Bhoo wears the thinking cap!

As if that is possible!

Captive centre economics – my recent discoveries!

Posted by bhoo on September 2, 2006

Last week I met with the country head of a local captive center for a mid-sized ISV from Texas. While I have always known that captive centers with smaller scale makes it expensive, I learnt a little bit more of details in this meeeting.

Since they also operate in India a normal assumption would be that their cost should be similar to ours. But, the opposite is true.

 

One striking difference was the way they had set up the infrastructure. I had realised based on our own experience with respect to setting up our new infrastructure that “scale” matters. We had always operated in tight spaces. Just last year we had a total of 6300 square feet of rented area. We had 100+ people working. That made the average square feet per person to be about 63 square feet or less. Real estate, assumed to be lower in cost in India or at least equivalent in cost, in reality, adds up quickly.

 

When we built our first phase, and moved in, we only had about 170 people. And we had built a 45,000 square feet of space. That made the built-up space per person to be about 300 square feet. It may appear insignificant but in reality this very thing has made a significant impact in our bottom line for the financial year 2005-2006 – much reduced profitability for that year for us.

 

This lady who is the country head of the captive centre that was employing 41 people in North India, mentioned that the area of their office was 17,000 square feet. That naturally made her per-person square feet more than 400. No wonder, their costs were phenomenally higher.

 

In setting up a development or B. P. O. in India, the only cost is not the cost of labour. Cost of labour may be cheaper by direct terms, but the other costs become significant. One such cost is real estate. Surprisingly, costs of real estate in India many times exceeds that of the United States. $1.5 to $2 per square feet per month is normal. At a per person square feet of 400, that works out to $600 – $800 per person per month. See how quickly this adds up? See how this makes the labour cost savings vanish in a jifffy? Scale matters!

 

Picture this: the space in India becomes a lot more expensive, due to the additional infrastructure needs that have to be set up in India. She was mentioning that when she had set this up initially, her executive members in the United States could not understand why she needs a UPS for a normal, non mission-critical operation. Why need a diesel generator on top of that? But that is reality in India. The loaded square feet cost is even higher than the $1.5 to $2.

 

So, what is the solution? Scale, scale, scale! In our own case as we have become about 270 people our per-person square feet has reduced to about 150 square feet. When we build our next phase of 23,000 square feet, and the grow to 500 people, per person square feet will even reduce further. Scale matters!

 

No wonder, people talk about scale as an absolute need to justify an offshore operation.

 

The higher costs did not just stop at real estate. More factors were influencing their economics of scale and were rising their costs. I will write about them later.

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One Response to “Captive centre economics – my recent discoveries!”

  1. […] Captive centre economics – my recent discoveries! […]

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