Why small business must hire offshore.

• Position: Outsourcing

Will the small business sector--the nation's largest creator of new jobs over the last decade--become the biggest outsourcer to foreign countries? They may be left with little choice, notes John A. Challenger, CEO of the global outplacement firm Challenger, Gray & Christmas, Inc., Chicago.

"It is a matter of survival for these firms, especially those in the information technology sector where the company's highest costs can be payroll," he explains. "One venture capitalist even told our researchers that it would be virtually impossible to start a new IT or software company in Silicon Valley without offshore outsourcing." Small business could lobby to gain an exemption from the proposed Federal legislation seeking to curb American companies from shipping work overseas.

"Small business, defined as those with 500 or fewer employees, could argue that, as they are the No. 1 creator of jobs, and as they too are competing in the global marketplace, an exemption to the proposed law would also gain domestic jobs as they out-compete foreign firms on the basis of superior American-made product quality, service, and price," Challenger suggests.

In fact, Warren Weiss, general partner at Menlo Park, Calif.-based Foundation Capital, relates, "There's no way you can have a Silicon Valley company without outsourcing. You simply cannot make the numbers work."

That sentiment was echoed by Venetia Kontogouris, managing director for Trident Capital, based in Westport, Conn., with offices in Palo Alto, Calif. "It is far too expensive today to start a technology business in Silicon Valley without outsourcing. The economies of salary simply do not make it possible. Companies can go to India and get highly skilled workers with PhDs for the equivalent of $15,000 to $20,000 per year. You can have a team of five to six programmers in India for about the same cost as having one or two in Silicon Valley."

The need for cost containment has increased in recent years as venture capital firms become more frugal with their investment dollars. Before the dot.com collapse, it was common for new companies to receive as much as $15,000,000 in the initial round of venture capital funding. Today, most get $3,000,000 or less for the first year, which means they only can spend about $250,000 per month.

A cost analysis by one Silicon Valley employer, Solidcore Systems, calculated the cost of keeping one tech employee in Silicon Valley at $15,000 per month, which includes salary and...