One of the top reasons for outsourcing is to control cost. In the U.S. and Europe, the primary cost driver for business services is compensation . Outsourced services are affected by changes in compensation, but the impact varies depending on the location, and different countries can have unique compensation issues. Today, we will look at factors affecting compensation in the U.S. and in the world's most popular outsourcing country, India!
Before we look at individual compensation variables, we need to understand how compensation relates to fees paid for outsourced services. When a client manages a service, especially a well-paying Fortune 500 client, compensation and benefits can be higher than the industry average. These clients may also have higher costs for IT support, HR and recruiting, taxes, electricity, cleaning services, and so forth. Let's look more closely at how location affects compensation costs.
- Client Location: Many firms with large outsourcing programs are located in big cities, often in highly prestigious neighborhoods. Space costs and taxes tend to be high, making other costs appear to be smaller. There are wide variations, but salary tends to be around 50% of total cost.
- Onshore: Domestic outsourcing locations are usually chosen because of lower compensation plus other key benefits. Exceptionally low space costs, lower taxes, or even low electric rates may be the key factor in deciding your location. Because these cost are lower for outsourcers than for clients, the percentage for compensation rises, even when salaries are lower. Expect salary to be as much as 70% of outsourcing fees.
- Offshore: Offshore workers are typically paid less than their domestic colleagues. This cost advantage is a key selling point for offshore work. Other costs--such as equipment, software licenses, furniture--are as high or higher than for domestic outsourcing. The cost of electricity, internet access and space are often far higher. For this reason, salary may only represent 10% to 20% of outsourcing fees.
From January of 2008 until January of 2012, the rate of inflation in India varied between 8% and 16%, compared to 0% to 4% in the U.S. Inflation affects all local costs, not just compensation. A multi-year contract provides some protection from rising costs, but when the contract is renewed it may require a significantly higher increase than a comparable domestic contract.
The rate of exchange between the rupee (India's currency) and the dollar can add a "wildcard" factor to all offshore programs. Between 2008 and 2012, a dollar was worth between 38 and 53 rupees. You can gain or lose from the exchange rate, depending on when you sign your contract.
Pay rises with seniority, regardless of the country. But the "rate of increase" is very different in the U.S. and India. While entry level offshore workers are relatively easy to hire, workers with greater seniority are much more difficult to find. The scarcity of experienced workers plus the financial incentive for rapid promotions (senior workers are charged at higher rates), accelerates the speed of promotions, and the rapid increase in pay rates.
Another pressure on compensation in India is their "mid-manager crisis." For rapidly growing services, managers are not being developed quickly enough to fill all positions, And many managers leave India to work in the U.S. or Europe. In 1970, only 50,000 native-born Indians lived in the U.S.; today the number is 1.5 million. This drain of experienced Indian workers creates further pressure on the cost of compensation.
Compensation can be a complicated issue for outsourcing programs. When you outsource to an offshore location, you need to manage a few more issues. Issues like exchange rates can average themselves out over a long period of time, but they can also be very problematic when you agree to or renew a contract. If you understand these issues about compensation (and other costs) you will be able to build and maintain a stronger and more predictable outsourcing program.