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4.2.1. Cost

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Drivers of outsourcing in general and offshore outsourcing in particular have already been identified in the literature review. One trend which has decisively led to the implementation offshoring is the wage difference in emerging markets and developed countries in services with equivalent qualifications.

Concurrently, cost pressures caused by intensified global competition propel the trend of outsourcing services to countries like Morocco. Cost cutting, especially the reduction of wage costs, is noted as one of the main motives by the companies interviewed in my study. Firm3, for example, attested that by outsourcing IT projects out to Morocco lower unit labour costs are achieved due to lower wage costs, productivity differences and gains in efficiency.

While specific estimates on the cost savings in taking software projects to Morocco vary, all my respondents agreed about the compelling price differentials. According to Firm1 cost savings on large projects from moving operations to Morocco could be as much as 30% to 40%. Firm3 estimates that developing software in their Moroccan affiliate is 30% cheaper than in France. Whereas Firm2 considers their offer in the Spanish market as particularly attractive in a context of costs reduction, since potential savings are substantial, they are around 20% with the guarantee of a successful project management. The proportion of salary costs in the net cost of production of these companies is about 60 – 70 %. Evidence about quality-of-life issues in my interviews was indirect. These firms also provide health care benefits and social services to their staff. Firm1 had even mentioned wage-inflation trend in Morocco assessing it as stable compared to other current offshoring hot spots such as India and china.

However, as seen in the literature review, as much as 72 percent of stated cost savings of typical offshore projects was lost to the costs of start-up, transition, productivity and maintenance (CIO, 2003). Though, other cost components can lead to a reduction of cost advantages owing to offshoring services.
Coordination costs that consist of search costs, negotiation costs and implementation costs were relatively low for the interviewed companies. In fact, there were no costs of search for suitable partner for Firm3 and Firm4 as they already had operation centres in Morocco. And information costs in connection with tests and quality controls of the existing teams were very low.

« Our group already has an extensive global network of captive operations, we therefore felt justified in locating offshoring operations in a familiar place, without further analysis. Existing management resources, infrastructure, and government connections in Morocco have lessened the risk of the early stages of offshoring. »

In the same way, Information gathering by Firm1 about of the aptitude of their Moroccan partner and its compliance with international quality standards were not very expansive since the on-site visits necessary to verify its information were relatively economical by virtue of geographic proximity. Besides, Firm2 considered that search and information costs were negligible for them and that as a small company they were less affected by these expenses and that thanks to their small size even recruitment costs were optimized through personal contacts.

Moreover, Firm2 told me that they have negotiated tax breaks with the local authorities for operating in Casablanca, which enabled them to invest the saved money on hiring additional staff. Similar tax breaks concerning value-added tax and salary taxation were obtained by Firm4 from the government. Companies are also aiming at taking advantage of a new specific tax scheme for offshoring activities announced by the ministry of finance that include a flat rate of 20% on income tax and a corporate tax relief for companies reinvesting part of their profits in the country.

In addition, Firm4 argued that the fact that there were no information asymmetries from the legal aspect between Morocco and France reduced considerably negotiation and agreement costs that they have faced in other parts of the world.

« Differences in culture and language increased the complexity of our negotiations in countries like Indonesia or Argentina whereas the similarity of the Moroccan legal system with the European one saved us a lot of time and money. »

Morocco also offers training assistance and subsidies for companies wishing to train newly hired staff by themselves, to the tune of MAD 50,000 (£ 3,800) per recruit over three years.

Real estate cost is another important issue pointed out by some of my interviewees. Firm1, for example, is situated in one of the offshoring dedicated zones that the government created with infrastructure up to the best standards of quality and cost, square metre costs less than MAD 100 (£ 6), about half the current market price for such facilities.

« We are very satisfied with this ready for services office space; they came with air-conditioning, lighting and internet connection, as well as an attractive telecoms offer. In a normal office, we would have spent more time setting up each of these conveniences. »

Furthermore, since the interviewed firms applied quality certifications, they declared that costs related to monitoring were minor. In fact, organizing and controlling the performance of their Moroccan development teams was mainly supervised through internet and intranet applications. Quality and performance were controlled online at any time. Firm3 also reported implementing quality measures that result in better assignment, project administration and system development processes. Thanks to these measures, the company is able to coordinate value chains from its French office, software deliveries were on time and they have to spend less time and money fixing or recoding them.

However all the firms agreed these cost is one of a wide set of decision criteria and admitted that there offshoring experience in Morocco aims at exploiting advantages of the country through a well-planned and articulated proposition that looks at work performed by their Moroccan affiliates from multiple dimensions, rather than as a simple labour cost savings exercise. What changes cost is a collection of many independent variables that are not captured by the typical accounting system in a useful way. In fact, by being forced to identify their processes and company requirements in the early stages of offshoring, Firm1 realized additional savings financially and personnel-wise through gained efficiencies. They also found better uses for there extra resources after releasing them from their old responsibilities. These additional savings were redistributed to the bottom line and to growth efforts.

Finally, Firm3 also cautioned against seeking instant payback. « It’s a myth that it’s possible to cut costs immediately, » they said. « It takes several years to realize real economies. »

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