My Mexico’s Nearshore Blog

It’s all about Offsite Leverage.

TCE: Total Cost of Engagement, the unique value of Nearshore as an enabler for lower cost of offshore outsourcing.

Here is an overview of the cost components of any offshore TCE:

Ressource Needed Technical Lead Engagement Manager Project Duration Project Team Cost Project Overhead

On-site Resources Allocation Vendor Attrition Parameters Long Distance Calling Cost Single Trips Costs Knowledge Transfer Costs Productivity Losses Costs Risk Management Costs

Resource Needed – Composition of the team needed to complete your project. (On-Site and offshore)

Technical Lead - these leads are senior resources that act as bridges between the remote and US teams. Usually you need to have a technical lead for every five or six remote engineers.

Engagement Manager - these are managers responsible for the outsourced project. They monitor every aspect of it and make sure that everything and everybody are synchronized.

Project Duration - Refers to the anticipated duration of your project.

Project Team Cost – These represent the fully-loaded labor costs of the project. They usually have the highest weight on the TCE, but are not the only aspect that should be considered.

• Project Team Costs= (On-Site Man/Hours * On-Site Rate)+(Off-Shore Man/Hours * Off-Shore Rate)

Project Overhead – Off Shore engagements tend to require additional resources, both from the vendor and the client, for supervision and project oversight. Distance and Time zone differences have a direct impact in the way an offshore engagement is managed. For an offshore engagement in India, people on-site (client’s and vendor’s personnel) have to accommodate odd schedules to have the necessary communication like conference calls.

The impact in the TCE is that in some cases the client has to pay overtime for its employees or local vendors, and in some Time and Materials engagements, there are additional man/hour fees applied to this type of activities. Also, ease of communication has a direct impact on productivity, while non-spontaneous communication has a negative impact in the cost of the engagement. 

• Project Overhead Costs= Project Team Costs * Project Overhead Percentage

On-site Resources Allocation – This is the amount charged back from the organization to the project or IT area per person working at the client’s site. Generally includes power consumption, office supplies, office space, etc.

• Allocation Costs= On-Site Resources* Monthly Facility Use Cost per Resource* Number of Months

Vendor Attrition Parameters – Every time a resource from the vendor resigns and leaves an engagement, there is a burden to the project, caused by loss of productivity and a cost of knowledge transfer to the replacement.
The fact that India based vendors have been growing so rapidly in the last few years, has created market dynamics where talented individuals are always offered with attractive opportunities. With so many large vendors concentrated in main India regions like Bangalore or Chennai, attrition levels have been raising in recent times. Nearshore promotes higher retention levels due to better communication between the onsite and offsite members of the team.

• Costs of Vendor’s Attrition= Attrition Rate (%)* Number of Resources*Time to be productive*Rate

Knowledge Transfer Costs – It includes labor costs and travel expenditures needed for knowledge acquisition. In most cases, this is assumed to be a group of people from the vendor traveling to the client’s site and spending as much time as needed to acquire the knowledge to carry-on the project. But a portion that is generally overlooked is the time that client resources allocate to train vendor’s personnel, which can represent a heavy burden to the cost of the engagement.

• Knowledge Transfer Costs= Project Team Costs * KT Overhead Percentage

Productivity Losses Costs – One of the main sources of productivity loss is the overhead in communications between teams which must be formalized to be effective. It requires extra time to prepare documents that would not be necessary were they able to communicate often, throughout the day.
Another source of productivity loss is the fact that, because of the great demand for engineers, off-shore vendors typically attract entry level people with modest skills, whose output is not commeasurable with US-based engineers.

• Productivity Losses Costs= (Off-Shore Man/Hours * Off-Shore Rate) * Productivity Loss Percentage

Risk Management Costs - This is a monetary value for the effects that Geographical and Political aspects can have on the viability of the engagement. Risk factors include the following:

1. Security Risks: Consider Information Security Standards, Vendor and Vendor’s country track record
2. Privacy Protection: Consider the availability of Data privacy laws and the enforcement of those laws. Also consider vendor’s privacy protection policies.
3. Government Interception Risks: Consider Foreign government capability to access and intercept records, as well as available regulations for record encription controls
4. Intellectual Property Risks: Consider patent laws, trade secrets and copyright enforcement in the Vendors country. As well as the sensibility of your engagement for Intellectual Property.
5. Employee & Labor Laws: Consider labor laws and possible liabilities of your company in the vendor’s country.
6. Contractual and Legal Risks: Consider the availability of bilateral agreements between you country and the vendors. Take into account contract enforcement efforts.

• Risk Management Costs= Subtotal Engagement Cost * Risk Management Percentage

Long Distance Calling Cost – According to AT&T corporate rates (published in AT&T web site), India Long Distance costs are 310% higher than those for Mexico.

• Long Distance Costs= Number of LD Minutes/Month * LD Rate * Duration of Engagement in Months

Project Trips Costs – Most off-shore engagements require some sort of traveling, either from the client’s side or the vendor’s. The purpose of these trips can be project tracking and oversight, issue resolution or scope change, among several reasons. Beyond the evident travel & living costs, project trips cost should also consider the hourly costs of the resources that are traveling.

From a conservative point of view, travel expenses to an Indian Off-shore facility are 330% higher than those of a travel to BCM’s Nearshore Software Development Center.

• Project Trips Costs= Airfares + Hotel Fares + car rental fees + per diem