Offshore Savings Fall Short, Says Study

Companies must also factor in the costs of planning, transition, start-up, technology and communications, and remote management and oversight.
Stephen TaubJuly 21, 2004

Savings from offshoring — especially payroll savings — are not nearly what’s they’re cracked up to be — according to a survey of 100 of the largest employers in New York City.

“Companies may not be looking at the whole picture when they go offshore,” said Howard Rubin, a consultant and professor emeritus of the City University of New York, who conducted the study, according to Reuters.

Many companies that send work overseas are enticed by the promise of significantly lower wages. The study found that those projected savings often fall short of expectations, however, because companies must factor in the costs of planning, transition, start-up, technology and communications, and remote management and oversight, according to the wire service account.

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Approximately 70 percent of the largest companies in New York City currently ship some jobs overseas, Rubin reportedly said at a panel discussion sponsored by New Jobs for New York, the group that commissioned the study. Most of those jobs are in information technology or business support, he added; by 2005, that figure is expected to climb to 90 percent.

“Fly to Beijing or Bangalore a few times,” added panelist Sen. Hillary Clinton (D-N.Y.), according to Reuters, “and you will find it is neither easy nor inexpensive to stay in the kind of constant touch that such management requires.”

“Suddenly a call center worker with a raw wage of $5 an hour might not be worth it,” she reportedly added. According to the study, the true cost of an offshore worker is closer to $17 a hour when you add $5 an hour for telecommunications and security, $3 an hour for management overhead, $2 an hour for technology, and $2 an hour for training, travel, and transition.

That $17 per hour, noted the study, is just about 20 percent less than the cost of doing the same work in many places in New York state.

Rubin said that when one company in his study planned for offshoring, the company calculated about $20,000 in salary per person. However, it wound up spending closer to $45,000 after figuring in many of those added costs. Rubin compared this figure with the cost of a computer programmer in Buffalo or Syracuse who earns an average of about $53,000 a year. “Suddenly what looked like a major advantage is only a moderate one,” he reportedly said.

Clinton offered another way to close the gap: Eliminate tax incentives she described as “perverse,” noting that current tax laws reward businesses for sending jobs offshore, according to the wire service.

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