Labor Costs & Overall Pricing

Labor costs within a pricing formula

The way large companies choose which companies to outsource work to is based on a very complicated algorithmic formula that takes into consideration many aspects. We’re all aware that labor cost is one of the major considerations that effect the price of outsourced labor. But, there is a lot more involved, and since prices are always changing, long term cost considerations need to be included in a calculation.

Per capita income and prices
Statistically, India is a very poor country with per capita income around $700 per year (rough figure) while American income is around $40,000 per year. Therefore, the price of labor in India must be 57 times as cheap, right? Wrong. American income doesn’t vary so dramatically from place to place and from city to countryside. Although extreme cases exist including NYC which has wages that might be double what wages are for similar jobs in Mississippi, the rest of the country doesn’t vary so significantly. There are parts of India such as Bangalore or Chennai where a highly skilled Indian software worker makes $20,000 to $100,000 per year while a peasant in the Bihari countryside might only make 50 cents per day and might only eat once per day (on a good day).

The BPO jobs that happen in India are generally located in high cost urban areas where the price of labor and everything else is sky high. This is why the price of outsourced labor in India is only four times as cheap as in the U.S., and not fifty-seven times as cheap.

Job conditions in India
The next problem is that inflated and rising land prices in India make companies conserve on space. India has less land than the U.S., yet has four times the population, and the population shows no sign of declining either. Indians are typically squeezed in offices with their small desks crammed together like sardines. The American “dream” of having your own 6×6 cubical simply doesn’t exist for most Indian Software or call center workers. The price of land continues to rise in Indian metros making outsouring costs higher and higer. A 2 bedroom condo in the outskirts of Pune costs even more than it would in Portland, OR on a square foot by square foot basis.

High turnover is another cost in India
A few decades ago, it was only the lucky in India who could get a decent job, and the rest had to take menial jobs just to survive working for pennies per day.  Nowadays, there are too many good BPO and Indian software jobs. Its common for young techno-saavy Indians to skip from job to job chasing better working conditions, more likeable bosses, higher salaries, and nicer looking female work counterparts. Every time an employee jumps boat, that costs the boss a bundle to try to find someone new and train them. This cost gets transfered to the customer in the long run.

Management costs can vary
This is a very difficult issue to pinpoint, but there is always a management cost for the company who hires and outsourcing company. If your company is nearby or on a similar time zone, communication is easier and travel to see your outsourcing company is quick. If the company is working while you are sleeping, unless you sleep late, you will have trouble interacting with that company, not to mention the 30 hour plane flight to Mumbai! If you need to visit a company frequently, then outsourcing to India will carry a hefty management tab, but what if you only need to visit for initiating new complicated projects?

Transportation costs can add up
A business that involves shipping would choose a new location primarily on access to good transportation arteries with low warehousing costs. Reno and Memphis are famous shipping hubs in the U.S. as they are centrally located for their respective East and West halves of the nation. A call center doesn’t need to ship anything, but there are still costs for moving workers around. Cab fare in Hyderabad is not cheap. If a Hyderabad software company pays worker’s transportation, it can add up, even if workers cab-pool. Transport is yet another factor in the pricing formula.

Labor costs are only about 20-30% of the total cost of outsourced work. The rest go to infrastructure, management, and other costs.

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