Good Hopes For Global Outsourcing Case Analysis
Global Sourcing • Global sourcing is the procurement of products or services from foreign suppliers • Global sourcing has become a major international business activity. • A firm can outsourc from independent suppliers, company-owned subsidiaries and affilates, or a combination of both.
Drivers of Global Sourcing • Technological advances, particularly Internet connectivity and broadband availability • Decrease in transportation and communication costs • Increased access to information and a rise in connectivity between suppliers and their customers • Entrepreneurship and rapid economic changes in emerging markets.
Characteristics of Global Sourcing • Services are more difficult to outsource than manufacturing • Difficult to judge quality of services • Need to develop a trusting relationship • Location decision • Eastern Europe, India, China & Latin America • Main motive of outsourcing is to cut costs, however it often is more costly than planned • International laws do not fully protect confidentiality of customer information
The Firm: Good Hope Hospitals • Chain of nine hospitals in California • Needs to significantly cut operational costs. To avoid laying-off workers, management wants to outsource certain business processes. • Outsourcing goals: • Reduce labor costs • Allow Good Hope to focus on activities that are most critical to their value offerings. • Increase organizational efficiency, revenues and the quality of service offerings.
Background • Good Hope • Wants to outsourcedata processing for accounts receivable and accounts payable, some customer service applications, transcription of medical records, and some data processing • Researched the risks of global outsourcing • Consulted with an outsourcing broker • Recommended BangSource, a supplier in India • Claimed that Good Hope would save $1.4 million annually • 25% annual employee turnover rate
Problem #1 • Financial costs of outsourcing were higher than expected • Processing of accounting and other data more complicated than expected. • BangSource is less efficient in answering customer inquiries, which resulted in more telephone time and phone calls to address customer needs • Fluctuations in the rupee and dollar exchange rate inflated the cost of BangSource
Problem #2 • Outsourcing has decreased customer satisfaction, putting Good Hope’s reputation on the line. • Customer complaints about hard-to-understand accents • Poor infrastructure, partly due to new contracts • Late in performing promised services due to shortage of workers.
Alternative #1: Captive Operation in Mexico • Good Hope would own its offshore facility in Mexico • Criteria for choosing Mexico: • Financial structure of Mexico • Availability and skills of people • Nature of the business environment • Proximity to California Costs • High initial costs • Bureaucracy and regulation increases with FDI • Higher energy and transportation costs • Quality of infrastructure is low, which will increase costs.
Alternative #1: Captive Operation in Mexico Benefits • Complete control of outsourced activity • Control over reputation, brand equity and customer service • Control of key technologies and processes • Protection of intellectual property • Enhanced customer service for Spanish-speaking customers • Enhanced communication between Head office in California and outsource facility because Mexico is close to the US, and it is in the same time zone • Labor costs are low • Access to qualified personnel abroad • Enhanced employee morale and commitment among employees in Mexico. • Faster corporate growth because outsourcing allows Good Hope to focus on key activities. • Increase production efficiency, maximize resource utilization • Possibility of access to new markets
Alternative #2: Outsource only Backoffice Activities to BangSource • Customer service affects reputation and brand equity, especially in the service industry. • If customer service is considered an important key activity it should not be outsourced.
Alternative #2: Outsource only Backoffice Activities to BangSource Costs • Savings will not be as substantial • BangSource lacks quality workers • BangSource has a high turnover rate of skilled employees, • Absence of strong protection of intellectual property in India • Exchange rate fluctuations between the rupee and the dollar • Higher energy and transportation costs • Quality of infrastructure is poor • Conflicts and misunderstandings between Good Hope and BangSource due to cultural differences • Process of accounting and other data is still complex • Bureaucracy, legalities and regulation is still complex
Alternative #2: Outsource only Backoffice Activities to BangSource Benefits • Control of most customer service activities, which preserves reputation • Faster corporate growth because allows Good Hope to focus on key activities, such as customer service. • Sheds unnecessary overhead. • Increases production efficiency
Alternative # 3: Maintaining Status Quo with an Enhanced Relationship • Outsourcing fails because focal firm and the supplier do not spend enough time in the beginning establishing a relationship and setting boundries • Good Hope needs to collaborate closely with BangSource in co-development and co-design activities.
Alternative # 3: Maintaining Status Quo with an Enhanced Relationship Costs • Lack of quality workers with adequate knowledge. • Regulation and bureaucracy is complex, however by maintaing a close relationship with BangSource, Good Hope will have an easier time. • Exchange rate fluctuations between rupee and dollar • Higher energy and transportation costs • Quality of infrastructure is poor, resulting inelectricity blackouts
Alternative # 3: Maintaining Status Quo with an Enhanced Relationship Benefits • Less conflicts/misunderstandings • Enhanced employee morale and commitment among employees • Good Hope will gain negociating power and better control of the value chain • Faster corporate growth because outsourcing allows Good Hope to focus on key activities • Productivity and service improvement • Production efficiency due to giving BangService specialized tasks • Faster responsiveness to evolving customer needs • Shedding unnecessary overhead
Alternative #4: Terminate All Outsourcing Activities Costs • Lay off workers, which may lead to eroding employee morale • Reduction in competitiveness • Cost effieciency reduction • Not focused on key activities • Spending unneccessary overhead Benefits • Control over value chain • Maintain reputation, brand equity, and customer service • Protection of intellectual property • Good infrastructure
Recommendations • Alternative #1, Captive Operations in Mexico, • preserves reputation and increasing customer service quality • However, increase costs – lay-off some employees. • Alternative # 3, Maintaining Status Quo with an Enhanced Relationship, • Risky: May or may not work. • Good Hope and BangSource have different priorities • Alternative #4, Terminate All Outsourcing Activities • Better customer service • However costs would increase once again – lay-off employees • Alternative #2, Outsource only Backoffice Activities to BangSource • Best option. • Reduce costs and preserves customer service • Lay-off some employees This option would preserve customer service quality and Good Hope’s reputation.