup is good they will make enough money in 3-4 year by stocks. yes there will be some learning curve but given a good mentors it will be worth and you will be amazed at the fact how fast they learn and how much they can contribute

#3 Keep core design Team here and make them "work" with Indian team . i don't know about Riya but most of the startup have a core team in SV and they handout coding instruction to their indian peers . like do this do that . In many cases Indian team feel left out and the culture is not inclusive .

#4 Invest in Summer training /Research Project . go to IIT/REC campus recruit folks for summer training make them work in a office with bean bag and makeshift kitchen [not Brunch /Pizza from some 7 star Hotel ] . i am sure they will comeback on their knees to join .Sadly even startup are not promoting the romance of bootstrapping .

#5 Hire folks from out side of Bangalore and bring them to Bangalor there is enough Good talent stuck in small companies in Tier B Towns. my observation is that they will be somewhat more loyal [ i might be wrong on this point ]

I have seen these technique being successfully applied at various startup in and around Delhi NCR . i think situation is not that bad .Not Yet :)

[Munjal Shah]

This discussion is getting good...

Prashant - I totally agree that India is not Bangalore. I also understand that my post may hurt startups in Bangalore. I have always tried to be transparent even if it has unintended consequences. I'm a big fan of startups and frankly encourage people to join them. I just met a guy from AOL and he was telling me that they have been laying off thousands of people due to the change in this business model. So the risk of being let go is not just at startups.

We did keep a core design team in SV but our leads here did have a lot of autonomy but that didn't change what they wanted to get paid it only increased our retention. The other ideas of summer training and recruiting from other cities are great suggestions but that issue is that again they are over-head costs and time which reduce the ROI. Now the management has to focus even more on recruiting instead of shipping product. The big companies can afford to do this, but not startups.

Shankar - that is exactly the equation that is starting to fall apart. Startups move so fast that the communication cost is significant.

[Suresh Ramasubramanian]

If you are moving out of Silly Valley and want to cut costs, you just dont want to move to a wannabe silly valley with a property bubble and creaking infrastructure.

Got pointed to this thread by a friend, and while I dont run a startup as such, I have had to setup an indian office for my employer, with much the same criteria as you have (hire bright, talented people). As others have pointed up, Madras or Hyderabad in south india, or Bombay, quite possibly Pune in the west are possibly the best places for you to set up a startup.

There's just as good a work culture, just as good people (IIT-B is top notch) .. and not as much of the crazy prices and party harder than you work culture you get in Bangalore, or in Silly Valley. Yes, Bombay can be very expensive indeed, but the local trains are a powerful leveler there.

Or you could move to Manila, or Singapore, or Kuala Lumpur. All places you'll find some very good people indeed, and competitive costs (especially manila .. 50 pesos to a dollar, 47 rupees to a dollar, see?).

[mike]

Wow Munjal, that's a HUGE shift. And good for you for having the cojones to make the call. I have some, ahem, interest in a firm that I've been wishing would do the same for three years.

One thing you just barely touched on, and which tends to get overlooked by investors, is the fallacy of the 24-hour development cycle. "we have coders going round the clock." In reality the distance creates a 24-latency to problem solving and it can be a killer. Productivity and creativity get such a powerful multiplier when the answer is right over the cube wall.

If you can't get ridiculously good ROI, then the equation breaks rapidly. But it's super tough for people to change their original plans.

I am so glad that country is getting rich. Creative products and great companies are emerging every day from India. It's just not a good strategic bet to stake your Silicon Valley startup on. (Though I remain a big fan of using the capital efficient talent pool for well-defined, tactical projects.)

[San]

Munjal

Sad to read this. Yes, it was bound to happen sooner than later. I was hoping companies like Riya would lay the foundation of the startup culture in Bangalore and sooner than later you would have true indigenous startups emerge from that experience.

Experiences like yours may cause a setback to the startup culture. It reminds me of Paul Graham's "How to be Silicon Valley?" essay - these things reinforce his thoughts there.

