Outsourcing can cost more, claims group

Low wage rates among Indian outsourcing providers tell only a fraction of the story about the true cost of offshore outsourcing, a recruitment body has warned.

The Association of Technology Staffing Companies (ATSCo) claims that hidden costs make many deals far less financially attractive than they might first appear.

Although wage differences for IT workers in the UK and India can be substantial - £100 an hour in the UK compared with £20 an hour in India - huge upfront investment costs and years of fine tuning mean that, in reality, few companies save even half that amount with outsourcing projects.

"Many companies fail to achieve any cost reductions at all from their outsourcing projects, and some even experience an increase in costs," Ann Swain, chief executive of ATSCo, told vnunet.com.

In particular, the legal and advisory fees associated with selecting a provider are likely to be substantial, as are the costs of redundancies and retraining in the UK, she said.

ATSCo wants tax breaks for companies that outsource, to provide an incentive for retraining and retaining UK staff.

The call comes days after the chancellor, Gordon Brown, hinted in his pre-budget speech that a tax loophole allowing outsourcing firms to avoid charging VAT on contracts would be closed, increasing the cost of outsourcing.

The National Outsourcing Association has warned that a 17.5 per cent VAT hike will lead many companies with outsourcing contracts to feel the pinch. Financial services companies that are unable to pass on VAT will be most affected by the proposed legislation.

But analyst Ovum Holway maintains that companies should still expect to achieve cost savings of between 20 and 30 per cent by following the outsourcing route.

Earlier this month, estate agent Foxtons said it had saved 40 per cent of its IT budget after outsourcing application development and support in India, allowing it to increase the size of its in-house IT team.

"If [suppliers] can't offer 20 per cent cost reduction net, there's no point in entering into an agreement," said Phil Codling, analyst at Ovum Holway.

"In a lot of cases customers will expect more and will also expect process improvements."