Last updated on November 26th, 2022
The universal adoption of the internet, the proliferation of telecommunication technologies along with political shifts and lower trade barriers have driven the creation of new business models. However, these forces have also led to increased global competition and rising consumer expectations. Today, we are living in a world where consumer and enterprise products are expected to deliver the same elevated experiences. UX rules and continuous updates, upgrades, and new products are the norm. Software companies are always looking for the next big product…the next big ServiceNow or even NetFlix if you please. In regions like Silicon Valley, venture capitalist money has always had similar hopes. However, the operating costs of software development companies in these areas are proving severe dampeners to all that enthusiasm.
When it comes to software development, we need to consider ‘what’ needs to be developed (the business requirements), ‘how’ it should be developed (the technology being used), and “who” will develop (the people who will be working on the project). While places like Silicon Valley have traditionally ruled the roost due to an unbeatable set of answers to those three questions, the alarmists are becoming increasingly more vocal.
Let’s take a look at the infrastructure costs. In a place like Silicon Valley, the infrastructure costs are almost prohibitive. According to real estate firm JLL’s 2017 U.S. Fit Out Guide, Silicon Valley is one of the most expensive places in the US to build an office. The average cost per square foot and out of pocket costs in this area is estimated at $199.22. In comparison, the cost of building an office in Washington stands at $103.88 per square foot. The malaise is spreading -even places like Sacramento and New Jersey are expensive when it comes to commercial real estate at $198.24 and $179.13.
And while some tech companies can afford to take on this huge infrastructure burden, they need to take into account the other essential cost factor – talent. While the San Francisco startup culture makes it a hotbed for tech talent, it also means more competition among companies for the same set of people. This drives up salary and associated people expenses.
It is also getting harder to get people to move to locations such as the Valley owing to the extremely high living costs. A report from Public Relations firm Edelman showed that 40% of Bay Area residents would happily move out of California because of the high living costs. While there are other locations coming up such as Kansas City, Missouri, Nashville and Huntsville, Alabama getting tech talent to willingly move is still a challenge.
Political shifts such as the tightening restrictions on immigrant tech workers holding an H-1B visa is also a cost to companies as this workforce is being reeled in by countries such as Canada. The tech vacancy forecast in Canada is expected to reach 200,000 by 2020 -so chances are that they will welcome anyone who can’t find a visa to come to the USA. This is affecting our tech leadership too. Cities such as Toronto already have expertise in cutting-edge areas like artificial Intelligence. In fact, the city has added more tech jobs in 2017 than the San Francisco Bay Area, Seattle, and Washington, D.C., combined.
With the constantly changing and fast-evolving business landscape and constantly rising consumer expectations, software companies need to deliver faster and deliver better while keeping costs under check. Organizations need greater access to talented human capital at a workable cost. They also are pressed to develop software products with the latest technology. Scaling a local team just to meet specific or limited-impact skills gaps will only add further to the operating costs. The resource costs for the same can be prohibitive especially for short-term projects.
It’s an old argument -but still true that in response to these high operating costs, organizations looking at developing high-quality software products faster should leverage an offshore or nearshore global product development team.
These models are based on the lower cost of resources, the greater efficiency of scaling up and ramping down of teams, and the ready availability of resources with key skills. Add to that the zero costs associated with infrastructure. Models like nearshoring also give software companies the option to work closely with the local project management team as there is hardly any time or cultural differences to navigate.
This is a dynamic situation -there’s always a trade-off when you consider working with a global team. You give up a degree of control and introduce complexity into your operations. It’s also a fact that the costs at popular offshore locations like India are also rising -salaries are higher than they used to be and there is a cost associated with communicating across the time-zones. That said, as operating costs rise in the USA’s traditional product development centers like the Silicon Valley -the global team model is becoming more attractive than ever.