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US: Technically Speaking Still a Hub

by Joseph MennLos Angeles Times
March 15th, 2004

Outside the gray ranch house in a quiet and well-tended neighborhood, a ceramic frog guards a flower bed.

The house is pretty much the same as the others on Woodford Drive, except for the plastic sign on the wall that says "Easic Corp." Inside, in the dining room and family room, there's a daybed for the dog, brass plaques memorializing the chip-design firm's patents and five employees setting strategy, reviewing software and sending e-mail to programming colleagues in Romania.

It looks a lot like the future of Silicon Valley. Zvi Or-Bach, Easic's founder, president and chief executive, hired the Romanians for the same reason he keeps Easic's headquarters in his three-bedroom house, where a secondhand mobile home in the backyard accommodates overflow employees.

"Obviously, it saves money," said Ze'ev Wurman, vice president of software development, noting that the Romanians' salaries are one-tenth of programmers' wages in San Jose.

As Silicon Valley emerges from three years in the economic wilderness, it is taking on a new look. These days, many technology powerhouses no longer have thousands of locals employed to perform tasks ranging from designing software to cleaning the cafeteria.

The new Silicon Valley is a land of headquarters, a place where deals are made but not necessarily carried out.

The transformation echoes the evolution of Hollywood, which from its base in Southern California manages film shoots in Canada, animation in South Korea and special effects in New Zealand. In fact, the Silicon Valley tech sector is the latest addition to a long list: Generations ago, the textile industry sent factory and management jobs south from its New England base, for example, and later back-office jobs in financial services migrated from lower Manhattan to New Jersey.

With the shift, "the character of the valley is changing pretty dramatically," said AnnaLee Saxenian, dean of UC Berkeley's School of Information Management and Systems.

Although some companies are doing things the old-fashioned way, an increasing number of jobs that once were the guts of valley life technical support, programming, even some computer system design are now handled in places as remote as Bombay, India, and Bucharest, Romania.

More than half the companies backed by top venture capital firm Kleiner, Perkins, Caufield & Byers have operations offshore, firm partner John Doerr said.

Big companies like Armonk, N.Y.-based IBM Corp. and Oracle Corp. of Redwood City, Calif., have drawn headlines and political fire for transferring jobs overseas, but the phenomenon has extended to even the smallest companies, which collectively employ the majority of technology workers in the valley.

"For some high-level engineering and marketing people, this is probably still the place to be," said Doug Carlisle, a managing director of Menlo Ventures in Menlo Park, Calif. "But they aren't going to build a whole company here like Cisco [Systems Inc.] and Oracle, companies that were growing like crazy 15 years ago. Almost no company is putting 100% of their operations here for the long term."

Lower-cost labor is just one factor. Another is the increasingly far-flung demand for sophisticated technology.

In years past, young companies almost always tried to establish themselves in the U.S. before going after customers elsewhere. Not anymore.

"It's more expected today that companies start to engage in global markets earlier," said Ken Xie, CEO of computer security firm Fortinet Inc., who founded the Sunnyvale, Calif., company in 2000.

Like many of his peers in the valley, Xie finds it easy to do business in some faraway places because they are familiar to him. Xie grew up in China and earned a master's degree at Tsinghua University in Beijing before moving to the U.S.

Xie worked on security technology at several companies, including dot-com start-up Healtheon Corp., now WebMD Inc. Healtheon's successful initial public offering gave him the means to start again with Fortinet.

Fortinet sold its first products for protecting computer networks from viruses and hackers to businesses in Asia, so it made sense to build a significant presence in Tokyo and Beijing, Xie said. Almost 250 of its 350 employees are now located outside the U.S. Fortinet is aiming for $100 million in revenue this year, two-thirds of which probably will come from abroad.

Spreading employees across multiple time zones is also a big plus in a field like computer security, in which companies have to swing into action in minutes. At Fortinet, there is always an employee somewhere who is awake to respond to a new virus or electronic vulnerability.

In part, the globalization of Silicon Valley's workforce is an indirect result of the high-tech boom of the late 1990s. Back then, when Fortinet and thousands of other firms were eager to hire, engineers at home cost twice as much as they did a short flight away in Vancouver, Canada. So Fortinet built a staff of 120 there.

Even though job seekers in the valley are now much less demanding, firms with far-flung operations see no reason to move those offices here.

Fortinet does plan some local hiring: Its cavernous two-story headquarters building can fit 400 staff members, and it's only 25% full. But Xie said he also would hire in Vancouver, where the workers are cheaper and less likely to jump to a nearby company dangling a better offer.

Not only is the talent in Canada and in India, China and Romania getting better, it's getting easier to find. Small brokers and major consulting firms now help tech firms find low-cost workers overseas, and specific projects can be handed off to the contract armies of companies like Wipro Ltd. and Infosys Technologies Ltd.

Equally important, executives say, is the state of communications. High-speed Internet connections are more pervasive, videoconferencing is routine and phone calls placed over the Internet are cheap.

Ten years ago, video chats required an initial outlay of about $25,000, said venture capitalist Mitchell Kertzman of Hummer Winblad Venture Partners in San Francisco.

"Today, if you have [Apple Computer Inc.'s] iMac and iChat, you can have videoconferencing for virtually free," he said.

And more people throughout the world are using the same tools such as Excel spreadsheets made by Microsoft Corp. and database software from Oracle making collaboration across great distances much easier.

At Navis, an Oakland firm that makes software to help seaports track the loading and unloading of cargo, corporate staffers can easily coordinate with 45 programmers in India, customer support teams in England and Hong Kong and a sales force spread out near customers in 38 countries. That kind of long-distance teamwork was made possible by augmenting Navis' internal systems with standard software programs available off the shelf, CEO John Dillon said.

"It's vastly easier today than it was five years ago," he said. "And it was probably impossible 10 years ago. A support rep in London can work on a problem in their morning, they can pass it off to California when they go home and, if need be, California can pass it to Hong Kong."

For now, 150 of Navis' 212 employees are at the company's headquarters, where engineers earn $39.38 an hour instead of the $10.98 they make in India. The Bay Area has played a key role for Navis since its founding in 1988 by two Berkeley PhDs; the company's first customer was a shipping line based in Oakland.

The area is still the best for finding the top-flight software people Dillon calls "10X programmers the ones who do the brilliant stuff."

But the cost of doing business here has stunned the former Navy submarine officer. "I never thought being in California would be a competitive disadvantage," he said.

Over the next several years, Dillon said, he might export more high-level jobs. "The core team will be concentrated here, but much of the other talent will be based in other places," he said.

After reviewing recent offshore hiring to identify the professions most at risk, UC Berkeley economist Cynthia Kroll and her colleagues reported last month that 15.7% of the Silicon Valley's employees were in vulnerable lines of work, compared with 11% of the national workforce.

"Silicon Valley has already lost 18% of its jobs," Kroll said. "Outsourcing is definitely making it harder to replace even a fraction of those."

Fortunately for the valley's future, most companies share Dillon's plan to keep a central group of executives in the area.

Even Easic, the company with the backyard mobile home, intends to hire locally in the near future as its new chip-design system gets off the ground.

"We certainly have much more contact with customers here," said Wurman, the vice president. "You need the contacts, the networking."

If all goes well, Easic will get a real office. That will mean fewer stares from potential investors, some of whom have been taken aback by the firm's reliance on dining-room workstations and cheap labor in Romania.

Then again, Wurman said, "others appreciate it, because they see we don't burn money. Especially if it's their money."





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