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”.
Good article, but I do not buy the conclusion because it is too generic. "“TCO is still lower in India" seems to indicate that TCO is lower in India in all circumstances. I think there is a deeper level of analysis: at different levels of skill the delta in TCO looks very different. At the lowest level of skills (for example call center), the delta in TCO is very big between India and expensive LatAm countries (like Brazil), but the delta is not that much in Central America, and you have the advantage of Spanish language for the Hispanic market. The most interesting comparison is at the highest levels of skill: architects, project/program managers/ designers, etc. At those levels of skills the TCO difference between LatAm an India is very small, and it makes a lot of sense to do it closer to the customer to have more flexibility. Also – in India is very difficult to hire high level of skills at US business hours (at night India time), which makes everything very difficult. The big lesson is: NEVER compare hourly cost only, always compare TCO and quantify as much as you can. Also – Mr Vashistha may not be convinced, but LatAm techies in sophisticated locations (like Sao Paulo, Mexico City, Monterrey, Guadalajara, B.A.) are as productive or more productive than their Indians counterpartswith teh same skill level in my experience.
The real answer is: 'It depends', for me the value of the article is that it shows how complex the TCO calculation can be, and how much the TCO depends on the specifics needs you have.
If you know you need a 10.000 IT developers, you should know that the question is irrelevant as only India will deliver this amount of people.
If you need a small call center with people that understand your business, most probably it will be easier to set-up in Latam as you can spend more quality time training and you can solve problems by just taking a few hours plane.
Conclusion: do your homework and hire one advisor to discuss opinions and results as the answer is very much dependent on your needs and situation.
Good article and good feedback but it's only at a high level glance so stating "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”. You mean "than India likes to think." The article does state TCO analysis must be taken to deeper level, and is key, because until you compare actual project details only then will true costs appear to make an educated decision for project placement.
Our Central America pricing consistently beats India pricing today so it's not a 10-year forecast of thinking pricing between these regions will normalize, plus ten years is an eternity in our industry. However, factoring total LATAM population vs India the nearshore region will always be viewed as boutique so it goes back to project specific client needs. With total award contracts today being smaller in size, or reduced in size, my opinion is the advantage leans towards LATAM. Only an opinion.
Wow, excellent NASSCOM Marketing Advertising, or similar use, but in my opinión and experience from Spain, Europe, in severall global companies with use Indian & American Offshore/Nearshore Services, your conclusions and a lot of data aren't correct.
1.- you talk about in 10 years the wages of Latham will be the same as Indian. Sir, in 2014 India will pass to Spain at 9th position in the economic nations ranks! Follow up to Brasil.
Yours HIPC is habitually, each year by year, arround 14% and Brasil 6%, in similar rates as Easter Europe, excepto Russia, >17%, and in all of these countries the IT & BPO wages are upper HIPC, in India especially!. Only Argentina has this HIPC in Latham, while China is in 15% and will pass the USA in the world's economic ranks.
What do you think about this?
2.- Spain & Portugal, have HIPC arround to ZERO, 1% 2,5% in the 3 last years! The trenes show you other world environment! as you describe in your document. Iberia wages, is each year more closer to Easter Europe, all UE!
Spain has 4.5M of unemployers, with 42% of youngers, the most of them, University Degree!
1.2M of these > 40 years of age, experience people, a lot of them in IT & Administrative Processes. Do you have workers? The Iberian Salaries, EMEA's Nearshore in 4th ranks as Forrester and Gartner said, are in the Q3 2004 Levels and going down!
From my vision, I'm happy to India, China, Brasil will pass our economy ASAP!
I'm sure, you have other problems in the NeXT secases that damage you wages: Kyoto protocol? Workers Rights? Population: in 2034 India will pass China as world's population nation. I suppouse that your nation, and companies should to work hardly as 9th economic world nation, and that supose Cost!
3.- Languages? The Spanish are increasing in US. 1/3 of poblation is bilingual, and the analist studies show us that the Latin Culture wins the NortAmerican People! As you can ser in Sports: football, basketball, tenis, motorbikes, F1, Shailing, …Spain is IN! an all that our represent, of course, the fusión of Europe & Latin World
Spanish Language is fashionable! In UE and USA
Spanish Language is the 2nd World's Business Language, and the 3rd more talked
Latham & Iberia, speak Spanish & Portugese, and English, we are TreeLingual!
