Assignment 2 Example | Topics and Well Written Essays - 1000 words

2 - Assignment Example The cash flow from the operations proposed to be outsourced is analyzed to work out the net present value for evaluating the outsourcing decision of the company under various scenarios. Hypothesis Cost savings is an important determinant in the risk reward analysis of an outsourcing decision taken by a company. However, there are also other considerations involved such as tax implications, stringent statutory regulations and the conditions in the labor market. Labor productivity Since the decision proposed to be taken is mainly on the basis outsourcing labor involved in the operations, productivity of the labor need to be analyzed for comparison. Though currently the labor productivity in India is less compared to US, the company is hopeful of increase in productivity over a period of time due to training and experience as reflected in Scenario 2. Labor productivity Number of service calls per day : 600 Total number of calls during the year : 600 x 365 = 219000 Number of customers se rved in US/Hour : 10 Number of customers served in India/Hour : 6 Number of hours in US required/year : 219000 / 10 = 21900 Number of hours in India required/year : 219000 / 6 = 36500 Labor Cost The company aims at reducing the cost of providing service to the customers for maximizing its profits. Since the important determinant factor is cheap labor available in India which works out to just 20% of the wages prevailing in US, the overall cost of labor comes down in outsourcing. Estimated labor cost in US : 21900 x 10 = $219000 Estimated labor cost in India : 36500 x 2 = $73000 Investment in outsourcing The company estimates that all other costs associated with outsourcing customer service have a present value of $2 million. The annual rate of interest is considered at 5% for working out the net present value of the cash out flows over the expected future life of the business of 20 years under Scenario 1 and at 3% under Scenario 2 for 30 years. The net present values relating to ope rations in US and outsourcing to India under the two scenarios are given below. Operations in US Outsourcing to India Scenario 1 (20 years & Interest @ 5%) 2,729,224 2,909,741 Scenario 2 (30 years & Interest @ 3%) 4,292,497 4,126,214 It could be observed that under Scenarios 1, outsourcing appears to be not attractive. However, under Scenario 2 outsourcing to India is beneficial. The parameters adopted under Scenario 2 are applied for 20 years time horizon for the purpose of comparison (Scenario 3) as below. Scenario 3 (20 years & Interest @ 3%) 3,258,167 3,417,476 Outsourcing is not attractive under Scenario 3. In the case of Scenario 2, the reduction in cost through outsourcing is negligible considering the longer time horizon. The changes in Scenario 2 compared to Scenario 1 are analyzed to understand their impact on the outsourcing decision. Also, the recommendations are given after careful evaluation of the impact of the various important determinants involved in outsourcing de cision. Recommendations Outsourcing under Scenario 1 does not result in cost savings in view of the initial investment outlay required to be made. The changes introduced under Scenario 2 also do not make the outsourcing decision attractive. Therefore, based on a careful analysis from different perspectives, outsourcing is not recommended due to the reasons given. However, outsourcing under S