An offshore cautionary tale

Once an idea turns into a craze, there’s no stopping it. But IT crazes typically burn themselves out before too long. Once numerous cautionary tales begin to surface of people or companies getting burned, expectations get pulled back a few notches and assessments get more realistic.

In that light, let’s look at offshoring. I spoke with Tom Cole, a general partner at Silicon Valley venture capital company Trinity Ventures LLP, and asked him if what I heard was true: that VCs will not fund a startup unless it includes the use of offshore resources in its business plan.

Cole said Trinity tends to be a little less demanding; it doesn’t mandate outsourcing for companies in its portfolio. But it does insist that they consider it.

The issue is conservation of capital. “Basically, the board and the management have to do what is best for shareholders,” Cole told me. Trinity’s active portfolio is about 30 companies, and 25 to 50 per cent of that number use offshore services. However, Cole tellingly said, “That number is trending toward 100 per cent.”

Well, if each little startup is a seed planted in the ground by one VC company or another, some of those startups — someday — will become the new giants of high tech. Can we expect that, in five or 10 years, the current 15 to 20 per cent market penetration of offshoring will have grown to 90 per cent or higher? Perhaps.

That’s not necessarily a good thing, according to Bob Thibodeau, president and CEO of outsourcing consultancy White Label LLC. “Whenever you have a mass exodus, people make mistakes,” Thibodeau said, citing Ishoni Networks as one of the higher-profile failures.

If offshoring has become a bona-fide craze, I submit Ishoni Networks as an example of a cautionary tale.

Ishoni holds intellectual property for a single-chip solution for voice, broadband data, and security for homes and small businesses. We know for a fact that Philips Semiconductor invested US$25 million for a 51 per cent stake in the company. In addition, it secured approximately US$65 million from a half-dozen VCs.

But, as reported in the San Jose Mercury News, the Economic Times, and others, Ishoni declared bankruptcy in December 2003 after creating a subsidiary in India — a subsidiary that promptly shut itself down, only to have its 150 engineers resurface in a new, rival company named Ample Wave Communications.

According to Thibodeau, the offshore subsidiary’s management stole Ishoni’s intellectual assets and told its Indian employees to join the competing company.

Offshoring, Thibodeau said, is not as easy as picking up the Yellow Pages.

Many of the companies Trinity invests in do not give offshore resources access to source code. But of course, Cole said, that policy reduces the potential benefit that you can expect back.

Shirish Gosavi, vice-president of sales at vMoksha Technologies Inc., an offshore company I’ve mentioned previously in this column, pointed out that outright theft by a service provider is only one way to lose control of your intellectual property. Obviously, lax security is another.

Gosavi advised those considering outsourcing to work with companies that are certified to Carnegie Mellon Software Engineering Institute’s CMM (Capability Maturity Model) Integration Level 5, as well as British Standard 7799 for software engineering best practices and security.

And I say, while “he who hesitates is lost” is the typical byword in high tech, maybe “look before you leap” should be tacked on, too.

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