EU isn't English as your IT & BPO Global Companies knew yet. Here, we speak German, French, Duch, Sweden, Norgerian, Italian, Spanish, Portugese, ….and English.
In Madrid Region, only 7M people lives 150 diferent nationalities!! We aré multilingual, and our brothers in Latham, who emigrate to Spain and Europe, speaks some oc these languages.
Spain is the 2nd Tourist destination, and the 2nd Inmigrant receiver country at World!!
What do you think about this? How do you show the future?
4.- Productivity? No, Efficiency.
Re-work? Why? I knew this concept working with India, and after with Lathan.
Do you know what is Outsourcing 2.0?
Do you know what is Offshore 2.0?
this is not future, it's present, and, of course the future and "low cost", "re-work", and concepts as your document write miles of twices, haven't place!
Innovation, Transformation, Business Inpact!
5.- You think that all the world are stopped?
What do you think about RuralSourcing?
What do you think about HomeSourcing?
My own company offers rates less India in Soain to EMEA! NOW!
I only work from Iberia. I not use energy that I don't produce for myself!
I not use Offshore, I use my own terminology; CLOUDSHORE!
I don't write mote from "my book", but you should be consider that INNOVATION, Business & IT Trabsfirmation and HICP Sustantiability, of course with respect to Kyoto; Global, Green, Grwoth!, aré the NEW ERA, and talk about wages and low cost, is the past.
With all of my respect to India, and all of your country and enterpretures had has to IT wold.
Thank you all for your comments. Carlos – you're absolutely right. The purpose of the article is just as you stated – to "show how complex the TCO calculation can be, and how much the TCO depends on the specifics needs you have". If you notice, I don't go into great detail about any one aspect of the TCO calculation, or discuss numbers in much depth. The article simply highlights some differences between India and the Nearshore that are often not considered before firms locate there.
Enrique and Ken – depending on who you talk to these days, you'll different answers for the most productive location, or the cheapest location. From what I've seen, it all depends on what kinds of services your operation is focused on, and where your clients want you to be. But I do agree that in many cases LatAm workers are substantially more effective than their counterparts in India. The important point however is that in IT, India is really the only place where you can be assured of scalability.
Daniel – I actually have very little knowledge about sourcing from Spain. This article is only comparing TCO in India and the Nearshore. But I disagree with your statement "talk about wages and low cost, is the past". This is absolutely untrue – you're right that innovation is the new thing these days, but companies will still chase low costs, and this is usually one of the main determinants for site selection.
Tarun, thanks for your answer.
I agree with you that the "service total cost" is an "importan decision driver", but not the "wages". That´s important because have impact if you think in the "actual industry way", "OffShore" & evern "OffShore 2.0", but isn´t so relevant, because there are other ways, at present, and wich wins the future.
As I said from Iberia, Spain, Latham, now and in the future, is posible to deliver services with "low cost", but this is not the key decision criteria, actually, and never in the companies. Even, isn´t in the top 5 criteria. IAOP Reports explain that 51% of companies don´t choose by "service cost" or "country wages", but most important, the 3% are finding INNOVATION, and 10% Business Impact & Transformation, ans the rest to 51%: Enhacements, Experts Access, Vertical experience even in R&D Processes, ….AND the "wages" is important, but NOT THE MOST IMPORTANT, this is part of OUTSOURCING 2.0
Gary Wendt (GE Capital´s Former & CEO) put Innovation, Access to Skills, Conservation of Capital at fisrt time to Cost Savings. Gary Wendt, have a rule, Gary´s Rules or 70-70-70 Rule, that said 70% of all IT could be Outsouce, 70% of it could be OffShore, and 70% of this result should go to India.
I´m sure that Gary Wendt is an experience Outsourcing consumer, and it obvious the great work of India, but all have an finish, even the Gary´s Rule. GENPACT actually 40% property of GE, before GECIS 100% property of GE aren´t in India only. OffShore 2.0 ! Global Delivery Model or RightShore as in Capgemini we called from 90´s and actually (I left in 2006).
I wrote about now, here, in the anciant Europe, but also in USA, and I´m sure in other locations at world, we are deliverying with other model, built on innovation and new Business Models & Technology, we are starting to offer the same "rates" that the offshore destinations for EMEA & USA Markets, but whitout "much of their problems". As you said, the "wages" are important, but not the 1st factor to take decisions in any company to Outsource, even, is less important when is possible to make this from Spain, Portugal, but even USA, or UK, or wherever you want ! (really).
