Testing, testing, one two three

I chatted to testing group SQS today on their results. They're growing rather nicely - organic growth at 18%, well ahead of the IT market as a whole (5-6%). They're paying a dividend, something of which I heartily approve. And they seem to be quite lowly valued, so this could be a nice choice for a growth portfolio.

What I found interesting though was their approach to offshoring. They've decided to go for South Africa rather than India, but they're still coming in with day rates about a third of what you might get in the UK or Germany.

And apparently, if you don't offer offshore facilities nowadays, no one is going to take you seriously. They've actually found that by offering offshoring, they're getting more onshore business too.

Where the problems come is with staff attrition. They reckon churn rates in India are 25% or more - that's one heck of a management problem for a software company. Not so bad for McDonald's or All Bar One, but not good where you need continuity on projects and a high level of technical knowledge. South Africa, apparently, is a lot better in that regard - and because consultants aren't job hopping so much, wage inflation is also low, another contrast with India.

I'd hate to predict that the glory days of Indian outsourced services are over. I think they'll carry on growing - and companies like Wipro have shown they are nimble and clever.

But there is certainly room for growth in other countries too and I'd love to see some South African, Bulgarian or Vietnamese outsourcers coming to AIM. (Vietnam is big in computer graphics - an interesting niche; Bulgaria used to be very big in optical systems and web development.)

Meanwhile, SQS seems to be capturing business as more and more companies see the value of an independent testing regime - putting them half way between computer consultants and auditors. With corporate systems scrambling to keep up with change, and Vista on the way, that doesn't look like stopping any time soon.