After 10 months of working with software developers in Bangalore, India, Bill Wood was ready to call it quits. The local engineers would start a project, get a few months' experience, and then bolt for greener pastures, says the U.S.-based executive.

Attrition rose to such a high level that year that Wood's company had to replace its entire staff, some positions more than once. "It did not work well at all," recalls Wood, vice-president of engineering at Ping Identity, a maker of Internet security software for corporations. Frustrated, Wood began searching for a partner outside India. He scoured 15 companies in 8 different countries, including Russia, Mexico, Argentina, and Vietnam.

That path is being trod by a lot of executives, eager for new sources of low-cost, high-tech talent outside India. Many are fed up with the outsourcing hub of Bangalore, where salaries for info tech staff are growing at 12% to 14% a year, turnover is increasing, and an influx of workers is straining city resources.

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Even Indian outsourcing pioneers Tata Consultancy Services [Get Quote], Wipro [Get Quote] Technologies, and Infosys Technologies, which have helped foreign companies shift software development and other IT operations to Bangalore, are starting to expand into smaller Indian cities, as well as China.

"Overall, in terms of productivity and quality of life, beyond Bangalore is better," says Wipro Chief Information Officer Laxman Badiga. "Bangalore is getting more crowded, and the real infrastructure is getting stretched."

So companies are setting their sights on a slew of emerging hot spots for IT outsourcing. Need a multilingual workforce adept at developing security systems and testing software? Buna ziua, Bucharest. Want low-cost Linux developers? Bienvenidos a Buenos Aires, where many companies adopted open-source software after the devaluation of the peso in 2002 made licenses from abroad prohibitively expensive.

Other cities on the list include Moscow and St. Petersburg in Russia and Prague in the Czech Republic, according to consulting firm neoIT. Other hot spots include Mexico City, Sao Paulo, and Santiago in Latin America; and within Asia, Dalian, China, and Ho Chi Minh City, Vietnam.

The Search for Lower Costs

Make no mistake: India remains an IT outsourcing powerhouse, with $17.7 billion in software and IT services exports in 2005, compared with $3.6 billion for China and $1 billion for Russia, according to trade organizations in each country. And India's outsourcing industry is still growing at a faster pace than that of Russia and other wannabe Bangalores.

Yet many companies can't resist the lure of cheaper labor. "Ninety percent of all outsourcing deals in the market today have been structured around cost improvement only," says Linda Cohen, vice-president of sourcing research at consulting firm Gartner. By the third year of an outsourcing deal, after all the costs have been squeezed out, companies get antsy to find a new locale with an even lower overhead.

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But moving IT operations into developing countries like Vietnam or China can also pose big risks, such as insurmountable language and cultural differences, geopolitical instability, and the risk of stolen intellectual property. "You keep following the money, but how often are you going to move people around?" asks Cohen.

Even the routine day-to-day management of an offshore team can require significant project management expertise. "If you don't have experience and don't do it well, it can negate savings," says Barry Rubenstein, program manager of application outsourcing and offshore services at IDC.

Mix of Outsourcing Locations

Plenty of providers are ready to help clients overcome those obstacles. Companies including Accenture, EDS, IBM Global Services, and Genpact are building global networks, comprised of operations in a variety of cities, aimed at giving customers a mix of worker skills and labor costs. "We tailor where you want your people, based on the premium you want to pay," says Charlie Feld, executive vice-president of portfolio development at EDS.

Continental Airlines, for instance, uses an EDS center in India for development of some software that runs on mainframes, but the airline handles some finance work through an EDS office in Brazil.

Accenture uses its global network of facilities in a similar fashion. "Today we are about 35% in high-cost locations, such as the U.S. and Britain; 20% in medium-cost locations like Spain, Ireland, and Canada; and about 45% in low-cost locations like the Philippines, India, China, and Eastern Europe," says Jimmy Harris, global managing director of infrastructure outsourcing at Accenture.

When Bob Gett, CEO of Boston systems integration firm Optaros, decided to hire an overseas outfit to handle development of some applications or programs designed to perform specific tasks, he scouted out six or seven countries in Eastern Europe. He finally settled on Akela, an outsourcing company in Bucharest, Romania. Gett found Romania attractive because of its good education system, multilingual population, and abundance of technical talent.

Benefiting from Geography

The move reduces costs by 60% to 75%, Gett figures, letting Optaros offer competitive pricing to customers. "We're going to where the most cost-effective talent is in the world, but it has to be feasible," he says.

"It can't be where there are economic, time zone, or language barriers." In fact, Gett needs his application developers to interact directly with customers in the U.S. and Western Europe, so he appreciates that Akela workers speak English and French and are closer to the Optaros Geneva office than workers in India would be.

