Beware of hidden costs. That's one way to interpret
some of the latest research on selecting sites for call centers,
onshore or offshore.
Before we define what these costs are, let's consider one of the
most frequently-cited statistics about call centers, which is that
labor costs represent the largest percentage of a call center's
In the U.S., this observation is relevant to businesses in
general. During the third quarter of 2005, for example, employee
compensation accounted for 56.7% of the goods and services the U.S.
produced, according to the U.S. Bureau of Economic Analysis.
If we focus only on what it costs to run a call center, whether
the centers are inside or outside the U.S., employee compensation is
the greatest expense. That's one of the findings Call Center
Magazine gleaned from the most recent BizCosts
study from The Boyd Company, a site selection consultancy
based in Princeton, NJ.
The study outlines costs of setting up call centers in 72 cities
in North America and 30 cities elsewhere throughout the world. Most
of the cities in the study are wellknown as locations for call
centers, or have histories of attracting them. Others have
workforces and infrastructures to accommodate call centers, as well
as actual sites, even if they don't necessarily have the reputations
of cities like Omaha or Bangalore.
The costs that the BizCosts study mentions are those that are
most dependent upon geography. They include, in addition to annual
compensation for agents in a given city, annual costs of
electricity, telecom, rent, equipment amortization and occasional
travel to the city by U.S.-based executives. To ensure that the
costs among locations are commensurate with each other, the
estimates refer to call centers that employ 500 agents, occupy
45,000 square feet and receive 2.5 million minutes of toll-free
calls from customers per month.
In raw numbers, compensation is not only the largest share of
call center expenses; compensation also varies the most with
geography. In Manila, the Philippines, the city with the lowest
labor costs of the cities in the study, agents on average earn $2.13
per hour. San Jose, CA, has the highest labor costs of North
American cities in the study; average wages for agents in that city
are $13.39, or more than six times greater than those in Manila. In
Copenhagen, Denmark, agents' average wages, $16.85 per hour, are
nearly eight times more than agents' wages in Manila, and labor
costs are the highest among the cities in the study.
What wages tell us most clearly are the cost of living and
standard of living in a particular region or country. Within the
U.S., for instance, San Jose, CA, offers the highest average wages
for agents because, according to the U.S. Bureau of Labor
Statistics, San Jose is part of the highest-paying metropolitan area
in the country. (See Figure 1.)
But in themselves, average wages tell us little about agents'
skills or education. To get a better sense of the viability of a
prospective location, we need to look at agents' overall
WHAT COMPENSATION REVEALS
Site selection isn't simply about comparing hourly wages; it's
about tradeoffs. One such tradeoff is apparent in the BizCosts
study's method of estimating agents' compensation. For all cities it
mentions, the study calculates agents' compensation by presuming
that agents work the equivalent of 238 eight-hour days per year. The
study presumes that agents earn another 176 hours' worth in wages
annually with paid vacations and holidays.
What distinguishes American cities is that the BizCosts study
estimates that employee benefits add the equivalent of 38% of
agents' annual wages to agents' annual compensation. Benefits for
American agents account for a larger share of agents' compensation
than benefits for agents in Canada and Denmark. Why? One explanation
is that many American workers depend on their employers for what is
often the largest portion of their benefits: health care.
According to the U.S. Bureau of Labor Statistics, as of September
2005, health insurance represented the largest single component of
compensation costs for workers in private industry. In Canadian
cities, for example, the BizCosts study estimates that benefits add
only 20% of agents' annual wages to agents' annual compensation
because Canadian residents are entitled to government-sponsored
Indeed, the presence of social services in a city or country is
an important consideration in choosing where to locate your call
center. As John Boyd, Jr., colleague and son of John Boyd, The Boyd
Company's founder, acknowledges, "in many offshore locations, there
are many hidden costs," especially with regard to social services.
In a wealthy country that offers, for instance,
government-sponsored health care and top-notch public education, you
may pay more up front in hourly wages. Yet as a percentage of these
wages, you might pay less for some types of benefits, like health
care, if they're already available to residents of that country.
According to the World Health Organization, as of 2002, private
health care expenditures accounted for about 30% of all health care
spending in Canada; the government took care of the rest. That same
year, spending on health care in the U.S. was nearly evenly divided
between public and private entities, with private expenditures
representing 55%, or a slim majority, of health care spending.
When we contrast two other countries, India and the Philippines,
which both have track records as call center locations, we see that
health care, and benefits in general, represent a much larger
portion of employee compensation in these countries than in the U.S.
or Canada. (See Figure 2.)
