1. Outsourcing

2. Outline Drivers and Benefits What is outsourcing?
Risks and Disadvantages
Some technologies that influence outsourcing
Some current Collaboration Tools
Outsourcing
Friend or Foe?
What is outsourcing?
Some examples of outsourced activities
Poor candidates of activities for outsourcing
Terminology
U.S. outsources to India
Remember the concept of “Service BluePrint”; What is decoupling?
Metters et al: Page 116: “Decoupling” means that separate job descriptions with different employees are formed around the back-office work, and those employees are often removed from the physical sites that deal with customers.

3. What is Outsourcing? Client hires vendor to perform task(s) for client
Example: GM hires another company (e.g., AT& T) to perform telephone related services for GM.
GM – Client
AT&T - Vendor
Client vs. Vendor/Service Provider - e.g., Campbell Soup and IBM worked out well
Nearshoring: Ontario Power Generation and Capgemini ($1 billion deal)

4. Examples of Activities Outsourced
Cafeterias, janitorial services, copy centers, trucking, building maintenance, security, payroll, legal services
Small banks outsource check processing function to larger banks.
Activities that have a high degree of variance (one day 50 employees needed, next day only 10 are needed).
Auto/Manufacturing

5. Examples of Activities Outsourced
IT Outsourcing
Examples: IT application management, IT application development, data center operations, quality assurance etc.
Business Process Outsourcing
Examples: Outsource HR, Accounting, Financials etc.
Gartner predicts that the worldwide market for IT and business process outsourcing services will increase from $582 billion in 2004 to $769 billion in 2009.

6. Poor Candidates for Outsourcing/Offshoring
Core competency related activities
National Security related activities
Local knowledge requirement
New York City parking tickets were processed in Ghana
New Jersey’s welfare help line calls were answered in India
Medical diagnostics?
Tax returns?
Intuit – an exception to first bullet (core competency was outsourced) – seasonality effect – If they did not go for outsourcing, they will end up spending more resources for hiring/training/laying-off seasonal employees.
Crowdsourcing may be an exception; Apple – Design of iPhones.
Local Knowledge - (vacations spots in U.S., Chinese and Indians who have not traveled to U.S., should not provide services on these).

7. Terminology (continued)
Multisourcing
Multiple vendors for client’s outsourced project
Example: GM’s Brazilian e-commerce site crashed in 2003
Vendors: Oracle, AT&T, Microsoft, Cisco, EDS, IBM
GM ($7.5 billion) IT Outsourcing contract with:
EDS, IBM, Capgemini, and Wipro Ltd.
Onshoring
Vendor in the same home country as client
Example: GM (client) and AT&T (vendor)
Nearshoring
Vendor in a country closer to client’s home country
Example: Nike (Beaverton) could hire Indosoft (Canada)
GM’s Brazilian e-commerce site generated 80,000 online car sales annually
HP has acquired EDS for about $13.6 billion in May 2008.

8. Crowdsourcing
Crowdsourcing (Howe): “Taking a job traditionally performed by a designated employee and outsourcing it to an undefined, generally large group in the form of an open call."
Company puts out a call for a (programming) project; best solution/submission is accepted and paid for.
"Best, most direct and least expensive sources of innovation lie outside the corporate walls"
Jeff Howe maintains a blog called crowdsourcing.com and is writing a book on crowdsourcing.
Crowdsource companies brokering.

9. Advantages of Crowdsourcing
Several, alternative designs and solutions.
Cost spread over many, benefits spread over few.
24x7 workforce (project gets done faster).
Applies to other aspects of innovation:
Netflix recommender service
Dell's IdeaStorm.
Amazon.com's Mechanical Turk (

10. Disadvantages of Crowdsourcing
Requires great coordination
Exposure of intellectual property (both! the contractor and the sponsor).
Corporate Social Responsibility issues.

11. Terminology (Continued)
Global Outsourcing or Offshoring
Vendor and client in different countries
Example: Amsterdam-based ABN Amro (client) and IBM (vendor)
Captive Offshoring
Client owns vendor (offshore unit) in foreign country
Example: IBM (Beaverton) hires IBM (India)

12. Global Sourcing: An irreversible trend
Sources: Gartner; Karen Fast - Claremont Associates, LLC

13. HP Server’s Path to Market
Source: Laudon and Laudon (10th edition)

14. Source: Nasscom; Marty McCaffrey; Giga Information Group
U.S. Outsources to India
80 percent of U.S. offshore outsourcing dollars go to India
The U.S. is India’s biggest customer/60-70% of Indian market
India’s software export market is about $ 40 billion and has been growing at about percent for the past five years
This market was a mere $20 million in 1989
India exports software to nearly 100 countries
India’s IT and BPO industry - $64 billion revenue in 2008
Source: Nasscom; Marty McCaffrey; Giga Information Group

15. Video – CBS (2004) Think about ‘SWOT’ analysis
Why did U.S. select India?
What were some risks of outsourcing to India?
How did U.S. mitigate country risks of India?
What are some examples of activities that are outsourced to India?
Any surprises in the video?
Per capita income then - $500; In – About three times that.
Bullock-cart, rickshaw, threewheelers, four wheelers all travel on same lane of a road.
Population/Pollution/Poverty/Poor Infrastructure/Child Labor/Potential Terrorism Threats

16. SWOT Factors for India Weaknesses Strengths Opportunities Threats
Infrastructure
Cultural Differences
Distance from US
Feud over Pakistan
Legal System
Strengths
Solid History of Software Development
English Proficiency
Government Support
Process and Quality Focus
Skilled, Educated Resources
Entrepreneurialism
Opportunities
BPO and Call Centers
Expansion of Existing Relationships
Emerging Chinese Market
Indian Domestic Market Growth
Threats
Competition for Resources
Over Promise/Under Deliver
Rising Costs
Competition from Other Countries
Corruption, Piracy, Trust
Competition for Resources – Huge population – limited resources
Population/Pollution/Poverty/Poor Infrastructure/Child Labor/Potential Terrorism Threats

17. Anything in the video that surprised you?
Tax; Medical Diagnostics; Name changes of call center employees; Geography is history?!

