OPERATING ACTIVITIES— OUTSOURCING AC 303 Summer 2015 Prof. G. Thomas White

Outsourcing—Some History Not a new business activity Has become much more prevalent in last 25 years Dominant business strategy in 1970’s & ‘80’s was vertical integration This ensured control of firm’s supply chain and customer services in-house With world-wide recessions and economic uncertainty many firms started to evaluate their core competencies Increasing pressure to manage the bottom line to meet expectations in an increasingly competitive global marketplace led to a cost-benefit analysis of service departments (especially) Many firms eliminated departments such as legal services, IT, accounting, internal audit, and even some manufacturing

Outsourcing—Some History Off-shore outsourcing dramatically increased at the turn of the millennium due to the Y2K computer code challenge Bangalore India became the hot spot for this IT service In the U.S. some major firms like IBM and HP developed significant outsourcing lines of business Large accounting firms began to offer internal audit services on an outsourced basis for clients Late 1990’s Sears outsourced its point-of-sale installation, maintenance, and customer service to IBM which located 1500 employees in Sears stores

Outsourcing—Why Do It? Cost reduction and cost control—can someone else do it as well and cheaper? To maintain profitability & meet expectations off-loading some costs became an attractive strategy Cost structure impact—potentially turning fixed cost departments into a variable cost Improved company focus—back to core competencies & more emphasis placed on value chain activities Companies like P&G had centralized IT and human resources across divisions, rather than duplicate those functions After doing cost analysis P&G awarded $3billion contract for IT infrastructure to HP (10 years)

Outsourcing—Why Do It? Access to state-of-the-art talent for smaller companies, or the ability to take on short-term projects without longer term labor commitments Ability to react quickly to changing environment/business needs—access to external talent/resources to meet constant change Better strategic use of internal resources E-business and internet access made this move feasible

Outsourcing—Other Issues Domestic vs. Offshore Outsourcing Survey cited 26% offshore outsourcing located in India, 16% in China, 16% in UK Labor costs in India are one-third of U.S (gap narrowing) Time differences allow 24-hour availability and access to services High quality Speed and reliability Challenges of offshore outsourcing include: Difficulty obtaining visas to work in U.S. Language differences Worker exploitation instances in underdeveloped countries Backlash of consumers to “exporting” U.S. jobs overseas

Outsourcing—General Risks Privacy (ethical and legal considerations—health info) Protecting intellectual property & proprietary info Security—cyberspace & increasing hacking frequency Loss of morale Loss of control—reliance on collaboration with other firms Cost containment Goal alignment between outsourcing firm & vendor In spite of risks, many success stories—especially call centers, and use of 70/30 model _____________________________________ Note: Fineprint Co. case includes an outsourcing option.