That’s what I was asked, by email. Someone read my previous entry and wanted more details on how a company could truly realize savings on their research and related knowledge work, without a loss of quality.

Here’s a case study based on some client experiences - brace yourself as it’s rather lengthy; if you still have questions at the end of it, just let me know.

Context: Mid-sized consulting company with a corporate library of eight: two sector specialists, five generalists and one researcher for quick turnaround requests. The company is headquartered in New York with five researchers; two others work from a Chicago office and the fifth in LA.

Until Q1 2008 the team was running at full stretch with a small network of local freelancers helping out as needed (Business360 was part of the network), but since Q2 demand started to soften and there was a sharp drop in Q4. With practice (non-billable) work the team is still busy but billability is down to about 60% and still falling.

The company has an internal charge rate of $120/hour for its research services and tries to operate as a profit center, although the reality is they are happy to cover costs.

We’ve been working with the company to look at how they can save money and still deliver a quality service, and (roughly) this is how the numbers stack up. Note: we exclude data costs here which can be large but don’t really affect resourcing decisions.

First you have basic salary costs:

Then for each employee there are a series of direct oncosts (insurance, pension, training etc):

Add these and you arrive at a grand total for annual direct costs of $725,513.

But salaries and related costs aren’t the only ones, there are also indirect corporate overheads, which in this case we just limit to office rental costs:

Note: we use 60 square feet here which is a little tight - most estimates call for ~125ft but the company runs a hot desking approach and believes this amount is all it needs.

Put it all together and you get total costs for each employee:

These costs go to establishing the research services of the company that are charged out on an hourly basis, some for billable purposes and some for non-billable. I mentioned above that billable work for the client’s research team has been falling and this matters since many research teams aim to cover their costs internally and the only way to do this is through internal billing. Research teams do work besides billable assignments but billable work is usually better measured, the value of the work is clearer and for many teams the percent of time billable is the key metric that is tracked. Accordingly, this analysis focuses on the most cost-effective way a research team can complete its billable work.

The amount of hours an employee can be available for billable work is crimped by vacation, public holidays, sickness and training needs, with the actual number of hours available for billable work is around 1,864:

Of these 1,864 hours the company hopes to get as many billable hours as possible, and the higher the number of billable hours, the lower the average cost.

There are two ways to look at these costs - just direct costs (i.e., those that would stop as soon as the employee was laid off), and those that include indirect costs (office rental costs and other costs that don’t stop as an employee is laid off but which are avoidable in the longer run). This difference is important since if companies really want to save what they can, they need to think about ways to avoid all possible costs, and this means reducing office space.

At high billable levels (90-100%) we find that average costs come down to about $43-48/billed hour on a direct basis (4th column), and $66-73/billed hour on an indirect basis (last column). Depending on the work we do, Business360 charges $15/hour to $250/hour (sorry for the large range, but if we are doing basic and regular data entry, web search etc it is at the low end, while rates for specialized consultants or financial analysts on urgent projects are much higher). Most of our research work is in the range $40-80/hour, so while we are competitive when a research team is at higher billable levels, the case for giving us lots of work is weak, although it is prudent for them to keep a vendor or two on hand to cope with peaks in demand.  (There are two separate points worth mentioning here - Business360 is a variable cost, not a fixed one, which means our costs only apply as we complete work (there is no charge for idle time, vacation, training etc); and second, our network-based business model means we can often access researchers with greater familiarity with certain subject areas, but I’m leaving both these aside for this analysis.)

The table above shows how we can usually help companies save money against fully accounted internal charges. Cost savings opportunities emerge when billability rates fall: below 90% we can save companies a good chunk against their full (with indirect cost) expenses, and below about 80% we even save money against their direct costs.

A logical company’s approach is to reduce its internal team in size so it runs at as close to 100% billability as possible, although given the choppiness of workflow, 90% is a realistic maximum.

So returning to the example, the company can make savings and get all its billable work done through reducing the size of its team by four, layoffs being the unfortunate reality in today’s climate. We assume reductions are made from the larger and more costly New York team. To complete the picture, we assume that Business360 picks up regular assignments that don’t require in-house knowledge (newsletters, clipping services, data capture, some secondary research), which means we can do them cheaper (~$40/hour), as well as a similar amount of some higher value tasks that can be done remotely (competitor analysis, telephone interviews, some analysis) at, say $60/hour, all of which makes for an average rate of $50/hour.

