Total Cost of ownership (TCO): Comparison of Third-Party Offshoring to Company

| June 11, 2016

Major companies, such as Citigroup, had wholly owned offshore service centers. Those types of company-owned offshore centers are called captive models. Captive offshoring models reduce the risk of offshoring. A recent study from the Everest Research Institute estimated the costs of third-party offshoring and captive offshoring. The estimates are shown in the accompanying table.

Create a spreadsheet that totals the average cost of each model for each cost item. For example, average the annual salary based on the range for third parties and also for captives. Then calculate the total cost of ownership (TCO) of each model. The difference is the cost of risk.

Full-time equivalents (FTE) are used to standardize labor costs since workers may be part time or full time. For example, two part-time workers equal one FTE. The estimates are given in terms of FTE, so the conversion is already done.

Based on your results, how much does the captive offshoring model allow for risk? The answer is the difference between the TCOs of the two models.

Third-Party Offshoring Mode

Captive Offshoring Model

Office space: Annual rental cost per square foot (assume 10,000 square feet of office space)

$11 to $13

$14 to $16

Base salary costs of workers (assume 1,000 FTEs)

$7,770 to $8,200

$9,500 to $10,300

General management staff for every 1,000 FTEs

12 to 14

16 to 18

General management salary

$55,000 to $65,000

$70,000 to $90,000

Travel and housing costs per FTE

$280 to $320

$900 to $1,060

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