[/pd]

Munjal, from what I am reading here is it fair to say that "wage inflation" and talent capital retention strategies are the keys for players who are offshoring ??

I think this issue is being faced by both startups and big companies. Even the likes of TCS /WIPRO and infosys have the same issues.This is sliding the scale on ROI's because Wages is a direct cost allocation that always grows Year2year and certainly brings pressure to companies that need to maintain margin leverage and met targets.

So on the long run, having an dev group offshore, could have long term loss. The trajectary model on offshoring is now being broken / failing. Startups are feeling the pressue as their pockets are not so big. But, IMO the big companies will also face the same issues along the time scale.

ITs just a matter of time before the bubble burst on offshoring !!

[Yuvraj Bhatnagar]

Hi All,

Whatever has happened i with Riya is not a new phenomenon...many other Product companies with their R&D centers in India and also startups with distributed "core" teams have faced the similar challenges and taken tough decisions Eg Pervasive, Apple, Accelrys. However why this is happening is something which does not have one single answer. I am recruiter who has now taken a amove to BD and what i have observed is that Indian industry is still maturing and will take another 5-6 years to mature further, what i mean to say that we may be good at customized software application development but we are definately not good in Product developemnt. This has many reasons lack of good engineering education, cultural and social factors, lack of managerial talent and leadership etc.

Over the period of last 6-7 years their has been a whole new generation gap which has come in i mean people who are graduating now are a genration ahead of their counterparts a 6-7 years back. They have a very different thought process, they know more about industry and its trends and they are more demanding infact very demanding...i have seen this trend in engineering schoold where bigger Indian companies have struggled to hire fresh graduates..infact in MNREC TCS could manage inly 39 offers, even when they visited the place on day 1 (a sharp drop from 109 a year before and 139 2 years back). People today now ask for money, role, domain, vertical, growth path so many questions and they do not care about Brand. This factor helps startups and Product companies but creates attrition challenges because as they want more quickly they are prime targets for other startups and hence leave quickly..

I do agree that Bangalore is not India and their are other cities where start-ups can flourish and thrive places like Pune/Delhi/NCR have many startups and product captives but challenges here are reduced not eliminated as these places are equally HOT!! Infact 1 product company transfered their captive operation to us around 12 months back for same reasons. Hiring freshers may work for Big Product companies with around 300+ people but freshers do not fit in well in Product environment and they do not work for stsrt-ups. Going to a tier 2 city like coimbatore and Nagpur/Chandigarh will only increase the problems.

Cultural challenges and lack of strong technical and managerial talent is a big issue becasue most of talent pool available in India today comes from 1st generaion Indian companies like Infy, TCS, wipro etc..they are used to doing this in their own ways and used to scope/schedules/processes/waterfall etc etc..so different.. from product startups. I was talking to the VP Engg of another product company in Bangalore, he said that engineering talent is good but managerial and technical leadership is missing in India...they too are shutting down their operations soon!!

As of young people not vauling stocks...i guess its true to certin extent but if its conveyed in a better manner this can be resolved...

Thanks, I will look forward for your feedback..

Yuvraj

[Shankar Balasubramanian]

The other interesting thing I have noticed that lots of large companies have established operations in India because they "think" that they "have to have" a India strategy. I am not sure if they completely understand what that means.

I have worked both in India and in the US and I have seen the equation from both ends. A VP of engineering in the US has to retain his talent in the US which means they have to keep the good projects in the US to keep the talent. Secondly, the VP in india has to establish credibility with his counterpart in the US, to that end, he is willing to take on pretty much anything and this is the win-win equation which is most prevalent. In the process the technology work which comes to India suffers. The managers will continue to grow as they will get more people to get whatever US does not want to do.

Having said that, It is my opinion that as long India operation has complete ownership of piece of technology then it will able to attract talent because the ownership is there to drive the need the for talent.

Startups again are a place where such a split is not easy, it requires very focussed and agile execution capability and to split that across 12.5 hour time difference has to be warranted with very significant productivity levels which has to exceed productivity levels in the US to justify the communication and remote management costs.

