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Outsourcing.

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Presentation on theme: "Outsourcing."— Presentation transcript:

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.


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