Outsourcing in the 21st Century CHAPTER 19 Outsourcing in the 21st Century CLASSROOM OPENER GREAT BUSINESS DECISIONS – Rupert Murdoch Builds a Printing Plant without a Union Rupert Murdoch built a new printing plant in the East of London that, for the first time, did not require union labor. On January 28, 1986, four million newspapers were produced at the plant. Thousands of picketers, from the print unions and others, attempted to close the plant and end nonunionized printing. The violent protests raged throughout most of the 1990s. Eventually, Murdoch paid the union $96 million to disappear and was left with a highly efficient and effective printing plant, which substantially reduced costs. Valuations of his company soared from $300 million to $1 billion. Murdoch’s confrontation with the union is a defining moment in his career and in the history of British unions. Murdoch’s win over the unions changed the face of the British newspaper industry and catapulted his empire. Regardless of what you are outsourcing, where you are outsourcing, or how you are outsourcing, there are advantages and disadvantages.

Learning Outcomes 19.1 Describe the advantages and disadvantages of insourcing, outsourcing, and offshore outsourcing 19.2 Describe why outsourcing is a critical business decision 19.1 Describe the advantages and disadvantages of insourcing, outsourcing, and offshore outsourcing Answers to this question will vary 19.2 Describe why outsourcing is a critical business decision Outsourcing can give the right combination of people, processes, and technology to operate efficiently and effectively in the global marketplace without burdening time and budge

OUTSOURCING PROJECTS Insourcing (in-house-development) – a common approach using the professional expertise within an organization to develop and maintain the organization's information technology systems Outsourcing – an arrangement by which one organization provides a service or services for another organization that chooses not to perform them in-house Discuss the Allied Office Products example in the text Insourcing has been instrumental in creating a viable supply of IT professionals and in fact in creating a better quality workforce combining both technical and business skills This is an interesting lecture given by Tom Friedman at MIT on his book The World is Flat and the power of outsourcing http://mitworld.mit.edu/video/266/ CLASSROOM EXERCISE Mail Bombing If you are discussing outsourcing remember to discuss how it affects the employees and the culture. Here is a scary article  Outsourcing May Not Be Popular, But Letter Bombs? http://www.informationweek.com/blog/main/archives/2007/02/outsourcing_may.html  

OUTSOURCING PROJECTS In some cases, the entire IT department is outsourced, including planning and business analysis as well as the installation, management, and servicing of the network and workstations This is an interesting clip on outsourcing and tutoring kids in the United States http://www.npr.org/templates/story/story.php?storyId=4497026 

OUTSOURCING PROJECTS Reasons companies outsource Tom Friedman on the Daily Show http://www.comedycentral.com/motherload/index.jhtml?ml_video=70490 (takes a while to load). 

OUTSOURCING PROJECTS Onshore outsourcing – engaging another company within the same country for services Nearshore outsourcing – contracting an outsourcing arrangement with a company in a nearby country Offshore outsourcing – using organizations from developing countries to write code and develop systems Discuss the three different types of outsourcing options and determine which one would be ideal for each of the following: Production of a new cereal Development of a new CRM system Development and maintenance of a KM system Production of a new sneaker Deployment of a logistics system

OUTSOURCING PROJECTS Big selling point for offshore outsourcing “inexpensive good work” Does outsourcing always guarantee inexpensive good work? CLASSROOM EXERCISE Categories In a group research the Internet and find examples of outsourcing arrangements that have gone bad Was the arrangement onshore, nearshore, or offshore If offshore, was the arrangement a leader, up-and-comer or a rookie?

OUTSOURCING PROJECTS Factors driving outsourcing growth include: Core competencies Financial savings Rapid growth Industry changes The Internet Globalization CLASSROOM EXERCISE The Outsourcing Debate Print and cut out the below companies. Assign the companies to your students. Each company has an argument for or against outsourcing. Have your student’s debate for or against outsourcing. Team size can vary. Review the IM for additional details. Core competencies Many companies have recently begun to consider outsourcing as a means to fuel revenue growth rather than just a cost-cutting measure. Outsourcing enables an organization to maintain an up-to-date technology infrastructure while freeing it to focus on revenue growth goals by reinvesting cash and human capital in areas offering the greatest return on investment. Financial savings. It is typically cheaper to hire workers in China and India than similar workers in the United States. Technology is advancing at such an accelerated rate that companies often lack the resources, workforce, or expertise to keep up. It is close to impossible for an IT department to maintain a “best-of breed” status, especially for small and medium-sized enterprises where cost is a critical factor. Rapid growth. A company’s sustainability depends on both speed to market and ability to react quickly to changes in market conditions. By taking advantage of outsourcing, an organization is able to acquire best-practices process expertise. This facilitates the design, building, training, and deployment of business processes or functions. Industry changes. High levels of reorganization across industries have increased demand for outsourcing to better focus on core competencies. The significant increase in merger and acquisition activity created a sudden need to integrate multiple core and noncore business functions into one business, while the deregulation of the utilities and telecom industries created a need to ensure compliance with government rules and regulations. Companies in either situation turned to outsourcing so they could better focus on industry changes at hand. The Internet. The pervasive nature of the Internet as an effective sales channel has allowed clients to become more comfortable with outsourcing. Barriers to entry, such as lack of capital, are dramatically reduced in the world of ebusiness due to the Internet. New competitors enter the market daily. Globalization. As markets open worldwide, competition heats up. Companies may engage outsourcing service providers to deliver international services