Ideally, complete ownesrship of significant pieces of technology in India will be a good answer to manage accountability as well talent attraction and retainment.

[Peter]

I also hear Indian coders complain there is not enough *cool* work around (startuppy, fun stuff, as opposed to a mcCoding Job where you churn out boring code in a cubicle). Do the commenters here feel that way too?

[Munjal Shah]

At the end of the day is it about productivity vs. costs. The wages of the engineers in Bangalore can rise all the way to the US level so long as the productivity is equal. Even if we assume that an top guy here in Bangalore has the skill and intelligence as the US, he still maybe less effective for several reasons:

His infrastructure is less reliable. I was just hearing from one the guys on our team (who is moving to the US) that he sometimes gets up early to work on stuff while he is fresh. Frequently, however, his power goes out and then he has to come into the office (where more people are likely to bother him).

He will lose more time in transportation - horrible traffic and no parking which eat up more hours of the day than they do in the US. Even his home broadband connection is slower and unreliable - impacting his productivity there.

These external factors even include things like food. Each month at least 1-3 people call in sick for food sickness or for a Bandh (rioting in the streets). This rarely happens in the US.

Over time these things start to add up.

Munjal

[Zaid]

I doubt most of these guys that Riya had to let go would be complaining given the job market in India. From what I hear, a lot of start-ups in India get crushed trying to match salary offers for their employees from big corps like Google. It is so bad that many programmers don't mind paying the buy-out money to get out of their current contract and hop to the next job.

Overall I think this is just a sign of a maturing IT industry in India where it is not just about cheap labor but also about smart labor. For cheap labor new markets(such as Indonesia) I am guessing will pop up.

[Shanti Braford (a dude)]

This is really eye-opening.

I guess then it would also not make as much sense out outsource contractors for one-off projects to India, as well?

Or are contract rates still pretty low?

[Trevor Bailey]

Could this be perhaps an isolated case ... else we would've seen the exodus of the big names from Bengalooru, which is clearly not the case.

Outsourcing/offshore development isn't for everybody as this example illustrates. For small(er) companies, the costs can significantly outweigh any perceived advantages. Perhaps you are also at a disadvantage (read unaffordable to hire/retain) when it comes to hiring top-talent n'est-ces pas?

(btw, my email id is valid ... despite the goofy name) ;-)

[Mallik]

I dont agree completely on the point that startups need only experienced ppl. While startups need experienced ppl at middle and top management level, freshers are also needed at the lower level. Thats my experience from startup. I joined the startup as a fresher.

[Jacob]

Yuvraj seems to pretty much hit it on the head.

My observations, at least at the lower end of the employment spectrum, is that 'McJobs' with (apparent) security offering a position within a well-oiled corporation are generally favoured over startups, even with the offer of flexible time management and working from home which carry significant value in the west. Commuting is indeed a problem, as is infrastructure, broadband can be unreliable outside key locations, and UPS is requisite, but these are not always insurmountable, although the inconveniences (and cost) add up when you're used to or expecting absolute reliability.

When I talked about working with a startup, agility and pushing boundaries, the prospects were recognised by interviewees but don't generally win them over at the end of the day. However if the salary is increased beyond its skill average, that changes. It seems too many (not all!) inexperienced people are changing jobs after short intervals to climb the ladder faster and get a 'good' job. 'Cool jobs' do not appear to be important at the entry-mid level, they don't do anything for your reputation and status. I also found that agile methodologies are utilised as a catchphrase and not adopted in principle. These are general observations, there are obviously positive exceptions which can make it worthwhile.

@Shanti: Many other countries (east Europe, Egypt, even Cuba [don't know about China]) are becoming competitive with India. Some of these benefit from a more progressive outlook (developers who are better exposed to western expectations) or better time zones, but it depends what you're looking for, with larger projects having well defined requirements and a generous timeframe India has the edge, and experience. Innovation still lacks, indeed I think much of the current surge in innovation is imported by returning NRIs (which is good, if it continues).

