• Chart: Beyond Redmond

Recent expansion of Microsoft's India Development Center (IDC) in Hyderabad, along with reports of plans to send some "Longhorn" development and testing to Indian companies, have led to concern that Microsoft may move core development abroad to save money. In fact, although labor costs in countries such as India are certainly lower than those in the United States, these savings are partly offset by communication difficulties; other risks and benefits must also be considered. Consequently, Microsoft's core research and development will remain concentrated in Redmond, WA, and the company will continue to be selective about the type of work done elsewhere.

A Global Company

At the beginning of 2005, approximately 28,000 of Microsoft's 57,000 employees work on the company's main corporate campus in Redmond, WA, or other offices located near Seattle (including a large facility in Issaquah). These employees perform a wide variety of functions, including marketing, operations, and support, but the majority of them are in product planning and development. The company also has large development offices in Mountain View, CA (part of Silicon Valley, a critical IT hub), and Fargo, ND (headquarters of Great Plains, which Microsoft acquired in 2001).

Of the remaining Microsoft employees, most work in field sales or support organizations around the world. However, several thousand employees work at research and development facilities outside the United States, including China, Denmark, Germany, India, Ireland, Israel, and the United Kingdom. (For an overview of Microsoft facilities where R&D is conducted, see the chart "Beyond Redmond".)

Today, Microsoft's largest product development centers outside the United States are in Vedbaek, Denmark, and Dublin, Ireland. The Vedbaek location was part of the July 2002 acquisition of Navision—now part of Microsoft Business Solutions—and employs about 700 people, mostly in development roles. The Dublin campus has 1,200 employees total and includes the European Product Development Centre, which works primarily on translating Microsoft’s products into many European languages (as well as the company's European Operations Center and the Ireland sales office).

However, the IDC is likely to overtake both of these facilities in size and scope over the next several years. Opened in Mar. 1999 by S. Somasegar (now the vice president of Developer Tools) and overseen by General Manager Srini Koppulu, the IDC today employs about 450 full-time employees in development-related roles (including testers and program managers) and will increase to 500 employees in 2005. In Nov. 2004, Microsoft CEO Steve Ballmer inaugurated a new facility in Hyderabad that will be able to house up to 3,200 workers by 2006—nearly double the current facility's capacity.

Why Develop Abroad?

Microsoft has not given any firm details about its plans for expanding the IDC or any of its other development offices, saying only that it will continue to grow both in the United States and abroad. In fact, in Jan. 2005, Microsoft and the City of Redmond announced an agreement under which the company would add up to 2.2 million square feet of office space to its existing campus in Redmond over the next 10 to 20 years—an increase of more than 25%, and enough room to house between 10,000 and 12,000 additional employees.

Nonetheless, the company gains several benefits by locating some of its development abroad:

Lower labor costs. The most frequently cited reason for Microsoft (and other American and European companies) to move work to developing countries is the availability of highly educated workers and a lower-wage environment. For example, a Dec. 2004 report by research firm AMR suggests that the average IT worker in India earns about 60% of the salary of his or her counterpart in the United States. India has become particularly popular for IT development because of its good education system and the fact that many educated Indians are fluent in English.

Influence. Microsoft views developing countries as an important future source of revenue as personal and business incomes rise, but high rates of software piracy and the popularity of open-source software such as Linux limit the appeal of commercial software in these countries. Open-source software costs almost nothing to acquire and may be freely inspected and modified, not only by government agencies and other organizations that want to ensure security (for instance) but also by students and budding developers.

By locating some of its product development in developing countries, Microsoft can court local and national governments and help establish a local software industry—two factors that encourage governments to pass and enforce stricter laws against piracy of intellectual property (such as software). In addition, Microsoft's presence encourages young developers to learn Microsoft technologies so they can get good jobs, and it may temper their interest in open-source technologies.

Efficiency. In acquisitions where Microsoft intends to continue selling the acquired company's product with few modifications, it makes sense to continue using existing facilities. Moving development to other locations (such as Redmond) would cause a break in production, and Microsoft might not be able to convince key developers and managers to relocate. This is an important reason why Microsoft continues to operate development offices in Fargo and Vedbaek.

