What's the True Hourly Cost of Offshoring?

Abstract

Most companies have learned that cost calculations for offshore outsourcing shouldn't be limited to hourly wages. Looking at salaries alone, you could naively hope for cost reductions of up to 90 percent. However, don't underestimate the cost of knowledge transfer, travel, attrition, miscommunication, and so on. But does an opportunity for cost reduction still exist? To answer this question, researchers delved into the collaboration between a Dutch software company and an Indian vendor. They gathered evidence for direct costs and quantified perceptions of indirect costs associated with an in-house team in the Netherlands and the outsourced offshore team in India. The offshore team's true hourly costs took three years to become comparable with those of the in-house team. Getting close to the break-even point took five years. Learning costs due to offshore employee turnover were the primary cost factor to get under control.