OUTSOURCING PROJECTS According to PricewaterhouseCoopers “Businesses that outsource are growing faster, larger, and more profitable than those that do not” Best Buy is the number one U.S. specialty retailer for consumer electronics, personal computers, entertainment software, and appliances Best Buy outsourced its enterprise systems to Accenture The results of this outsourcing arrangement included a 20 percent increase in revenue which translated into a $25 million profit

OUTSOURCING PROJECTS Most organizations outsource their noncore business functions, such as payroll and IT For each industry, determine the benefits and challenges of outsourcing CLASSROOM EXERCISE Outsourcing Issues There are many issues and obstacles to outsourcing such as time zone differences and accents. Break your students into groups and ask them to research the Internet to find examples of companies that have experiences issues with outsourcing. Ask your students to present their findings to the class and offer a small prize to the team that finds the most outrageous example. There is also a great video by Thomas Friedman on his famous book The World is Flat. The video can be found at www.mit.com. The video lasts around 40 minutes.

Outsourcing Benefits Outsourcing benefits include: Increased quality and efficiency Reduced operating expenses Outsourcing non-core processes Reduced exposure to risk Economies of scale, expertise, and best practices Access to advanced technologies Increased flexibility Avoid costly outlay of capital funds Reduced headcount and associated overhead expense Reduced time to market for products or services Are there any additional outsourcing benefits not mentioned in the text? Outsourcing Benefits The many benefits associated with outsourcing include: Increased quality and efficiency of a process, service, or function. Reduced operating expenses. Resources focused on core profit-generating competencies. Reduced exposure to risks involved with large capital investments. Access to outsourcing service provider’s economies of scale. Access to outsourcing services provider’s expertise and best-in-class practices. Access to advanced technologies. Increased flexibility with the ability to respond quickly to changing market demands. No costly outlay of capital funds. Reduced head count and associated overhead expense. Reduced frustration and expense related to hiring and retaining employees in an exceptionally tight job market. Reduced time to market for products or service

Outsourcing Challenges Outsourcing challenges include Contract length Difficulties in getting out of a contract Problems in foreseeing future needs Problems in reforming an internal IT department after the contract is finished Competitive edge Confidentiality Scope definition Contract length – Most outsourcing contracts span several years and cause the issues discussed above Competitive edge – Effective and innovative use of IT can be lost when using an outsourcing service provider Confidentiality – Confidential information might be breached by an outsourcing service provider, especially one that provides services to competitors Scope definition – Scope creep is a common problem with outsourcing agreements

CHAPTER NINETEEN Opening Case Study Questions What are the benefits and risks associated with outsourcing? What are the ethical issues associated with outsourcing government applications? What are the security issues associated with outsourcing government applications? 1. What are the benefits and risks associated with outsourcing? There are numerous advantages to outsourcing including: Focus on unique core competencies Exploit the intellect of another organization Better predict future costs Acquire leading-edge technology Reduce costs Improve performance accountability The risks associated with outsourcing include contract length, competitive edge, confidentiality, and scope definition.   2. What are the ethical issues associated with outsourcing government applications? If an unethical contractor builds a government application they could sell the information or the application to someone outside of the government. 3. What are the security issues associated with outsourcing government applications? If the wrong person is on the team that builds the outsourced application they could add accessibility to the application that nobody knows about and have a backdoor into the government system. They could also steal the information and the application to sell to non-government organizations.

CHAPTER NINETEEN CASE UPS in the Computer Repair Business Toshiba is handing over its entire laptop repair operation to UPS Supply Chain Solutions, the shippers $2.4 billion logistics outsourcing division

CHAPTER NINETEEN CASE QUESTIONS Do you think UPS’s entrance into the laptop repair business was a good business decision? Why or why not? Explain why Toshiba decided to outsource its computer repair business to UPS What are some advantages UPS can offer Toshiba in the outsourcing arrangement? Explain the advantages of forming an outsourcing relationship with a parcel delivery company such as UPS 1. Do you think UPS’s entrance into the laptop repair business was a good business decision? Why or why not? Yes. UPS is now entering many businesses where it is taking over the logistics of the company including Papa John’s pizza and Nike. Outsourcing logistics to UPS is a highly successful business and has provided UPS with a new revenue stream. 2. Explain why Toshiba decided to outsource its computer repair business to UPS Since the primary challenge of computer repair is more logistical than technical, Toshiba’s business decision seems brilliant. Outsourcing its computer repair business to UPS was cheaper and more efficient than Toshiba could perform the same tasks itself. The company is receiving excellent service and has reduced fix times from weeks to days making customers happy. 3. What are some advantages UPS can offer Toshiba in the outsourcing arrangement? UPS can offer Toshiba other logistic services such as managing inventory, ordering, and custom processes. It can also provide advantages in transportation and freight, logistics, international trade, and consulting services 4. Explain the advantages of forming an outsourcing relationship with a parcel delivery company such as UPS UPS is an expert in logistics and the supply chain. Partnering with a company like UPS that has facilities, equipment, and employees located around the globe can be a huge advantage for a company. For a detailed overview of the benefits of partnering with UPS review the UPS Supply Chain solutions Web site at http://www.ups-scs.com/ .