OffShore 2.0 is te evolution of 80´s & 90´s "IT cost saving delivery model" (OnShore -> OffShore) and it is based on the market & IT industry experiences, that consider a Global Delivery Model a better aproach, much more "closer to client" that is important for a lot of reasons (culture & timezone, travel cost management, transition cost, very high problems mangement in/or very critical applications or processes, re-work, documentation effort, etc…). Actually exist a lot of documentation about form Garnet, Forrester, IDC, Ovum, ATKearney, and more important, all the IT Industry actually works now in these model OnShore – NearShore – OffShore (Glolbal Delivery) with a great position of Indian Big IT & BPO, as you coment in your article, like TCS (Iberia, Latham, Philipines, other Asia..), Genpact (Iberia, E.Europe, NortAfrica, Central America), Infosys, Wipro, M.Sathyam…
But, OffShore 2.0 is the finish of these evolution? That I wrote, I think the future probably will calls "CloudShore" and as we are doing in Iberia, or the Nordics fist as we, and other colleages in USA, the "New ERA IT Companies" Deliverying from RuralSourcing & HoneSourcing, with a cost structure very light, -> competitiveness !! -> "WAGES" & CLOSER TO CLIENTS & High V-A Services (Innovation, Transformation, Business Inpact, Knowdledge in Verticals even in R&D+i processes)
I didn´t to wrote about Spain or Iberia, only is an example that a "location" were some companies are "in a new direction". I really try to wrote about a "New ERA", with other Countries at 1st Economic Ranks, and the impact of these in the actual IT Market, because it will be change the environment.
Also, I try to explain that a business based on "low wages" and "countries" (OffShore & even OffShore 2.0) in Asia or Latham or Europe, or Africa, …, wherever you want, it won´t a good idea, because the "Cloud" concept give us these and mucho more!, with better "margins or savings, and serviceability" without necesary "Big Structures & Cost" like IT Global Enterprises & the OffShore concept.
In my opinion isn´t a question of Where (OffShore, NearShore, OnShore), isn´t a question of "Locations"
IS A QUESTION OF HOW?
FUTURE INTERNET, TOTAL MOBILITY, "CLOUDSHORE", PAY PER USE (TO USE, NOT TO HAVE) -> LESS DIRECT & UNDIRECT COST & HIGH PRODUCTIVITY WITH MAJOR DIFERENTIAL A-V SERVICES -> Outsourcing 2.0 !!
As I wrote in these moment we serve to EMEA with wages similar to Latham or Asia, but "we" are a group of "New ERA" IT & BPO Companies with a same vision! not Spain, or Portugal, or USA, …simply where you want, f.e. Rural Sourcing with auto energy generation by Renewable Energy resources, or HomeSourcing, withouth "office cost", and new Human Resources Models (Freelances as "employers", Salaries with Productivity Bonus, Employers or Associattes?, ….).
Obviously, methodology, infrastructure and other relevant aspects have modeling to the new "concept & vision", but faster, inside the Co-Creation & Co-Innovation phiilosophy, like Linux, Mozilla, Wikipedia, …because that´s other of "pilars" …"The wishdom of crowds & the crowdsourcing"
I think the question is not where? Nearshore Americas or OffShore Indias?, Why should be a question of countries? Internet 2.0 haven´t frontiers!! you don´t need a building, a great office to deliver services! "CloudShore" is in everywhere! and you can to have in your team people form all the world, if you want, but without the "traditional IT company structures", for this, the "wages of "locations" isn´t the question", much more when "the Economic World is changing !!" (Macroeconomic Panorama).
Some statements are a bit scary. When talking about India advantages you mention that in Latam:
"… leading to rigid labor regulations, restrictions on working hours and high severance payments."
I think that even when the cost is a powerful driver for decisions, if we want a better world to live on, we should all be responsible for the welfare of everyone.
It seems that the possibility to make people work countless hours in India is an advantage rather than a covert slavery.
Just my 2 cents.
Agreed. The consumer today is not the one from yesterday where quality and cost were the primary variables for product or service. Human rights and eco-friendliness can now be added to consumers' decision-making.