1. Lecture 10 MGMT 6180 - © 2012 Houman Younessi Outsourcing/Off-shoring Logistics maturity Organizational proximity culture

2. Lecture 10 MGMT 6180 - © 2012 Houman Younessi Outsourcing/Off-shoring Why do enterprises out-source? Cost Saving (cheap labor) Cost saving (economies of scale) To focus on core competence To refocus on new competencies Access to otherwise hard to find or unavailable skills Financial reasons (liquidate the IT intangible value) Financial reasons (move from a fixed+variable cost model to a variable cost model)

3. Lecture 10 MGMT 6180 - © 2012 Houman Younessi Outsourcing/Off-shoring Short-term effects: Cost Productivity (Financial) Employment shift Productivity (Organizational) Core competency shift

4. Lecture 10 MGMT 6180 - © 2012 Houman Younessi As it has always happened Long-term effects:

5. Lecture 10 MGMT 6180 - © 2012 Houman Younessi Long-term effects: ?

6. Lecture 10 MGMT 6180 - © 2012 Houman Younessi Long-term effects:

7. Lecture 10 MGMT 6180 - © 2012 Houman Younessi Long-term effects:

8. Lecture 10 MGMT 6180 - © 2012 Houman Younessi And on and on it goes

9. Lecture 10 MGMT 6180 - © 2012 Houman Younessi Insideoutside Barrier Energy work Have work Need work Geographical Outsource Technical work

10. Lecture 10 MGMT 6180 - © 2012 Houman Younessi Entropy Inside Outside Less Heat More Heat Work was done to reduce heat Work will be done to manage heat introduced More order Less order Entropy: Measure of how uniformly energy is distributed, a measure of systemic order (disorder). After Exchange Higher entropy Lower entropy Total entropy: Higher

11. Lecture 10 MGMT 6180 - © 2012 Houman Younessi Outsourcer Unit Useful resource Before After High Lower Useless resource Low Higher Resource used to out-source Zero Higher Does not work unless the burden caused by the useless resource created plus the cost of outsourcing (both higher after outsourcing) is better than compensated by the reduction in the cost of resource utilized

12. Lecture 10 MGMT 6180 - © 2012 Houman Younessi Outsourcee Unit Useful resource Before After Low High Useless resource High Lower Resource used to out-source Zero Higher Works so long as the burden created to sustain the outsourcing client is better than compensated by the increase in utility caused by employment of the useful resource

13. Lecture 10 MGMT 6180 - © 2012 Houman Younessi So should we outsource? Only under a certain condition: When we can at least increase the total efficiency of our own side It is even better if you could increase the efficiency of both sides Fortunately, there is another set of efficiencies at play But how do we do this? It seems impossible, doesn’t it?

14. Lecture 10 MGMT 6180 - © 2012 Houman Younessi BUT Where do we get rid of these resources to? They cannot just disappear! Either way, someone has to deal with this (excess heat ejected) (someone has to tolerate the hot kitchen when the fridge spews out the extra heat) This is the crux of the issue!

15. Lecture 10 MGMT 6180 - © 2012 Houman Younessi Always outsource your absolute inefficiencies AND You will be safe But only as long as the barrier is there ! Outsource only if your redeployed resources can be deployed into significantly less assailable positions. Outsourcing would make sense for the outsourcer economy only if it has the capacity to redeploy it’s released resources more efficiently than before.

16. Lecture 10 MGMT 6180 - © 2012 Houman Younessi As a manager………

17. Lecture 10 MGMT 6180 - © 2012 Houman Younessi How well do you understand the linkages among your strategies, the capabilities and infrastructure built to execute those strategies, and the value that can be created for all stakeholders (e.g., customers, suppliers, partners, employees, investors)?

18. Lecture 10 MGMT 6180 - © 2012 Houman Younessi Is your business infrastructure best-in- class in terms of asset efficiency and strategic flexibility? How can IT be used to improve your ability to leverage infrastructure and assets to drive profitable growth and create strategic options for the future?

19. Lecture 10 MGMT 6180 - © 2012 Houman Younessi How well do you understand the key factors that drive business performance in your organization and industry? What must be done well to reduce costs, grow revenues, and improve asset efficiency? How can IT be used to drive profitable growth and achieve proprietary advantage?

20. Lecture 10 MGMT 6180 - © 2012 Houman Younessi Conduct an audit of your digital business infrastructure. How much are you spending to run and maintain current IT operations? On average, how long does it take and how much does it cost to implement a new IT-enabled business product, service, or strategy? What are key bottlenecks that slow down the IT- enabled business innovation process and the key activities that increase the cost?

21. Lecture 10 MGMT 6180 - © 2012 Houman Younessi Create a list of IT-enabled business strategies and the solutions that could be developed that would leverage an open standard networked infrastructure. Are there opportunities to: a. Improve internal operating efficiency and quality? b. Improve knowledge worker performance and enhance organizational learning? c. Increase employee satisfaction, engagement, and loyalty and attract and retain top talent? d. Increase customer/supplier satisfaction, engagement, and loyalty? e. Attract and retain high value-added customers, suppliers, and partners? f. Add "information value" to existing products and services or create new information-based products and services? g. Streamline and integrate channels to market, create new channels, and integrate multiple online/offline channels?

22. Lecture 10 MGMT 6180 - © 2012 Houman Younessi From the above list, identify one or more simple, yet powerful, "big wins" where IT could significantly improve business performance. What are the realistic business goals you expect to achieve? Define measurable performance improvements that can be achieved quickly (usually within one year) and the follow-on benefits that will accrue as you pursue strategic options. How will these performance drivers link to financial and capital market performance? Validate your analysis by talking with others who have implemented similar systems. Ask for lessons learned and areas of high risk that must be managed closely. Collect benchmark data on the benefits that can be expected.

23. Lecture 10 MGMT 6180 - © 2012 Houman Younessi Do you have the resources, expertise, and skills required to successfully complete these projects? Can outside partners be identified when the organization's resources are not sufficient?

24. Lecture 10 MGMT 6180 - © 2012 Houman Younessi Do you have the political support required to ensure that the project can be completed quickly and effectively? Do project leaders have the resources, authority, and accountability required to get the job done?

25. Lecture 10 MGMT 6180 - © 2012 Houman Younessi Have you considered ways to limit the scope of the project? Keep in mind the "80/20 rule": you can often achieve 80 percent of the benefit with 20 percent of the effort. Don't push to include hard-to- implement features and functions that are not critical to overall project success.

26. Lecture 10 MGMT 6180 - © 2012 Houman Younessi Has an effective change control process been implemented? Can you ruthlessly manage "project creep" while not losing sight of the good ideas that emerge during implementation? To assist with the latter task, create two task forces to search for follow-on "options" benefits. One task force can be charged with identifying new IT-enabled business building opportunities to drive profitable growth and build scarce resources and capabilities. The second task force can be charged with searching for ways to continuously enhance infrastructure performance to ensure that the organization achieves and maintains best-in-class status-through partnering or internal development.