CASE STUDY

Pagoda.com

Introduction

Pagoda.com is an Internet service provider (ISP) that caters to

individual consumers and small businesses who require a high

level of service and are willing to pay a premium for it. Specifically,

Pagoda.com offers state-of-the-art email applications

and Web-building software, as well as plenty of storage space

and the fastest access available. The marketing vice president,

Jerry Hunter, puts it this way: "There are a lot of companies out

there promising the cheapest Internet access. But what do you

get for your money? Slow- or no-access and an endless stream

of system crashes. And I won't even mention the lack of support

if you have a technical question! For a few dollars more a

month, we give our customers the environment they need to

be productive. It's no surprise, then, that we have the highest

customer satisfaction and retention rates in the industry."

The Online Help Desk

One of Pagoda's services is its online help desk. The online

help desk works as follows: Customers who are experiencing

technical problems, or who simply have questions about their

account, enter a one-on-one chat room, where they can interact

directly with an expert. Problems are usually resolved within 10

minutes, and customers have listed it as one of the top three reasons

they stick with Pagoda.com. Presently, Pagoda has enough

capacity to handle up to 900,000 requests per year, although

management doesn't expect the number of requests to change

much from the current level of 800,000 per year.

A firm located in New Delhi, India, has approached

Pagoda about outsourcing the online help desk. The offer is

attractive. The New Delhi firm's own personnel would handle

the help desk function. These personnel all speak English fluently

and have college degrees or appropriate technical backgrounds.

And because they are located in India, labor costs

would be a fraction of what they are in the United States. The

savings would be passed on, in part, to Pagoda. And since the

help desk chat room exists on the Internet, Pagoda's customers

should be unaware of the switch.

Pagoda management has put together the following figures,

outlining the yearly costs associated with the current system

and the Indian proposal:

Current Online Help Desk

Personnel costs:

40 full-time-equivalent (FTE) technical experts @ $40,000

per year (salary and benefits); 3 supervisors @ $70,000

each per year (salary and benefits)

Equipment costs:

4 servers @ $2,000 per year

20 PCs @ $1,000 per year

Variable costs:

$1.50 per request (office supplies, fax paper, etc.)

New Delhi Proposal

Fixed cost:

$1,500,000 per contract year (to cover administrative and

IT costs)

Charge:

$0.50 per request

Questions

1. Calculate the total cost of outsourcing the online help

desk versus staying with the current solution. Which

option is cheaper?

2. What other factors, other than costs, should Pagoda consider? Explain your answer.