One of the main problems which pop up when Westerners think about outsourcing services to India is the overestimation of costcutting through decreasing the salary costs.
Because of the high level of labour cost in the West-European countries, most Western businessmen almost only take into account the salarycosts when making an offer.
Suppose one has to make an offer for doing an IT-job which will take an estimated 60 hours of labour.
In West-Europe, salary cost will be let's say around 25 euro per hour and typically one will add to that cost some euro's for investments and other costs. Total would come to around 30 euro. So 20% of the salarycost is added, and even for important new projects or tests, this investment/fixed costs are overlooked then.
Now, in low-labourcost countries, the situation is very different and the spontaneous calculation a Western businessman does, is not applicable here.
Let's say that the salarycost for a good employee is here 600 euro cost-to-company. This results in 3.5 euro an hour.
All the other costs however, fixed -, running - and investmentcosts, are at least the same and often a lot more in these countries. Among the reasons for this are: bad or at least unreliable power supply, lower quality in education, complexity of administration, traffic problems ... Often this results in a typical overhead cost of 4-7 euro an hour, depending on the size of the company.
So for overhead costs one must add 200% to the salarycost in case of a small company.
The total cost for an hour approaches as a result 10 euro an hour, which is a multiple of the salary cost.
This is the reason why so many outsourcing trials fail. At one side you have the overestimated costcutting at the Western side. At the other side often you find the underestimation of extra costs by the supplier in terms of reliability, quality, knowledge and overheadcosts in general ...
The same fact is also thriving f.i. Indian companies to grow as quickly as possible, because only companies with a big-enough number of employees can be profitable in India. In prepress this has f.i. led to companies having several thousands of employees.
The only way for a company in India to survive is to grow so that overhead costs decrease ...
Let's hope that the Indian government will work hard to meet companies in reducing all these overhead costs. Providing a reliable infrastructure in terms of energy and transport for employees, and the simplification of all administration, are the topmost requirements.
