1. Managing Operations
Lecture 19

2. Today’s Lecture Managing Outsourcing: Organizational Structure
Governance
Day-to-Day Working
Supplier Development

3. Today Lecture…
EASTMAN KODAK COMPANY Case Example: Managing Outsourcing
HONDA MOTOR COMPANY Case Example: Supplier Development
Offshoring
EXULT Case Example – Offshoring
Outsourcing – The ‘Final Word’

4. Managing Outsourcing: 1. Organizational Structure
Managing outsourcing is different from managing internal staff
One reason = it is a joint effort between parties that may not have the same goals
Typically, parties establish layers of joint teams.
Top-level team: final word in conflict resolution
Operational team: oversees day-to-day functioning

5. Managing Outsourcing: 1. Organizational Structure
Joint special purpose teams: created from time to time to solve pressing issues
Committees: oversee the use of formal change management procedures
Relationship Manager(s): look after the ‘relationship’
Skills = different to those of e.g. a data center manager

6. EASTMAN KODAK COMPANY Case Example: Managing Outsourcing
First IS outsourcing by a ‘good shop’
“Shocked the IS world”
Four suppliers (ESPs) – manage portions of IS:
Operate data centers and networks
Manage telecommunications
PC support
Voice messaging

7. EASTMAN KODAK COMPANY Case Example: Managing Outsourcing cont.
Management structure:
Management Board
Meets twice a year, includes senior management from both companies – Focus on strategic issues
The Advisory Council
Meets monthly, 15 members- handles technical and operational issues

8. EASTMAN KODAK COMPANY Case Example: Managing Outsourcing cont.
3. The Supplier and Alliance Management Group
Manages long term outsourcing relationships & contracts with large IT suppliers
The Relationship Manager
Focal point between itself and service provider – ensures Kodak gets more than just delivery

9. EASTMAN KODAK COMPANY Case Example: Managing Outsourcing cont.
5. Working Groups
Added to deal with specific technology areas.
Client Surveys
Sent out twice a year to 5,000 internal users

10. EASTMAN KODAK COMPANY Case Example: Managing Outsourcing cont.
Kodak needs all these forms of co-ordination for effective supplier management
Considered a ‘best practice’ outsourcing and relationship model

11. Managing Outsourcing: 2. Governance
The foundations of governing an outsourcing relationship are laid in the (LARGE) contract(s)
Service Level Agreement (SLA)
Responsibilities, performance requirements, penalties, bonuses
Another important component of SLAs is metrics. An SLA needs to be measurable to be of use
It is only when trust in one another breaks down that they turn to the contract. (Fig 8-4: Governance rules)

12. Service Level Agremeents

14. Managing Outsourcing: 3. Day-to-Day Working
Recommendations to manage day-to-day interactions:
Manage expectations, not staff
Facilitation becomes the mode of working. Rather than say “do this”, the approach becomes “how can we solve this together”
Realize that informal ways of working may disappear
Loss of informal ways of working may add rigor

15. Managing Outsourcing: 3. Day-to-Day Working
Integration of the two staffs requires explicit actions
Does not happen naturally
Explicit policies are likely to be needed

16. Managing Outsourcing: 3. Day-to-Day Working
Don’t unduly restrict outsourcing staff access
Joint celebrations
Invite each other to meetings
The best way to manage day-to-day is communicate frequently
Preferably ‘face to face’!

17. Managing Outsourcing: 4. Supplier Development
Topic that is receiving increased attention
Buying parts and services that go into one’s own products and services
Assisting one’s suppliers to improve their product and services by generally improving their processes

18. HONDA MOTOR COMPANY Case Example: Supplier Development
Not an IT related example (manufacturing) but a good one!
This automobile manufacturer conducted pioneering work in improving suppliers’ capabilities by pairing Honda engineers with a supplier’s engineers to drastically lower the cost of one part supplied to Honda
The results are like “walking around picking money up off the floor.”

