The compensation cost (comprising 65% of the total cost) incurred per person hour at offshore is 8 to 9 times cheaper than that at onsite.

The total cost incurred per person hour at offshore is found to be 4.2 times, on an average, cheaper than that at onsite.

Adding 100 employees at offshore rather than at onsite would result into annual savings of Rs. 31 crores.

It is now fifteen years since India opened its doors through liberalization to the rest of the world. Indian industry has achieved phenomenal success during these years. Several buzzwords such as competitive advantage, core competency and cost leadership caught the fancy of Indian corporate. China had already lapped up the opportunity out-sourcing created in manufacturing sector. We were late in picking up the latest trends but we were eager to compensate for that. While mammoth infrastructure (along with the long term commitment of public and private players) was needed for manufacturing sector to come to anywhere near China, there was a vacuum in services sector. We quickly moved in to fill the vacuum by positioning ourselves as preferred destination for IT services. Indian IT entrepreneurs / companies recognized the inherent cost advantage available in India against continuously ballooning cost of software development in countries like US. They adopted onsite-offshore model or its tailor-made variant which essentially meant leveraging cost advantages by doing large chunk of the software development at offshore location.

While numerous industry pundits have suggested huge advantages of such models, not much has been written about the extent of benefits accruing due to these models. To bring the numbers to the fore, we conducted a study for major players in Indian IT industry. The study is based on cost data of these companies in financial year 2005-06. It should be noted that we excluded BPO operations to focus on the cost structure of software development operations where Indian companies are competing with global giants like IBM, EDS. We found that though absolute cost figures were different for different companies, the ratio of offshore to onsite costs for cost heads such as compensation or travel & conveyance cost were quite similar across companies.

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* Contributed by: -
Saurabh Mishra & Anoop Bhatia,
Student, Business Management,
Dr. Gourav Vallabh,
Professor (Finance),
XLRI Jamshedpur.