18. Drivers of Outsourcing
Vendor excels in complementary core competencies
Global Economy
Faster time to market
Geography is history!?
American products more affordable
Differential tax rates and tax benefits
Keeping pace with technology innovation and innovative business practices; Vendor’s expertise leading to better quality; Vendor’s economies of scale
Example: IT in India; India has the most CMM Level 5 certified organizations
India has roughly 115,000 India computer science graduates per year; annually close to 350,000 engineering graduates take IT positions
This total represents roughly 10 times the available technically trained talent pool in the US
Defer taxes on offshore units until money is repatriated back to U.S. - interest free loan on taxes owed
Standard tax rate in Ireland is 43%.
BPO firms get a preferential rate of 10% until 2010.
Jamaica has a 34% tax rate.
BPO free trade zones are tax free.

19. Drivers of Outsourcing
Productivity gains
24x7 workforce
Using time zone differences to client’s benefit
Economic benefits to client and vendor
For every $1 dollar off shored, U.S. benefits $ $1.14
(McKinsey Global Institute )
0.58 cost reduction to a U.S. firm; 0.05 other countries buying more U.S. goods; 0.04 repatriation of profits from captive offshore units, 0.45 – 0.47 in redeployed U.S. labor.
India – Per Capita Income $500 in 2004, now $1000 (9% growth this last year).

20. Risks of Outsourcing Loss of local jobs Country risks Vendor risks
Strategy risks
Hidden Costs of Outsourcing
Loss of local jobs (affecting local economy)
Country risks (language, cultural bias, exchange rates etc.)
Vendor risks (Price, Contract etc.)

21. Hidden Costs of Outsourcing
Costs for identifying and evaluating vendors
Costs of transitioning to a new vendor
Costs of monitoring vendors
Legal Costs
Costs of losing control of the outsourced process or its integration with core processes

22. Hidden Costs of Outsourcing (Continued)
Special infrastructure costs
Costs of providing security
Costs to ensure privacy
Training costs, speech and accent neutralization, and turnover costs
Costs of lost business due to unforeseen events
Costs of providing basic conveniences to vendor’s employees (cafeteria, transportation)

23. Risks of Outsourcing Country Risks
Trade constraints imposed by governments
Exchange rate fluctuations
Poor Infrastructure
Contracts binding in both legal systems?
Security risks
Language risks
Cultural bias (works both ways)
Cultural differences (Sub-cultures and micro-cultures within each organization)
Exchange rate changes can turn long-term commitments sour
Language
Accent, idioms, slangs
Cultural bias (works both ways)
Domestic backlash (loss of jobs)
Call center seen to be destructive to traditional family values in India

24. Risks of Outsourcing Loss of Jobs Vendor Risks Pricing Risks
Contract Risks
Post contract re-negotiations
Changing business conditions
Scope and price creep
Protection of Intellectual Property (IP)

25. Risks of Outsourcing Strategic Risks
Lose touch with customer or suffer negative image
Sensitive information of client shared with vendor.
Vendor serves client and client’s competitors
Mediocrity vs. competitive advantage
Dwindling career paths at client firm with regard to activities that are outsourced
Lose control of process
Breakdown in integration of process

26. Some key technologies that have influenced outsourcing
Computer Networks
Fiber Optics
Multiplexing
Satellite
Scanning technology
Voice Communication (Voice Over IP)
Virtual Collaboration Tools (e.g., Wiki)

27. Some key technologies that have influenced outsourcing
Video Conferencing Tools
WebEx
Halo
Telepresence

28. Some benefits of WebEx Affordable to many businesses
Requires knowledge of less complex IT tools (e.g., computer, phone)
Share:
Messages, Whiteboards, files, presentations, applications, desktops
Save/Record/Playback meeting

29. Benefits of Halo/Telepresence
Collapsing time frame on decisions – Faster time to market
Less tired/exhausted – no jet lags – no long lines at airport
More creativity/innovation
More problem solving and collaborative success

30. Benefits of Halo/Telepresence
Quality – audio and video
Life Size and clarified images where necessary
HD lens for document sharing
Share desktop
Focus on experience – not on technology (click of a mouse)

31. Benefits of Halo/Telepresence
Allows for perfect audio collaboration of overlapping conversations
Eliminate distance constraints
Cheaper travel expenses
No missing children’s birthday party, piano recital, and softball games
Telepresence – Different products for different target markets; Interoperability

32. Outsourcing: A friend or foe?
Opportunities
The offshore outsourcing industry is predicted to grow and expand
Don’t fight the trend---find out how you can engage in it!
Become conversant with the offshore industry dynamics
Project management and leadership
Geographically dispersed team members
IT – Innovation, IT project management, aligning IT with business strategy (right blend of technical and business/user requirements vs. pure technical requirements)
Link Decoupling/Outsourcing to efficiency, quality, cost, speed, flexibility, convenience, and firm strategy.