Incidentally on my last day I interviewed someone who was leaving his current job because his employer wanted to 'retain' him...with a several year bond.

[gaurav]

Hi Munjal,

For a similar job, I guess you would pay ~ $120K to someone in US (including health insurance etc). 50% of it is $60K = 25-26 Lakh Rupees. Is this the amount you were paying (in terms of cost to company) in India, to someone who has a 5-6 year experience!

High-tech industry in India is still maturing. Most of the tech companies are about 4-5 year old in India. Therefore, it is quite likely that there is a shortage of people who have more than 6 years of experience, and/or experience in delivering on tough projects. But I guess (and hope) that this situation will turn around significantly by the end of this decade.

But in some ways your decision to relocate to US seems reasonable. A startup will definitely have difficulties dealing with the overheads of managing two time zones (plus the wage inflation in bangalore etc). I guess the startups will succeed in bangalore, only if they are fully/mostly based there. This would also mean that the products they are trying to create should aim for a large chunk of Indian markets too and not just the US market.

Many people in the past have expressed scepticism about the future of indian high tech industry. But I guess that future is quite secure. I think even huge MNCs wont want to have their core work done in 10-15 different countries. And no other country today (except perhaps china) can provide the scalability of operations and the engineering talent, that India can

[Munjal Shah]

Guarav and Malik,

Touching on the point about startups needing experienced folks... I think that startups benefit most from having people who are the best. They don't always have to be the most experienced but they do have to be the best. The best guys are always paid more than their peers so even if they are 5 years they probably get paid like they are 6-8 years. Software development is such that a really top guy can truly produce 10x the productivity of an average guy, making the ROI equation very different. Google understands this better than just about anyone.

Gaurav - I do agree that there are more and more people with more experience - so the supply is growing, but unfortunately the demand is still growing faster.

Malik - I think startups are a horrible place for freshers. Startups are not designed to teach core skills as they are moving to fast.

All - there is a very interesting question here of what attracts people to a startup and does that work in India or not. I'll put that in another post shortly as it is a longer topic.

[Santosh Godbole]

Hi All,

My comments on Munjal's post: looking to put together a team of "highly experience IITans" is asking for trouble. Unless, you are ready to spend the kind of money you spend in USA. There are other "soft issues", and tons of them, when you have high density of "IITans" in the team.

You need to be clear - you are in India because (a) you are looking for "relatively cheap" labor and hence will have to live with the "average" quality of labor ... or (b) you are looking for a pool of "highly talented" engineers. If that is the case, why think of saving money!!! There is an old saying "you want to deliver a product? Pick two out of three: (1) Quality (2) Cost (3) Time".

As described in the post and by others who commented on it, startups are facing many issues ... no brand, people cannot understand stock option, lack of startup culture, etc. etc. IMHO, "teaching" about the startups, innovation, creativity, and ownership should start in universities. No, I am not saying that the lecturers should talk about startups - that will be disaster. Startups and startup evangelists should go to universities and educate students. Startups should involve students while they are students. Do not expect students to come out and join startups. But if they have the "startup seed" planted in their minds - they will join startup, or start one, few years down the line.

About the near term trend in "Disney land", the Indian industry, engineers prefer to have a boat ride at "Alice in the wonderland" than jumping on the "Space Mountain".

Regards,
Santosh

[Yuvraj Bhatnagar]

this is not a one off case..the problem is more common in product development companies (start ups are most hit) in last 12 months 3 companies have closed doen their operations in Bangalore 4th one is Riya and 5th one is round the corner.

[Srini Ramakrishnan]

Companies looking for top talent can't also afford to enjoy the advantages of cost arbitrage. If you are truly looking for top talent, you hire the best you can find, where ever they are. They will always have the option to relocate to the US or similar wage band country, and hence they aren't going to come cheap.

What works for code factories doesn't necessarily apply for boutique product companies.