A better term for what Zoho does is "offshoring". Outsourcing and offshoring are orthogonal. It's only when the two go together that you get sweatshops.

An even better term for us is "and Indian company with an American HQ" - in early days due to foreign exchange restrictions in India, it was painful to have the HQ in India. Increasingly that has faded as India has liberalized. We just imported a ton of Macs for our development team in Chennai; 10 years ago that would have sucked, now it is easy.

So with enough liberalizing (and perhaps more Indian customers) the American HQ might move to India?

Good point. I like the term 'smart-sourcing' - having a presence 'on-shore' & 'off-shore' & having the customer-relationship stuff done near the customer (on-shore) & the non-relationship stuff wherever's best (sometimes, but not always 'off-shore).

That makes sense. But I still don't see how it adds up to a bootstrapped product company. Especially not one like Zoho (wide product range, products directly competing with major players, products in long established categories and classes).

India is one hell of a resource. It's kind of raw at the moment. IE, you can't easily just buy services there and expect good quality. Being able to make it work well could be one hell of an advantage. As you say, you can't just take elance rates and calculate what you save by producing in India. You would probably end up paying many times more to attract, train & keep the best. Could still be cheaper the California, but probably within range.

Basically what I am saying is this: You can probably save a lot and still get quality by being exceptionally good at producing in India. Sounds like Zoho is. But that still doesn't bring your costs down by enough to give a competitive edge to a product company. If you are a service business, cutting production costs (without harming quality) to 60% is a massive edge. If you are a product company, does that still apply?

Side note: It sounds like Zoho's important "technology" is knowing how to produce great quality products in India. I wonder if that is technology another company would pay to acquire. How much would it be valued at?

- update: - I have just read some of the other comments and found a link that sheds some light on my questions, I think. The product company / service company split is far to simplistic. Zoho sees itself as a business software company. An area where (apart form MSFT's monopoly), margins do count and success is not binary. Getting employment costs down and productivity up, even marginally, can make a difference here. I recommend reading the blog post.

http://blogs.zoho.com/uncategorized/why-we-compete-with-goog...