resource cost or resource use? (Outsourcing continued)

Neelakantan suggested in the comments of the last post that:

"But having seen outsourcing from fairly close quarters in India, where I live, the outsourcing happens not for manual labour. The outsourcing is for skilled labour. Now that's a bigger chunk of the cost... If outsourcing was only about manual labour, perhaps this argument would hold good, but often it is not."

To which I agree of course. Add that I am not against outsourcing either.

What I am trying to say is that the focus is in the wrong place, betting on the wrong horse, actually betting on a horse in a car race.

Let's take a typical (highly skilled labour) software company (US based, financial software, mass market) with its costs in percentage of revenues:

Cost of revenue: 20
Customer service and tech. support: 10
Selling and marketing: 20
Research and development: 15
General and administration: 10
(Net: 17)

Here "production costs" (R&D + customer service and support) that could be outsourced to say India would be 25%. Quite substantial.

But, hang on, labour costs are not that straightforward - it's a results of annual salary costs times number of employees adjusted by productivity. Or "salary costs" x "how we use the people".

It does happen that 3 chaps can do the work of 6, 12 or 30 if done intelligently, better, smarter. If the process is better.

That would lower the outsourcing savings to 12, 6 or 3%... even for the most highly-paid-highly-trained labour intensive service company.

"How we do things", "how we use the resources" should be the focus - saving on the direct outlay for those resources being the very last thing to look into.

Suspect Ric's right when he in his comments calls it the

""what gets measured gets done" syndrome"

Amazing how "process" remains such an iffy area... sad really.