TCE Scenario

A Tale of Two Shores

The best way to illustrate the difference in Total Cost of Engagement (TCE) is with an example. In this case, a California-based company needs to create a new product, but the existing product still needs enhancements and on-going support. The company simply cannot afford to double the team of 16 engineers in the US, nor can they afford not to develop the new product.

The decision is then made to outsource the on-going development and maintenance of the existing product to a less expensive locale. For lack of options, India is the first location investigated, but the responsible manager decides to investigate other locales closer to home.Much to everybody’s surprise, the conclusion of all the research and comparison is that doing the work in Mexico is less expensive, and more effective, than doing it in India.

Below, the numbers tell the rest of the story.

US-Based Team Costs

On average, an engineer in the California team gets paid about $100,000/year. In addition to that, the employer has to put out another 30% in overhead. That makes the total out-of-pocket for the company $130,000/year, or $70/hour.

Technical leads are paid more, about $120,000/year. Fully loaded, this translates to $156,000/year or an equivalent $84/hour rate.

The Engagement Manager is paid approximately $160,000/year. Fully loaded, this adds up to $208,000/year or $112/hour. This is a US based position in all cases, so this cost is constant in all scenarios.

Offshore- and Nearshore-Based Costs

The best fit outsourcing vendor in India offers the following rates:

  • $25/hour for Engineers ($52,000/year)
  • $36/hour for Technical Leads and Project Managers ($74,880/year)

After some investigation, a nearshore company in Mexico is found that is highly qualified and offers identical rates.

The Hidden Differences

From experience with other projects in India, the following hidden costs are identified:

  • 25% loss of productivity (e.g., for every three engineers in the US, you’ll need four in India)
  • 40% turnover
    • 10 working days to replace an Engineer
    • 15 days to train his/her replacement
  • 2 trips/year to India for the Engagement Manager
  • 4 trips/year for one offshore Engineer

For the offshore case, these are best case numbers. In particular, productivity loss is bound to be higher.

Because of intense competition for talent, outsourcing vendors in India will have to hire mostly junior people, with modest skills and little experience. Engineering managers with actual experience with offshore teams put it at 50% or higher.

For Mexico, the equivalent costs were as follows:

  • 10% loss of productivity
  • 5% turnover
    • 10 working days to replace an Engineer
    • 15 days to train his/her replacement
  • 2 trips/year to Mexico for the Engagement Manager
  • 4 trips/year for one offshore Engineer

To keep things simple, we used the same number of trips for both locales. However, there’s no reason why you shouldn’t take advantage of Mexico’s proximity to make more trips to the nearshore site. This will help you keep a tighter handle on your nearshore operation. Likewise, you can afford to have engineers from the nearshore team spend more time in the US by making more, shorter trips as needed.

The Results

For this company, the difference in TCE is dramatic. The US base cost for a year would amount to $ 2,757,401 and $ 2,206,790 in India, but they can do it in Mexico for $ 1,626,542.This represents a difference of more than 20% between the offshore and nearshore locales and a 35% net savings in Mexico. With long term commitments, the savings can be as his as 50%.

In addition, the nearshore choice adds the unique benefit of allowing the teams to work together most of the day. This is a significant benefit, above and beyond the dollars-and-cents savings, that cannot be duplicated in an offshore location.

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