So where does this leave us? The company is still getting all its billable work completed; the in-house team is running at full tilt (and with its own internal charging, making a profit) and Business360 is picking up the difference. Business360’s work is completed mainly by people based in the US working from home, with the possibility of it being done by our teams in lower-cost countries if the need is there to process work overnight or make even greater savings.

In terms of total costs, the company moves from total direct costs of $725,513 to $359,730 (with the level of work associated with 50% billability for the original team of eight) or $732,530 (with the level of work associated with 100% billability for the original team of eight). With indirect costs the total moves from $1,109,513 to $530,397 (at the 50% billability rate) to $903,197 (at the 100% billability rate). Essentially, the company saves money under any reasonable scenario, possibility up to over $500k annually, and at the same time manages to move much of its costs from fixed to variable, not an insignificant achievement in this difficult climate.

Apologies again for the length of this thing, and if you have any questions please do contact me or leave a comment.

We had a little bit of good news this week - we’ve been asked to take over some outsourced research for one of the world’s largest advertising conglomerates. That makes it sound like a big deal but it’s not, at least not yet - it’s perhaps 0.5-1 full time equivalent, but hey, it’s something, especially in this environment!

The significant thing is that the work is now coming to Business360 instead of an Indian-based supplier that had the contract for a number of years, which means the work will now be completed by US-based researchers working from home. It’s not much, but if every company in the US did the same we wouldn’t be in a recession!

I don’t have the full reasons that the client changed but I gather we’re about the same on price but the advantage of having the work done within the same time zone and by experienced researchers (professional librarians, corporate librarians and the like) made the switch worthwhile.

Over the last five years or so the dominant direction of business process outsourcing has been to India, with other countries like the Philippines and China lagging behind but still taking a fair chunk of work from US and European professionals.

And the biggest reason was the chance to lower costs, mainly on the back of lower wages in these countries. The wage differential remains substantial but the case for pushing ever more work to these countries looks to be weakening.

A December 2008 report from TowerGroup points out that managers at some US companies are discovering that offshoring in India is not the cost-saver they imagined, especially for captive offshore operations, in which the US parent sets up and runs the outsourcing operation, usually employing local workers to staff much of the operation.

Reading this reminded me of a February 11, 2008 article in the Wall Street Journal –
Rethinking the India Back Office; Some Western Firms Weigh Selling Their Units as Costs Rise, Dollar Weakens. The author, Jackie Range, cited a study by McKinsey & Co. and Nasscom, the Indian tech and outsourcing industry group, which found that, on average, company back offices - “captives” - were less efficient than companies run by outsourcing firms that specialize in the business. For some types of back-office work, captives’ costs are 30% higher. The survey also found that the higher costs didn’t lead to lower staff turnover or better-quality work.

More recently, the September issue of McKinsey Quarterly had an article – Time to rethink offshoring? – that showed how shifting cost curves mean the US is becoming a more competitive place to manufacture high-tech products.

“The production of high-tech goods has moved steadily from the United States to Asia over the last decade. The reasons are familiar: lower wages, a stable global economy, and rapidly growing local markets. These factors combined to make nations such as China and Malaysia favored manufacturing locations. In the last two years, however, the favorable economic winds that carried offshoring forward have turned turbulent. The new conditions are undermining some of the factors that made manufacturers of every stripe, including those in high tech, move production offshore” – Ajay Goel, Nazgol Moussavi, and Vats N. Srivatsan, McKinsey Quarterly, Sept 2008

McKinsey’s argument rests mainly on higher wage inflation in offshore locations and transportation costs and here is their summary analysis:

Manufacturing high-tech products is obviously different from knowledge services, but it all goes to show that this change is affecting business across a number of fronts.

Also, since McKinsey complete its analysis the dollar has strengthened, especially against the Indian Rupee, and oil prices have collapsed, so their findings wouldn’t be as compelling today. But these are likely short-term affects that won’t affect the longer-term view.

All up, clients will start to be more discerning when it comes to outsourcing and offshoring. One to watch.