Question

Refer to Table 1. Write the Excel formula for each cell marked with “?” in columns B, C and D such that formula could be copied and pasted into columns D, E, F and G using Microsoft Excel without further editing. There is no need to explicitly write the Excel formula for cells marked with “Copy & paste”. Label each formula clearly with cell reference position.

 

In 2020, BS Bank employs 800 employees in its call centres in the United States (U.S.), and the call centre operations involve answering queries from bank customers over the phone on credit cards, bank balances, deposits and other investments. The call centre operations are important but expensive in the U.S., and BS Bank’s management is considering laying off these U.S. employees and “off-shoring” its call centre operations to India for the next five years (2021 – 2025) where employment costs are significantly lower, and where a high quality of service could be delivered from Indian college graduates. An Indian firm, Bangalore InfoSystems (BI), would be hired as a contractor to run the call centre operations, arrange for a site, hire and train call centre employees in India. Cash would be freed up by foregoing telecommunications, computing and other real estate costs in the U.S. However, there are many hidden costs in transferring operations to “off-shore” countries. You are required to use Microsoft Excel (see table 1 in which figures for costs and benefits are at the end of each year) to forecast if the financial benefits of “off-shoring” operations to India would outweigh the costs based on the Net Present Value (NPV) approach. NPV is a standard economic analysis for using “time value” of money to appraise multi-period, long-term investments. BS Bank’s appropriate discount rate for NPV analyses has been 25% (row 18), which is the minimum 

acceptable rate of earnings on potential long-term investments. Thus, if the “off-shoring” investment shows a positive NPV at 25% discount rate, the Chief Information Officer (CIO) will consider the “off-shoring” operations to India financially justified.

Some hidden costs (cash outflows) of “off-shoring” operations to India would include:

·      Training a call centre employee will cost more in India than in the U.S. because Indian employees must be trained to speak like Americans as well as being trained on technical aspects of banking. When a customer from the U.S. calls about a credit card error, he/she does not want to be distracted by someone with a foreign accent. Training cost per Indian employee (row 12) is expected to be US$1,600 per year in 2021, increasing each year in future.

·      Legal and technical consulting in India (row 13): Costs would involve hiring an Indian law firm for legal advice and hiring an Indian technical firm for technical advice in evaluating the best contractor (BI is chosen). In 2020, BS Bank spent US$15 million for legal & technical consulting fees during the initial setup of “off-shore” operation. BS Bank expects to spend US$6 million on maintaining the relationship in 2021, with the amount increasing slightly each year in future.

·      Companies that have outsourced labour in India have noticed that day-to-day communication with their contractor is more successful if some representatives (called liaison employees) are stationed with their contractor. Thus BS Bank would send two of its employees to India to work with BI, and BI would send two of its employees to work with BS Bank in the U.S. (row 14). The cost of a liaison employee is expected to be US$200,000 in 2021, increasing each year (row 15). This expense covers the cost of a liaison employee’s salary and housing etc.

·      Background security checks for new call centre employees: In the U.S., background checks are inexpensive, because so much information about residents is readily available in digital format. In India, however, background information is difficult to obtain and thus, background checks are expensive. A background check would cost US$1,000 per Indian employee in 2021, increasing each year thereafter (row 16). A background check would cost US$20 per U.S. employee in 2021, increasing each year thereafter (row 17).

 

Some financial benefits (or cash inflows) of “off-shoring” operations to India would include:

·      At the U.S. call centres, networking and telecommunication costs would be US$95 per employee in 2021, decreasing each year thereafter (row 4). If the centre were off-shored, BS Bank would not have to pay for telecommunications directly.

·      At the U.S. call centres, computing support costs would be US$390 per employee in 2021, decreasing each year thereafter (row 5). If the centre were off-shored, BS Bank would not have to pay for computing support directly.

·      At the U.S. call centres, real estate costs would be US$1,100 per employee in 2021, increasing each year thereafter (row 6). Real estate costs include upkeep on the call centre building, insurance etc. If the centre is off-shored, BS Bank could use the site for other purposes.

·      For every 20 U.S. call centre employees, BS Bank employs 1 supervisor (row 7). If the centre is off-shored, supervisors could be used in other areas of the bank; thus a benefit for BS Bank.

·      The average salary cost of a U.S. call centre employee will be US$30,000 in 2021, increasing each year thereafter (row 8). The average salary cost of a U.S. call centre supervisor will be US$52,000 in 2021, increasing each year thereafter (row 9). If the centre were off-shored, these salary costs would be forgone.