The reason for this has little to do with the size of either
India's or the Philippines' economy. India's economy is one of the
world's largest in terms of purchasing power. But India has a lower
standard of living than the U.S., Canada or the Philippines, based
on the ranking of the United Nations' 2005 Human Development Index,
which evaluates countries on a variety of indicators like poverty,
life expectancy, school enrollment and adult literacy.
One of the most telling indicators of a location's standard of
living is the percentage of health care spending that doesn't come
from that location's government. According to the World Health
Organization, private expenditures accounted for a large majority,
78.7%, of India's health care spending in 2002. The Philippines has
a smaller economy than India in terms of purchasing power, but a
higher average standard of living. In 2002, health care spending in
the private sector represented 60.9% of the Philippines' overall
health care costs.
Low wages in poor countries often mask costs that companies --
rather than these countries' governments -- bear with regard to
essential services like health care and education. The flip side of
this observation is that wages in countries with high standards of
living include services that these countries' governments provide.
That's why, as Boyd explains, that "there's actually a pro-business
argument in support of nationalizing health care."
Other hidden costs of site selection that wages alone don't
reveal are the availability and quality of education in a given
location. To be clear, wages and standards of living are not perfect
indicators of literacy. You'll recall that the Biz- Costs study
refers to Manila, the Philippines, as offering the lowest average
wages. In 2003, the Philippines boasted a literacy rate of 92.6% for
people at least 15 years of age, according to the United Nations'
2005 Human Development Report (HDR). In India, where the cities of
Bangalore and New Delhi have slightly higher average wages for
agents than for agents in Manila, the literacy rate was 61% among
Indians 15 years of age or older in 2003.
Given that the Philippines' adult literacy rate and overall
standard of living are both higher than those in India, it may seem
counterintuitive that agents' average wages in Manila are lower than
agents' average wages in Bangalore and in New Delhi. A possible
explanation is the greater disparity of incomes among Filipinos than
According to the HDR, the richest 10% of Indians earn about seven
times more than the poorest 10% of Indians. The inequity among
Indians' incomes is small compared to the inequity of incomes among
Americans and Canadians. Indeed, the ratio between the top and
bottom 10% of incomes in the Philippines, 16.5, is comparable to
ratios in the U.S. and Canada, which are, respectively, 15.9 and
Low wages don't necessarily correlate with low levels of
literacy, but there is a strong tendency, as the HDR's findings
suggest, for high-wage countries to invest more in education and
health care than low-wage countries do. Moreover, countries that
don't have large disparities among what people earn are less likely
to be politically unstable than countries with wide gaps in income.
THE RIGHT ENVIRONMENT
Since continuity is a high priority for call centers, it's
important to understand how wages reflect a region's economic and
political volatility. To cite one example, Boyd points out that a
risk associated with locating call centers in South America is the
growing presence of leftist leaders in the region. It's worth noting
that Latin America has historically been a region with highly
unequal distributions of wealth. The ratio of people who earn the
top 10% of incomes to those who earn the bottom 10% of incomes in
Latin America ranges from 15.5 in Nicaragua to 68 in Brazil,
according to the HDR. (Uruguay is the only other Latin American
country -- and the only South American country -- with a ratio below
20.) It seems likely that that the current political trend in South
America is yet another manifestation of persistent economic
conditions on the continent.
Another aspect of site selection that has become painfully
apparent during the last 15 months is the vulnerability of a region
to natural disasters. The hurricane season of 2005 demonstrated how
powerfully storms can transform an economy. Boyd finds that
companies have become more skeptical than ever about locating call
centers in low-wage regions where storms can and do shut down sites
for long periods of time. A lot of Caribbean locations, says Boyd,
"are looked upon with a jaundiced eye."
Turnover is another issue to keep in mind when choosing a
location. If you're in an area where the labor market is saturated,
you increase your risk of turnover among agents. A call center that
retains more than half its workforce during the course of a year is
more productive than one that doesn't. In India, where Boyd finds
that "the labor market there is tightening," Boyd estimates that
annual turnover rates for lowskilled agents can range between 60%
and 80%. Such a high turnover rate can erase supposed cost savings
of low wages.
Compensation is the largest share of a call center's costs, but
other expenses can influence where companies locate call centers,
especially within the U.S. and Canada. Boyd says that interstate
telecom costs represent the second- largest expense, after
compensation, for North American call centers. In his view,
minimizing or eliminating an interstate telecom tax is "a way for a
state to be more attractive" as a call center location.
As you decide where to locate your call center, don't limit your
considerations only to agents' wages. Find out about the
availability of quality health care and education in the regions
you're evaluating, as well as what you can expect in terms of
continuity of operations and employee turnover. Whether you make
hiring decisions that involve individuals or populations, the best
assessments are those based not on what agents earn, but rather what