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Tuesday, April 03, 2007

One of the biggest advantages of offshoring to India is cost savings

Companies have been able to save about 30 to 40 percent for most services by outsourcing processes to India. Cost savings in India can be accounted for by savings in the following three heads:
  1. Labor: Indian professionals work at wages much lower than that in the US and Europe.
  2. Capital: Infrastructure costs in India are lower thus saving significantly on capital.
  3. Labor management: The number of employees required during a project is not same throughout the course of the project. Hence, when a business process is carried out in-house, companies have to pay the employees and maintain office space for them, even if these employees are not working on any project. Outsourcing enables companies to do-away with the expenditure on bench labor, as the outsourcing vendor allocates the bench employees to projects for other clients or bears the cost of inefficiency.

An excellent example of a company that has achieved cost savings by offshoring to India is General Electric (GE). After offshoring its BPO operations to India, GE found a reduction of 25 percent on its labor cost. This lead to an increase of 150 percent in the Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA).

There is a vast difference in the labor costs in US/Europe and India in the IT industry as well. An IT professional with 1-2 years of experience in the US and Europe charges USD 50,000 to 70,000 per year. On the other hand, a professional with same experience level costs about USD 8,000 per year in India, about 11 to 16 percent of that in the US and Europe.

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Risks factors to be considered when picking an offshore location

Offshore location risk factors include:

  • Infrastructure instability
  • Management of offshore resources
  • Confidentiality of information
  • Time zone differences
  • Cultural differences
  • Language barriers
  • Unknown suppliers
  • Uncertain legal rights
  • Geopolitical instability

Why is work going offshore?

Work is traveling offshore because of new information technologies such as the Internet, voice over IP, and enterprise applications, which make it easier than ever to hire, manage, and coordinate lower-cost, well-educated labor in the global economy.

There are also competitive and cost management reasons. Many executives know that if their competitors are going offshore to find technology or process support for drastically lower costs, they have to follow suit. If their competitors are finding the skills they require through an offshore outsourcing firm, they have to do the same.

Work is also migrating offshore because of the recent global economic downturn. Companies are more focused on improving their return on IT investments and closely managing IT spending. To attain high-quality IT services at a lower cost, companies are turning to providers with offshore delivery capabilities.