Bhoo wears the thinking cap!

As if that is possible!

Captive centre economics – my recent discoveries! – Part II

Posted by bhoo on September 7, 2006

In continuation of my earlier post on the same subject… 

In addition to the real estate costs being much higher than what we encounter, this captive centre also had other things that drove the costs higher.

She was mentioning about some 20 people out of these 40 people team to be mission-critical for her.  If we were running the development operation for this company, we would have had at the maximum, 10 critical people, and would have set up processes that ensures that 40 people output  comes about with these 10 people and the 30 other “change-able” people.  (Do we want stability?  Absolutely!  Do we think the other members are non-critical?  Of course, not!  But, that is the reality and a business model for offshore operations of a mature company.)

What does that mean to the economics of scale?  If we had to pay 2X salaries to the critical people, the total cost for the said Captive Centre will be 20 x 2X + 20 x 1X.  That would be 60X for 40 people.  So, average salary for them is 1.5X.

In our case, with the same logic, it would be 10 x 2X + 30 x X = 50X.  So, our costs would be 1.25X.

See how this makes a difference?  Scale matters!

Can they possibly do the same as what we do? Not possible by any count.  We have more than 200 engineers.  So, we can quickly substitute for any loss / change in the other 30 people.  They cannot, possibly.  Scale matters!

Add to this, the cost of the bench.  We typically maintain 20 to 25% Bench.  Bench contains trainees, new joinees and the like.  Obviously that must be happening for the Captive Centre as well.  If we assume 25% bench for this captive centre, their salaries are 60 X for a 30 people output.  That means their salary per person-month is 2X.

That is what they will typically pay for an outsourcing company as fees per person-month.  The outsourcing company manages to make a 25 to 30% profit out of this.  That is precisely the power of scale.

I am positive that there are advantages why software vendors setup their captive centres.  I will write about my interactions with another customer in a later piece.

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