Let me try and see if I can explain the offshore cost structure.
1 - THE BOTTOM UP CALCULATIONS
Nasscom reports that the average median annual salary for a software engineer in India increased from $6,313 in 2004 to $ 7,010 in 2005 - an increase of 11%.
Nasscom has also reported a 12% salary increase in 2006 over 2005 and this will bring the annual median to around $7,850.
Customers should be careful to use these numbers and divide them to calculate the cost of a person to their offshore vendors. The number that most companies use is cost to company or CTC. The CTC is usually an additional 15 - 20% of salary - so let's say the average median CTC for 2006 will be $ 9,420. To this are added the Infrastructure & SGA expenses
2 - THE TOP DOWN CALCULATIONS
Now let's look at this from the other side. Your offshore vendor is making roughly 20 - 30% EBITDA. That is the profit from operations - before any financial adjustments like interest, taxes or depreciation.
What it also tells us is that between what you are charged per hour and what it costs your vendor per hour is a margin of around 20 - 30%.
So, it is not as high as you may think, but there may be some scope for negotiations
3 - THE NEGOTIATIONS
Weigh the other aspects of what the offshore vendor brings to you
- Milestones based delivery
- Absorbing salary increases for a period of time
- Hard to find skillsets or resources
- Process, Domain, Experience, etc, etc