Companies such as Genpact, Accenture, Wipro, and Infosys [Get Quote] are hoping Romania's expected admission to the European Union will make it even more appealing for companies from Western Europe to do business there.

Dalian, a seaport in northeast China, is also turning out to be an ideal center for outsourcing, in large part because of its geography and history. Located in the northeast corner of China, Dalian is close to both Korea and Japan and was, in the first half of the 20th century, occupied by Japan. So there's still a labor pool of Japanese speakers.

Intellectual Property Issues

Dalian's labor costs are lower than in Japan, so it's become a center for application development for Japanese companies. U.S. firms outsource some technology work there as well. General Electricand Nissan outsource work to Genpact's operations in Dalian. Genpact was the first outsourcing firm to locate in the city in June, 2000. Accenture and IBM Global Services have since moved in.

There are certainly challenges for companies that wish to outsource to China, including the potential theft of intellectual property.

To combat this, Infosys Technologies has disabled USB drives on PCs to limit the ability of workers to take data out of the office. "We've taken extraordinary efforts to protect the intellectual property of our clients," says Stephen Pratt, CEO Infosys Consulting, a subsidiary of Infosys Technologies, which has operations in Shanghai.

For U.S. companies that need to collaborate closely with offshore workers, South America is an attractive option because the time zones are similar and the infrastructure is strong.

Infrastructure Counts

Brazil boasts a mature software and IT industry, and the nation's providers such as Politec, Stefanini IT, and ActMinds are keen to do more offshore business. Stefanini, which has served clients such as Whirlpool [Get Quote] and Johnson & Johnson, derives about 20% of its revenue from international operations, but the company would like to expand that to 50% by 2008.

Total Brazilian software and IT services revenue is $17.16 billion, while revenue from offshore software development is a much smaller $205.3 million, according to Brazil IT, an association of Brazilian IT services providers. "If we can get a client interested enough that they will go to Brazil, they will do business with us," says Eric Olsson, principal consultant with Politec, which has done work for clients such as insurer MetLife, software colossus Microsoft, and SAIC, a provider of a host of scientific and engineering services.

Companies are drawn to Brazil's modern infrastructure, with airports and highways that are first world, says Olsson, whose company is the largest IT services provider in Brazil.

Good roads and the developers who drive on them don't come cheap, though. A software engineer in Brazil costs $20 to $35 per hour. That's lower than in the U.S. but pricier than in India.

Threat to U.S. Workers

And while a technically skilled global labor force is a boon to companies, the picture isn't so rosy for U.S. workers. Instead of competing with just India, now U.S. IT workers will need to go up against workers all over the world. In 2005, about 24% of North American companies used offshore providers to meet some of their software needs, according to Forrester Research.

Over the next five years, spending on offshore IT services is set to increase at a compound annual growth rate of 18%, according to IDC.

The effect in the U.S. is that starting salaries in the engineering field-when adjusted for inflation-have stayed constant or decreased in the past five years or so, says Vivek Wadhwa, executive in residence at Duke University. "It doesn't make much sense to get into programming anymore," says Wadhwa, who worries that a lack of talent in certain industries, such as telecom, along with the outsourcing of research and development will erode U.S. competitiveness.

But U.S. companies say that hiring programmers in India, who might make a fifth of what programmers do in the U.S., allows the companies to survive in a globally competitive economy.

After traveling the world, Ping Identity's Wood finally settled on Luxoft, an outsourcing provider based in Moscow that has served high-profile clients such as Boeing, Citigroup's Citibank, and Dell.

While programmers are typically 20% more expensive in Moscow than in Bangalore, Wood found that there wasn't much difference in the hourly rate for the kind of work that he needed. "Indian companies are cheap until you ask for people with experience, and we wanted workers with eight years or more of experience," he says.

Russia's high-end software developers are drawing plenty of offshore business to Moscow and St. Petersburg, which together account for about 60% of the country's software development exports. Those exports have grown from $352 million in 2002 to nearly $1 billion in 2005, according to RUSSOFT, an association of software development firms from Russia, Belarus, and Ukraine.

Providers EPAM and Luxoft are starting to gain some international recognition as well, both making Brown & Wilson's Top 50 Best Managed Global Outsourcing Vendors for the first time in 2006.

For Wood, the biggest benefit of working with Luxoft is a cultural one. "One of the reasons we're in Russia is that we found a common value set. Their work ethic is strong, and these people are very outspoken," says Wood. He says engineers in Moscow have no trouble proposing a different course of action when necessary. He says he found workers in Bangalore to be reticent. And since Russian developers stick around longer-turnover is now in the low teens-Wood has plenty of time to take those opinions to heart.

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