·      At the U.S. call centres, 11% of call centre employees are expected to leave and be replaced in 2021, and this turnover rate is expected to increase in future years (row 10). It is expected to cost US$1,100 to train a new employee in 2021, increasing in future years (row 11). If the centre were off-shored, these training costs would be forgone.

Two important risk factors affecting the costs and benefits of “off-shoring” operations to India are:

·      Indian labour market risk (cell B20) has two values: F for “favourable”, N for “not favourable”. As the U.S. demand for offshore operations increases, so does the demand for qualified foreign labour, and thus wages and employee turnover rate are expected to escalate in 2021 – 2025 (N for this case in cell B20). However, some economic analysts think that as Indian technical schools are expected to turn out more and more qualified people, and thus wages and employee turnover rate will not go up greatly in 2021 – 2025 (F for this case in cell B20).

·      The currency exchange rate between Indian rupees and American dollars (cells C21 to G21) has three values: U for “Up”, S for “Steady”, D for “Down”. The 5-year contract between BS Bank and BI is made in 2020 and the agreed currency exchange rate is fixed at US$1 dollar to INR$45.85 rupees (cell B30), even though there will be currency fluctuations during the life of the contract. It is agreed that BI contractor will be paid in rupees once per year but BS Bank operates in U.S. dollars. BS Bank may benefit financially by taking advantage of currency fluctuations. BS Bank calculates currency conversion in the following steps:

·     1^st computes the contract fee to BI in U.S. dollars,

·     2^nd converts the contract fee to rupees at the contract’s rate of 45.85,

·     3^rd BS Bank acquires the needed rupees at the current exchange rate.

If more than INR$45.85 rupees are expected to be exchanged for US$1 dollar, U is entered in row 21. If less than INR$45.85 rupees are expected to be exchanged for US$1 dollar, D is entered in row 21. If the currency exchange rate is expected to be steady, S is entered in row 21. An entry is made for each year of the 5-year contract. The pattern of SSSSS in cells C21 to G21 means steady fluctuation is estimated for all 5 years. The pattern of SSDDD in cells C21 to G21 means steady fluctuation is estimated for the first 2 years, and down for the last 3 years.

 

Calculations (rows 24 to 55): Calculate intermediate results of benefits (cash inflows) and costs (cash outflows) for NPV analysis.

·        Number of U.S. employees (row 24): If the off-shoring agreement were not taken, this is the number of non-supervisory U.S. staff needed. There were 800 U.S. call centre employees in 2020, and it is expected to increase 2% per year (that is 2% more than previous year) due to expected banking business growth. Note that the number of employees must be an integer.

·        Number of Indian employees (row 25): If the off-shoring agreement were taken, this is the number of non-supervisory Indian staff needed. Initially, assume there is a 1-to-1 replacement of U.S. employees in 2020, that is 800 Indian employees (B25=800). India’s college graduates are expected to be more productive than U.S. employees, thus the number would increase only 1% per year (that is 1% more than previous year) due to expected banking business growth. Note that the number of employees must be an integer.

·        Number of new U.S. employees (row 26): If the off-shoring agreement were not taken, this is the number of new U.S. employees. New U.S. employees are hired for two reasons: expanding business growth (see row 24) and replacing employees who left in prior year (use the U.S. employee turnover rate in row 10). Note that the number of employees must be an integer.

·        Indian employee turnover rate (row 27): If the Indian labour market is expected to be favourable during the life of the 5-year contract, employee turnover rate will be 10% per year. If it is expected to be not favourable, employee turnover rate will be 25% per year.

·        Number of new Indian employees (row 28): If the off-shoring agreement were taken, this is the number of new Indian employees. New Indian employees are hired for the same reasons as new U.S. employees – see row 26, thus the logic of calculation is the same as for new U.S. employees, except that in 2021, all Indian employees are new employees.

·        Average Indian employment cost per employee (row 29): In 2020, the average Indian employment cost per employee is US$16,000. If the Indian labour market is expected to be favourable during the life of the 5-year contract, salary levels will increase 8% per year (that is 8% more than previous year). If it is expected to be not favourable, the increase will be 15% per year (that is 15% more than previous year).