In addition, some research and development work is best done closest to its core market, where developers are more likely to understand local needs. For instance, one of the reasons Microsoft acquired Navision was the product's support for multiple currencies—a problem more familiar to developers in European countries than in the United States. Other examples include the company's research branch in China, which has worked on user interfaces for Asian languages (which have thousands of symbols, compared with the handful of characters in European alphabets), and the recently opened research office in India, which will study problems typically experienced by developing nations, such as lack of infrastructure and illiteracy.

In theory, Microsoft can also use the time difference between Redmond and overseas locations to complete work more quickly—for instance, a team in India can check a project in at the end of their shift, just as their coworkers in Redmond are reporting for work. In practice, however, communication gaps make this type of cycle very difficult to implement, and Microsoft has not yet attempted to put 24-hour development cycles into practice in any significant way.

Risks

Although the benefits to overseas development are considerable in theory, there are risks as well.

Communication. Inefficiencies in communication are the most significant risk of doing development work in remote offices. The distance and time differences can create major delays—for example, a question sent via e-mail on Thursday afternoon may languish over the weekend, in contrast to a visit to a coworker's office down the hall, which can get immediate results. Similarly, distant employees may miss out on key strategy discussions and even simple office conversations and socializing that keep employees working toward common goals. Finally, teams in remote offices might want to work on larger and more challenging projects than team leaders in Redmond feel comfortable giving them, requiring leaders to spend an inordinate amount of time and effort defining and redefining the scope of projects.

Legal. Legal frameworks and practices differ widely among countries. For example, intellectual property violations are not prosecuted as vigorously in some countries, increasing the temptation of employees to pass trade secrets to competitors. Labor laws may make it more difficult to weed out underperformers in some countries.

Political and public relations. Any time a successful company expands its operations outside of its home country, it's almost guaranteed to face questions from the press and local politicians as to why it's not filling those roles with domestic workers. Conversely, if a company is later forced by economic or political reasons to downscale its operations overseas or withdraw altogether, it will face flak in those countries.

Candidates for Overseas Development

Because of the risks associated with development in other countries, Microsoft is selective about the products (or, more often, product components) that are developed outside the United States. Most candidates for remote development have the following qualities:

Modular. Components or features that can be developed in relative isolation, then added to the rest of the product without much disruption, are good candidates for remote development. For instance, because Windows Services for Unix uses well-documented networking specifications, the project could be specified very precisely in Redmond, then completed at the IDC without requiring much day-to-day communication. Other examples include the Marketing Automation and Analytics modules of Microsoft Customer Relationship Management, both of which are being developed at the IDC.

Low-level dependency. If a particular component or feature is so important that failure to complete it would delay delivery of the entire product, then it's considered a high-level dependency and is likely to be developed in Redmond, rather than remotely (in this case, even Microsoft's other U.S. offices might not be acceptable). In contrast, a delay in development of Outlook Express, the Windows System Resource Manager, or the Routing and Remote Access Service (RRAS)—all developed partly at the IDC—would probably not be sufficient reason to delay a release of Windows.

The same goes for complete products: no other products depend on the timely release of Internet Security and Acceleration Server (developed mostly in Israel), the Navision and Axapta ERP applications (developed mostly in Denmark), and Tablet PC (which is worked on at the IDC).

Nonstrategic technologies. Much of the software that Microsoft develops in other offices is designed to "bridge" customers from non-Microsoft technologies to Microsoft products, such as the J# language, Services for Unix, and Outlook to Notes—all of which were developed at the IDC. Other candidates might be products that have a significant user base and must be maintained, but that Microsoft no longer expects to update with major releases or new features.

In contrast, products that are likely to result in significant new intellectual property, or that will let employees acquire skills and expertise that can later be applied to other Microsoft products, are likely to be developed in Redmond. Similarly, all core product planning, strategic decisions, and management will remain in Redmond.

Resources

The IDC's home page is www.microsoft.com/india/indiadev.

Microsoft Research is discussed in more detail in "The Role of Microsoft Research" on page 25 of the June 2002 Update. The home page for Microsoft Research is research.microsoft.com.

Background on Microsoft's support organization, including Global Technical Support Centers, can be found in "Understanding Microsoft's Worldwide Support Organization" on page 31 of the Oct. 2004 Update.