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 budget.

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 compensation.

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 health care.

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 among Indians.

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 10.1.

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 they do.