·        Number of rupees per U.S. dollar (row 30): The agreed currency exchange rate is fixed at US$1 dollar to INR$45.85 rupees (cell B30) when the 5-year contract is made in 2020, but currency exchange rate fluctuates each day. If the exchange rate outlook is steady for that year, the number of rupees per U.S. dollar is the same as prior year. If the outlook is up, the number of rupees per U.S. dollar will be 2% more than prior year. If the outlook is down, the number of rupees per U.S. dollar will be 2% less than prior year.

·        Indian employment cost in U.S. dollar (row 32): This is based on the number of Indian employees and the average Indian employment cost (in US$) per employee.

·        Indian employment cost in rupees (row 33): This is the payment of Indian employment cost to BI contractor in rupees, using the agreed exchange rate of 45.85 rupees to US$1.

·        Actual US$ needed for Indian employment cost (row 34): This is the amount of dollars actually required to pay BI contractor as the Indian employment cost for that financial year.

·        Cost (in US$) of liaison employees living in the U.S. (row 35): This is based on the number of liaison employees living in the U.S. and the cost (in US$) of a liaison employee.

·        Cost (in US$) of liaison employees living in India (row 37): This is based on the number of liaison employees living in India and the cost (in US$) of a liaison employee.

·        Payment of Indian liaison employees in rupees (row 38): The liaison employees living in India will be paid by BS Bank in rupees, calculated at the agreed exchange rate of 45.85 rupees to US$1.

·        Actual US$ needed for Indian liaison payments (row 39): This is the number of dollars actually required to pay for the liaison employees living in India for that financial year.

·        Cost of background checks in India (row 41): This is the cost (in US$) of background security checks performed by BI for new Indian employees in a year.

·        Payment of Indian background checks in rupees (row 42): This is the payment of Indian background checks to BI contractor in rupees, using the agreed exchange rate of 45.85 rupees to US$1.

·        Actual US$ needed for Indian background checks (row 43): This is the number of dollars actually required to pay for the Indian background checks for that financial year.

·        Cost of training new Indian employees in U.S. dollar (row 45): This is based on the number of new Indian employees and the training cost (in US$) per Indian employee.

·        Payment of Indian training cost in rupees (row 46): This is the payment of Indian training cost to BI contractor in rupees, at the agreed exchange rate of 45.85 rupees to US$1.

·        Actual US$ needed for Indian training cost (row 47): This is the number of dollars actually required to pay for the Indian training cost for that financial year.

·        Cost of background checks in the U.S. (row 48): This is the cost (in US$) of background security checks performed for new U.S. employees in a year.

·        U.S. telecommunication costs (row 49): This is based on the number of U.S. call centre employees and the cost of U.S. telecommunication per call centre employee.

·        U.S. computer costs (row 50): This is based on the number of U.S. call centre employees and the cost of U.S. computer per call centre employee.

·        U.S. real estate costs (row 51): This is based on the number of U.S. call centre employees and the cost of U.S. real estate per call centre employee.

·        U.S. training costs (row 52): This is based on the number of new U.S. call centre employees and the cost to train a U.S. call centre employee.

·        Number of U.S. supervisors (row 53): This is based on the number of U.S. call centre employees and the ratio of U.S. call centre employees to supervisor. Note that the number of supervisors must be an integer.

·        Cost of U.S. supervisors (row 54): This is based on the number of U.S. supervisors and the average employment cost for a U.S. call centre supervisor.

·        Cost of U.S. employees (row 55): This is based on the number of U.S. call centre employees and the average employment cost for a U.S. employee.

 

Net Present Value (NPV) calculation (rows 58 – 61): This is based on the net cash flows in the 5-year investments. The net present value of an investment is calculated by using a discount rate and a time series of payments /costs (negative values) and income/benefits (positive values). The net cash flow in a year is the difference between cash inflows (or investment benefits) and cash outflows (or costs). Formulae for rows 58 to 61 are given, their descriptions are given below;

·       Cash inflows or benefits (row 58): These values are the total amounts that could be saved each year if the call centre is off-shored to India.

·       Cash outflows or costs (row 59): These values are the total amounts that will be paid by BS Bank to BI contractor each year if the call centre is off-shored to India.

·       Net cash flow (row 60): These values are the difference between cash inflows and cash outflows (that is, cash inflows less cash outflows) each year.

·       Net present value (cell B61): Use Microsoft Excel’s function - NPV(), to calculate the NPV at 25% discount rate (row 18) for the 5-year contract with BI if the call centre is off-shored to India.