When buy-side companies talk costs, we often hear how the Nearshore is more expensive than India. There’s probably no arguing that from a labor standpoint, but what about overall economic value, accounting for the variables of sourcing work from far away? If we compare the Total Cost of Ownership (TCO) of India and Latin American countries, will they be materially different? Or is India always going to be the cheaper option?
We spoke with two thought leaders – Atul Vashistha, Chairman of Neo Advisory; and Tony Mataya, Partner at ThinkSolutions – who take a hard look here at hidden costs, worker productivity and which geographies give you the most bang for your buck.
What you need to know about TCO
Total Cost of Ownership, or Total Cost of Outsourcing as it has come to be known, is a hugely misunderstood topic. In fact companies usually only understand it about six months after they sign on the dotted line. It all stems from a lack of knowledge about the factors that make up TCO either in India or the Nearshore. We’ve listed some rarely considered
differences between the two regions that could end up costing a lot more than you anticipated, if not managed effectively:
- Costly employee benefits – Three words: 13th month salary. Workers in most LatAm countries are entitled to an extra month’s wages, payable by the employer in December of each year. In Brazil this represents the highest monthly compensation paid to the employee during the year, while in Colombia and Argentina it’s the base salary paid in the last month of service. The rules for this practice vary by country, but one thing does not – it’s mandatory and represents a significant cost on your balance sheet that you won’t find in India. Worker unions are also big in many Latin American countries leading to rigid labor regulations, restrictions on working hours and high severance payments.
- Attrition rates – If Nearshore countries lose out on that last category, here’s one in which they outperform India. Depending on the service being provided, churn rates are anywhere from 8 to 20% – about half what they are in India, where attrition can often pass 35% according to NASSCOM. “The degree of employee retention is a hidden cost to companies”, says Mataya. “Especially if you do a lot of knowledge transfer, if the deal is not priced right then you’ll end up paying for it through training and re-training workers”.
- Productivity – How productive an individual is in one location versus another is possibly the most important factor in determining TCO. Too often, companies simply go after low wages and manpower without taking into account the output of a resource. The perception is that workers in Latin America are more efficient, but that may or may not be true. “I’m not convinced”, says Vashistha. “We often hear companies like Softtek and even TCS Latin America claiming that since they have closer cultural affinity, they can accomplish more complex functions with less re-work needing to be done. But I haven’t seen any evidence for that”.
However Mataya talks about the gap in skill level sometimes found in India. “A Level 1 Programmer in India may not have the same capability as the same position in Chile for example. If you have a resource but it takes them 20% longer to do something, that changes your TCO”. Because of differences in training standards, you really must judge workers by skill level and not by title in different regions.
Especially if you’re considering a third party vendor, we recommend negotiating performance guarantees into the pricing to lower your TCO. These metrics monitor the quality of the delivered service – without them you may be paying lower fees but getting diminished quality which ultimately will cost money to fix.
- Utilities – Another factor that’s rarely considered in a TCO analysis is utility costs specific to each region. “In India for example you absolutely must have a backup power generator for your delivery center, whereas in Latin America that may not be necessary”, says Vashistha. For infrastructure, countries like Chile provide cost-savings in terms of rental subsidies that are rarely found in India. On the other hand in some LatAm countries like Uruguay and Costa Rica, the government maintains a tight monopoly on telecom networks and other utilities, that drive up costs simply by limiting the efficiency of your operation.
- Recruitment – If India has one strong point, it’s the ability to easily scale up IT outsourcing operations. “The challenge in most of Latin America is still that you cannot have scale in IT”, says Vashistha. “If you want call centers or even BPO, sure you can hire a thousand workers. But it’s only in India where you can be assured of a scalable IT operation”. We’ve all heard the reports of firms competing for workers in IT hotspots in Latin America, consequently driving up wages all round. The smart countries are swiftly training more workers, but the region still trails India in scalability.
It’s easy to compare the hourly salary between offshore locations, but if you really want to understand where your hidden costs will come from, a TCO analysis on a deeper level is needed. The above are just a few factors that are sometimes overlooked.
This all ties into another element of TCO that’s often difficult to quantify, which is governance. If you know the type of relationship you want with your vendor, pick locations conducive to that management style. Many clients never visit their operations in India, and prefer in that way, while others appreciate the proximity of Latin America, and the level of involvement it allows. “It’s why you see companies like Google and Intel increasingly doing business in Latin America – they want to work more collaboratively. And we’re also seeing LatAm companies opening offices in the US”, says Mataya.
All things considered, it seems that India is still the less expensive option for now. “TCO is still lower in India, but the gap when all these factors are thrown in, is a lot closer than people like to think”, he says. “Often the situation is not either/or. Companies want to have a more diversified portfolio that’s not limited to one geographic area”. Vashistha agrees – “Some have been sending work to India for years, and are satisfied with the results on paper. But they’re frustrated with things like accent and attrition, and are now looking to Latin America. They recognize that there are some things that can be better done here. I think in about ten years, prices between India and Latin America will normalize”.