19. Offshoring
To round out our discussion of outsourcing, we turn to a topic receiving much attention today: sending work offshore
Now = a big political issue
Late 1990s – Offshore outsourcing
Started when labor markets were especially tight due to Y2K
Companies turn to offshore outsourcing because labor costs are lower and there is ample supply of educated people
Ireland, India, Philippines

20. Off-shoring vs Outsourcing

21. Offshoring
The trickle in the late ’90s has turned into a steady stream of white-collar work going offshore
Application maintenance and development
Call centers
Customer service
Back office processing
BPO
Claims processing
Etc.
Manufacturers have faced international competition, whereas service firms have (had?) not

22. Offshoring cont.
Offshore outsourcing differs in some unique ways from domestic outsourcing
Some areas to be considered:
Offshoring options are broadening
Both parties need cultural training to bridge cultural differences
Clients = cultural integration programs
Providers = accent neutralization

23. Offshoring cont. Offshore outsourcing differs from domestic
Some areas to be considered cont.
Communication issues need to be addressed from the outset
“Yes”
Asia = “I hear what you are saying”
West = “I can do what you ask” or “I agree with you”

24. Offshoring cont. Tips Avoid colloquialisms such as sporting analogies
Use short, concise sentences with common words
Have the provider write a ‘statement of work’ to gauge understanding

25. Offshoring cont. Get all commitments in writing
Include on your team someone who know their culture
Communication issues continue throughout offshore relationships
Country laws need to be followed

26. EXULT Case Example - Offshoring
Provides full-service HR outsourcing to Global 500 companies
Mature in outsourcing relationships because outsourcing is its primary business
2 Indian companies maintain its core HR computer systems (SAP & Peoplesoft)
Chose 2 Vs. 1 to ensure resources could be scaled up as needed

27. Exult services

28. EXULT Case Example - Offshoring
In choosing the providers used consultants to do the detailed review and content (neoIT) and to structure the contract (TPI)
Aim = for best deal. Needed to understand the Indian market and its practices. Consultants helped achieve that

29. EXULT Case Example - Offshoring
Current split of maintenance work
70% Indian
15% provider employees ‘onshore’
15% Exult ‘onshore’
Requires us buyers to work within the highly disciplined Indian maintenance processes rather than to try to change them
Applies to all outsourcing!
Good economic outcomes

30. Offshoring cont. Use Offshoring to Advantage
A major criticism is that it decreases skills and know-how of its client’s IS organization
This need not be so
Redefine Services Using Offshoring
Understand customers
Understand demographics

31. Offshoring cont. Stay in touch with customers Offer end-to-end service
Dominate the screen
As information moves online, companies are vying to control “the screen” = where the information ends up

32. Offshoring IS Activities
Outsourcing was caused by the emphasis on organizations sticking to their core competencies, offshoring was caused by scarce resources.
Offshore outsourcing occurs when products and services are procured from locations in other countries. Offshore out-sourcing of information systems services is, arguably, the most significant phenomenon to occur in recent decades

33. Offshoring IS Activities…
American Express has been offshoring their back-office processing services in India since
GE Capital opened its GE Capital International Services (GECIS) in India in 1997.
Given the abundance of skilled professionals at offshore sites as well as pressure on executives to drive down costs, it is very likely that this trend will continue and even increase for some time, despite negative public reaction.

34. Offshoring IS Activities…
Many of these outsourcing vendors are “offshore” in large part because of the lower costs that can be attained outside of countries in the industrialized West.
This exploitation of international cost differentials has been termed “global arbitrage,” as it is an extension of the classic economic arbitrage strategy.

35. Offshoring Factors Bandwidth growth and telecommunication
Scarce human expertise
Increased demand
Available global talents
Routine tasks
Changing goals and objectives
Innovation
Imitation

36. Offshoring Factors..
Offshore outsourcing of information systems activities is broadly accomplished in one of two ways:
First, the client or offshoring organization sets up units in other countries and hires local talent to develop, maintain, and provide services.
In this case,the company maintains responsibility for training, supervision, quality control, and the like.
These responsibilities can be managed locally or remotely

37. Offshoring Factors…
Second, the client or offshoring organization contracts out services to providers in locations in other countries.
In this case, responsibility for hiring, training, supervision, quality control,and the like rests with the provider.

38. Offshoring Factors…
Describes six varieties of work related to information systems:
1. Programming, software testing, and software maintenance;
Information systems research and development;
high-end jobs such as software architecture, product design, project management, information systems consulting, and business strategy; that are often offshored:

39. Offshoring Factors…
Physical product manufacturing—semiconductors, computer components, computers;
Business process outsourcing/IT enabled services insurance claim processing, medical billing, accounting, bookkeeping, medical transcription, digitization of engineering drawings, desktop publishing, and high-end IT enabled services such as financial analysis and the reading of X-rays;
Call centers and telemarketing.

40. Controlling information systems
Controlling information systems development and maintenance costs is necessary for an organization in general and the information systems function in particular.
In the early days of computers, investment in hardware, software, and IS products and personnel faced little scrutiny.

