When we discuss about outsourcing and in particular offshore outsourcing, we often discuss about the cost of salary. In a previous post I showed how an outsourcer’s labor costs can vary dramatically when changing countries. Even within Europe.
But cutting the labor cost by half does not mean the end cost can also be reduced by 50%. Other costs needs to be considered. In a typical inshore call center end cost can be roughly 2 times the cost of the agent.
Of course this varies between locations (e.g. UK vs. Italy) but for the sake of discussion, let’s assume the hourly cost of salary for our center is 10 € and that we can charge the client 20 €. The additional 10 €, in addition to the outsourcer’s margin, pay a long list of other costs.
These costs are often very similar between where in the world your center is located and, in most cases, savings on a cost item are compensated by additional costs on another. Let’s see some of these costs.
Rents: renting an office in an offshore location may be cheaper than renting in central London. But it is often not very different if you need a facility with proper electrical and network wiring. The stock of this kind of building tends to be limited and overpriced in most offshore locations.
Telecom: These days, thanks to the widespread adoption of Voice Over IP, phone costs are not very different between offshore and nearshore centers. On the other end Internet connectivity can still be quite pricey.
In our case, with more than 1.000 concurrent calls during peak hours, Internet was not reliable enough to sustain all our voice traffic. So we had to invest in a dedicated international link. And this is a cost that adds to the overheads.
Management: the cost of management can vary greatly between different offshore centers. Pure offshore players hire local managers, whose cost is lower than expatriates. Other players relocate managers from western countries in order to bring in more expertise.
We took this second approach, because we thought it was better for our clients and helped us support our warp-speed growth. But this adds to the costs as a relocated manager is much more expensive than one recruited locally.
Other infrastructure and G&A costs: all other costs tend to be very similar between countries. You will spend less for cleaning the office (a labor intensive task) but you will spend more for PCs (offshore markets are usually less efficient than western markets). You will spend less for office furniture, but you will need to buy a backup power generator.
Overall the som of all these costs do not vary much between countries.
So what’s the cost saving from offshore outsourcing on the bottom line?
If we assume that in a developed country 50% of the cost for outsourcing services is the cost of agents’ salaries, and that the other 50% is not varying sensibly between countries, every 10% saved on personnel translates in a cost saving of 5% for the client.
So, moving a service from a western country to Romania may a cost saving on personnel (salary + taxes) around 75%. But the real cost saving in terms of overall costs is more in the range of 30-40% .
