ScanSoft Pulling Up Stakes in
Silicon Valley, Heading for Budapest

More than a few companies have found the fabled Silicon Valley so pricey that they've relocated to other, less costly locales. But not many - if any - have relocated business functions from the Valley to Budapest.

That's the case, though, for Peabody, Mass.-based ScanSoft (www.scansoft.com). The digital imaging software concern is moving a key function to the banks of the Danube River, part of a broad-ranging series of cost-reduction initiatives within the company.

And waving bye-bye to the Valley is no minor move for ScanSoft. By closing its office in Los Gatos and eliminating 70 positions, the company is cutting more than 20 percent of its total global work force.

Other smaller cuts will be made in the sales, marketing and administrative positions at various other locations, according to ScanSoft officials. The headcount cutbacks "will be partly offset by incremental hiring of software developers [in] Budapest," they said.

Hungarian Operations Taking On High-End Tasks

ScanSoft's cost concerns mirror the strategies that often drive offshore relocations. In fact, company officials say that "the cost of developing software in Budapest is roughly one-quarter the cost of developing it in Los Gatos."

But ScanSoft's strategy doesn't follow the typical offshore model of relocating low-end functions. As part of closing the Silicon Valley office, the company is transferring to Budapest the responsibility for development of its OmniPage optical-character recognition (OCR) software.

ScanSoft - which one tech writer unceremoniously dubbed "a home for orphaned digital imaging products" - already has an existing operation in Budapest. The company's Hungarian presence is rooted in its acquisition of a Budapest-based firm then known as Recognita. As a result, ScanSoft already has in place in Budapest what officials described as "a highly capable team of 43 software engineers." In conjunction with closing the Los Gatos facility, ScanSoft will hire a number of additional software engineers "in the next few months," according to company officials.

"Having worked very closely with Budapest over the last several months, we are confident with their ability to supply world-class OCR products to ScanSoft's current and future customers," said Stan Swiniarski, senior vice president of research and development. Scansoft CEO Michael Tivnan said the repositioning of OmniPage software development will reduce the company's annual operating costs by US$10 million to $12 million.

"We needed to significantly lower the company's fixed expense base, while still maintaining a robust product development effort," Tivnan explained. "The decision to move to Budapest will achieve both objectives and enable ScanSoft to continue to invest in its core technologies."

Reshuffling Not Unexpected

ScanSoft's reshuffling wasn't totally unexpected. Despite a 36 percent increase in second-quarter 2000 revenues, with sales rising to $7.4 million, the company still posted a net loss of $3.7 million. And ScanSoft's 2Q 2000 losses swelled to $23.9 million when factoring in the effects of what the company called "in-process R&D write-offs, goodwill amortization and unusual items."

ScanSoft executives attributed the company's sluggish performance to a slump in U.S. scanner sales, "disruptions" from the acquisition of Caere and delays in new product launches. Now, it seems, some of ScanSoft's new product launches rest in the hands of the company's Hungarian operations.