Globalization Outsourcing & Offshoring

10 Flatteners that have leveled the global playing field 1: 11/9/89: Fall of the Berlin Wall 2: 8/9/95: Netscape’s initial public offering 3: Workflow Software 4: Uploading 5: Outsourcing 6: Offshoring 7: Supply Chaining8: Insourcing 9: In-forming 10: The Steroids: Digital, mobile, virtual, personal

Triple Convergence Convergence I: Up until 2000 the ten flatteners were semi-independent. However the flatteners converged – can be compared to “complementary goods” in that each flattener enhanced the other flatteners. Convergence II: After the emergence of the ten flatteners a new business model was required to succeed – instead of collaborating vertically (where innovation comes from the top), businesses needed to begin collaborating horizontally. Convergence III: After the fall of the Berlin Wall, countries that had followed the Soviet economic model (India, China, Russia, Eastern Europe, Latin America, and Central Asia) began to open up their economies to the world – the new players converged with the rest of the globalized marketplace adding new brain power and enhancing horizontal collaboration across the globe.

The New Middle: The Unflat World The New Middle: refers to American jobs that cannot be “outsourced”, automated, or digitized: Physician Surgeon Dentist Trial lawyer Pharmacist Teacher The Unflat World: there are ~3 billion people in places like rural India, rural China, and Africa who still live in an “unflattened” worlds.

The Hidden Costs of IT Outsourcing

Popularity of outsourcing is somewhat enigmatic: why would companies entrust activities that are its lifeblood (information technology, human resources, marketing & sales) to a third party? Reduced cost: expensive in-house; vendor with many clients can operate at a scale a single enterprise cannot. Large vendors can use more powerful equipment; their size helps them negotiate with hardware & software providers. Improved performance: expertise of an in-house IT department often lags behind today’s technology. A vendor’s sole job is to follow trends and provide leading-edge software and systems. Vendors develop more expertise because they more varied issues. They have employees who specialize in areas clients typically encounter only once (converting to a client-server architecture). In many instances the costs halved or even canceled the company’s potential savings from outsourcing.

Study Results: 500 IT-outsourced efforts

Hidden Cost 1: Vendor Search and Contracting Average cost $500,000 (~3% of the average total IT-outsourcing cost)

Hidden Cost 2: Transitioning to the Vendor Costs that stem from disruption – and from the vendor’s inability to react as quickly and appropriately as the internal department did at the beginning of the contract.

Hidden Cost 3: Managing the Effort Monitoring to see that IT vendors fulfill their contractual obligations Bargaining with IT vendors Negotiating any needed contract changes Costs average $300,000 per year (~ 8% of the yearly contract amount)

Hidden Cost 4: Transitioning After Outsourcing Switching vendors Reintegrating IT activities internally

How Can the Hidden Costs Be Reduced?