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? Outline
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
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)
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"
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 (http://www.mturk.com/mturk/welcome)
Disadvantages of Crowdsourcing • Requires great coordination • Exposure of intellectual property (both! the contractor and the sponsor). • Corporate Social Responsibility issues.
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)
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 30 - 50 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
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?
SWOT Factors for India • Weaknesses • 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
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)
Risks of Outsourcing • Loss of local jobs • Country risks • Vendor risks • Strategy risks • Hidden Costs of Outsourcing
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) • Virtual Collaboration Tools (e.g., 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; Interoperability http://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)