Outsourcing

Outline

What is outsourcing? Some examples of

outsourced activities Poor candidates of

activities for outsourcing Terminology U.S. outsources to India

Drivers and Benefits Risks and Disadvantages Some technologies that

influence outsourcing Some current

Collaboration Tools Outsourcing

Friend or Foe?

What is Outsourcing? Outsourcing

Client hires vendor to perform task(s) for client Example: GM (client) hires another company

(vendor) to perform telephone related services for GM.

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

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.

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?

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)

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)

Global Sourcing: An irreversible trend

HP Server’s Path to Market

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 was about $ 8 billion last year and has been growing at about 30 - 50 percent for the past five years

This market was a mere $20 million in 1989India exports software to nearly 100 countries

Source: Nasscom; Marty McCaffrey; Giga Information Group

Video – CBS (2004)

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?

SWOT Factors for India

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

Weaknesses•Infrastructure•Cultural Differences•Distance from US•FUD over Pakistan•Legal System

Threats•Competition for Resources•Over Promise/Under Deliver•Rising Costs•Competition from Other Countries•Corruption, Piracy, Trust

Examples of activities outsourced to India

Call Centers Debt Collection Tech Support Customer Service Stock analysis Tax returns Medical Diagnostics Software Development (e.g., Y2K)

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

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 $1.12 - $1.14 (McKinsey Global Institute - 2003)

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

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)

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)

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)

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

Some key technologies that have influenced outsourcing Computer Networks Fiber Optics Multiplexing Satellite Scanning technology Voice Communication (Voice Over IP) Wiki

Some key technologies that have influenced outsourcing

Video Conferencing Tools WebEx Halo Telepresence

http://newsroom.cisco.com/Newsroom/flash/evp/Flash7/main.html?videoXML=../xml/high/BA812487042B1FCE04B8C01254B51541_video.xml&defaultTopic=Technologies&defaultSubTopic=Technology%20Innovation

http://video.aol.com/video-detail/ciscos-on-stage-telepresence-experience/2113592145

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

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

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)

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; Interoperabilityhttp://www.cisco.com/

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)