41. Risks in Offshore Outsourcing IS Activities
Any business decision involves risks, and that risk is greater in situations when there is increased change or uncertainty.
The best option, however, is not to avoid decisions or to wait and see what might happen elsewhere.
The pressure on CEOs and CIOs to reduce costs is real, and there is no sign that it will be lifted any time soon.
Good management practice suggests careful assessment of potential risks for any decision.

42. Risks in Offshore Outsourcing IS Activities
Although offshore outsourcing of information systems services has been going on for some time now, our understanding of its impact is still evolving.
The trend in offshoring has been rapid, and there is little doubt that it will continue in the foreseeable future.
It is critical that offshored projects are carefully studied and costbenefit analyses are carried out to make sure benefits overweigh costs beyond a margin.
Only significant cost benefits will warrant offshore outsourcing of information systems services.
With only a marginal cost benefit of say 10–15%, most organizations are better off retaining their information systems activities in-house or in-shore.

43. Risks in Offshore Outsourcing IS Activities..
The offshore outsourcing of information systems activities is primarily based on transaction cost economics.
That rationale is narrowed down to the cost of labor to a large extent.
There is an extant discourse among academics, professionals, and business leaders as to the exact nature of this cost advantage.

44. Risks in Offshore Outsourcing IS Activities..
Risk in:
(a) overestimating the cost saving,
(b) underestimating the overhead costs that are necessary to get to the cost saving stage
(c) discounting non-cost factors that influence offshore outsourcing outcome.
The tangible transaction-cost economics of offshore outsourcing is more readily measured by economics and cost accounting models.
The intangible costs or benefits of offshore outsourcing include issues of organization, behavior, morale, social, strategy, and the like, and these require acute management skills and insight.

45. Risks of Offshore Outsourcing
Decline in employee morale
Loss of innovation and know-how
Public reaction to corporate citizenship
Regional instability of host country
Quality control and standards
Communications and culture

46. The Management of Offshore Information Systems Projects
Offshore outsourcing of information systems services has added new dimensions to duties and responsibilities of project managers.
Systems that are developed at remote sites in different countries are more difficult to manage due to differences in culture,language, time zone, labor law, work habits, and the like.
These issues are relevant even to cases when a firm operates its own offshore practice.

47. The Management of Offshore Information Systems Projects..
Project managers are often involved with negotiation and management of contract with international vendors for the delivery of information systems services.
Many firms have their legal division draw and finalize these offshore contracts.
Project managers often interact directly with offshore vendors to negotiate and clarify responsibilities.
Communication skills and clear understanding of the culture and language of offshore vendors are essential to successful negotiation.

48. The Management of Offshore Information Systems Projects..
Project managers are responsible for the development and management of relationships between their team members and offshore service providers.
Routine and effective collaboration and interaction between client and vendor teams is heavily influenced by relationship management
Risk assessment and risk management of offshore projects is especially difficult. For example,risks associated with local politics, natural disaster, and communication and network infrastructure in offshore locations are more difficult to assess and manage.

49. The Management of Offshore Information Systems Projects..
Systems planning and integration also takes a new dimension in offshore outsourcing practice.
This may turn out to be a critical problem if the outsourcing firm reduces internal expertise to the point that planning and integration of information systems services becomes dependent on outside vendors
Security and privacy continues to be an important issue for the individual and organization.
Issues of security and privacy have assumed greater importance in recent years on priority lists of information systems executives and project managers.

50. Skills Required for the Successful Management of Offshore Projects
Contract negotiation and management
Relationship management
Risk assessment and management
Planning and integration
Business process redesign
Enterprise needs analysis and testing
Security and privacy planning

51. Outsourcing – The ‘Final Word’
Outsourcing has become a strategic alternative for companies
With the pace of change so rapid in IT and e-business, the only hope of many companies is to tap the expertise of companies that are (paid to be) keeping pace with the changes
= Their ‘day job’

52. Outsourcing – The ‘Final Word’
Outsourcing does not however mean relinquishing responsibility
This is serious stuff
Marriage?
Trouble in ‘paradise’?

53. Summary Managing Outsourcing: Organizational Structure Governance
Day-to-Day Working
Supplier Development

54. Summary… EASTMAN KODAK COMPANY Case Example: Managing Outsourcing
HONDA MOTOR COMPANY Case Example: Supplier Development
Offshoring
EXULT Case Example – Offshoring
Outsourcing – The ‘Final Word’