We all know how hard it is to hire and retain talents in the Silicon Valley. The Bay Area is home of software powerhouses like Google, Yahoo!, Ebay, HP, now Facebook, and of many, many more; since there is not enough software developers here, most companies are looking beyond the Bay Area for their staffing needs, sometimes in the US, more often abroad, mainly in India so far.

In the past couple of years, employee retention has become a challenge from a much greater magnitude in Bangalore than it is in the Silicon Valley. It is not uncommon to observe turnover rates over 50%, especially within tier-2 and tier-3 providers. I know several US companies that have lost their entire Indian team within a 12-month period!

With average turnover in the low 10%, destinations like China or Vietnam were seen as a safe harbor compared to India. However, it might be changing fast.

In the professional services sector, cities like Beijing, Shanghai, Dalian or even Hanoi are experiencing turnover rates approaching the 20% and growing. In Beijing for instance, retaining talents is becoming a challenge for software companies, something that was not the case only 2 years ago.

The major driving forces that are causing China’s software industry to change so rapidly are:

• First, US companies are rushing into the country. China is gaining the reputation of being a better destination than India, not only for price for also for quality, and therefore giants like Google, IBM, HP, etc. are investing massively here, hiring talented engineers by the hundreds, when mot the thousands
• The second factor is … India. Large Indian companies are expanding very rapidly in China. In addition to finding cheaper talents, there is another attraction to Indian companies: China is the gateway to the Japanese market
• And China has a third factor, which a country like Vietnam have not developed yet: its domestic market is growing insanely rapidly; companies like Huawei, Alibaba, or Baidu have earned International recognition now, and have become magnets to many engineering talents.

Does it mean China is facing a shortage of talents similar to the Bay Area’s?

Not really. China produces over 600,000 engineering graduates every year. India follows with over 450,000 engineering graduates. The United States produces only 70,000 engineering graduates every year. All of Western Europe produces just over 100,000.

In fact China is likely to produce enough graduate engineers to satisfy the market needs for any foreseeable future.

So why is turnover growing?

The usual explanations apply here: the economic growth creates a wealth of opportunities, causing salaries to increase at a much faster pace than the inflation. Talented developers are often presented with new offers to increase their salary, or to fast track up the ladder.

However, a closer look at the Chinese software companies show that the companies with high turnover rates are either the ones that have not developed any HR strategy, and the ones that are still using the old-fashioned rules, inherited from the previous economic regime.

Turnover remains low for the companies that have already implemented a well-thought HR strategy that includes employee “responsibilization”, career path definition, regular career reviews, training, financial incentives, the right mix between more senior and younger developers, and proper management of the “natural” turnover.

Turnover is inherent to this industry. The challenge is not to eliminate it, but rather to keep it under control. An 8-10% turnover rate is just healthy (for outsourcing companies).

It is certainly a very good time for US companies to outsource to China. However, when selecting a local partner, inquiring about their employee retention program is a must, and should be one of the first items on every checklist.

Posted by Remi on Monday, March 31st, 2008 at 7:26 AM.