Outsourcing
Outline
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What is outsourcing?
Some examples of
outsourced activities
Poor candidates of activities
for outsourcing
Terminology
U.S. outsources to India
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Drivers and Benefits
Risks and Disadvantages
Some technologies that
influence outsourcing
Some current Collaboration
Tools
Outsourcing
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Friend or Foe?
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
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Cafeterias, janitorial services, copy centers,
trucking, building maintenance, security, payroll,
legal services
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Small banks outsource check processing
function to larger banks.
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Activities that have a high degree of variance
(one day 50 employees needed, next day only
10 are needed).
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Auto/Manufacturing
Examples of Activities Outsourced
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IT Outsourcing
 Examples: IT application management, IT application
development, data center operations, quality
assurance etc.
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Business Process Outsourcing
 Examples: Outsource HR, Accounting, Financials etc.
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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
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Core competency related activities
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National Security related activities
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Local knowledge requirement
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New York City parking tickets were processed in Ghana
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New Jersey’s welfare help line calls were answered in India
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Medical diagnostics?
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Tax returns?
Terminology (continued)
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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
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GM ($7.5 billion) IT Outsourcing contract with:
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EDS, IBM, Capgemini, and Wipro Ltd.
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Onshoring
 Vendor in the same home country as client
 Example: GM (client) and AT&T (vendor)
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Nearshoring
 Vendor in a country closer to client’s home country
 Example: Nike (Beaverton) could hire Indosoft (Canada)
Crowdsourcing
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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."
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Company puts out a call for a (programming) project; best
solution/submission is accepted and paid for.
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"Best, most direct and least expensive sources of innovation lie
outside the corporate walls"
Advantages of Crowdsourcing
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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:
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Netflix recommender service
Dell's IdeaStorm.
Amazon.com's Mechanical Turk
(http://www.mturk.com/mturk/welcome)
Disadvantages of Crowdsourcing
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Requires great coordination
Exposure of intellectual property (both! the
contractor and the sponsor).
Corporate Social Responsibility issues.
Terminology (Continued)
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Global Outsourcing or Offshoring
 Vendor and client in different countries
 Example: Amsterdam-based ABN Amro (client)
and IBM (vendor)
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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
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80 percent of U.S. offshore outsourcing dollars go to India
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The U.S. is India’s biggest customer/60-70% of Indian market
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India’s software export market is about $ 40 billion and has been
growing at about 30 - 50 percent for the past five years
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This market was a mere $20 million in 1989
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India exports software to nearly 100 countries
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India’s IT and BPO industry - $64 billion revenue in 2008
Source: Nasscom; Marty McCaffrey; Giga Information Group
Video – CBS (2004)
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Think about ‘SWOT’ analysis
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Why did U.S. select India?
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What were some risks of outsourcing to India?
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How did U.S. mitigate country risks of India?
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What are some examples of activities that are outsourced to
India?
Any surprises in the video?
SWOT Factors for India
Strengths
•Solid History of Software Development
•English Proficiency
•Government Support
•Process and Quality Focus
•Skilled, Educated Resources
•Entrepreneurialism
Weaknesses
•Infrastructure
•Cultural Differences
•Distance from US
•Feud over Pakistan
•Legal System
Opportunities
Threats
•BPO and Call Centers
•Expansion of Existing Relationships
•Emerging Chinese Market
•Indian Domestic Market Growth
•Competition for Resources
•Over Promise/Under Deliver
•Rising Costs
•Competition from Other Countries
•Corruption, Piracy, Trust
Anything in the video that surprised you?
Drivers of Outsourcing
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Vendor excels in
complementary core
competencies
Global Economy
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Faster time to market
Geography is history!?
American products more
affordable
Differential tax rates and
tax benefits
Drivers of Outsourcing
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Productivity gains
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24x7 workforce
Using time zone differences
to client’s benefit
Economic benefits to client
and vendor
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For every $1 dollar off shored,
U.S. benefits $1.12 - $1.14
(McKinsey Global Institute - 2003)
Risks of Outsourcing
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Loss of local jobs
Country risks
Vendor risks
Strategy risks
Hidden Costs of Outsourcing
Hidden Costs of Outsourcing
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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)
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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
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Country Risks
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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 microcultures within each organization)
Risks of Outsourcing
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Loss of Jobs
Vendor Risks
Pricing Risks
Contract Risks
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Post contract re-negotiations
Changing business conditions
Scope and price creep
Protection of Intellectual Property
(IP)
Risks of Outsourcing
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Strategic Risks
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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
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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
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Video Conferencing Tools
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WebEx
Halo
Telepresence
 http://newsroom.cisco.com/Newsroom/flash/evp/Flash7/mai
n.html?videoXML=../xml/high/BA812487042B1FCE04B8C0
1254B51541_video.xml&defaultTopic=Technologies&defaul
tSubTopic=Technology%20Innovation
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http://video.aol.com/video-detail/ciscos-on-stagetelepresence-experience/2113592145
Some benefits of WebEx
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Affordable to many businesses
Requires knowledge of less complex IT tools
(e.g., computer, phone)
Share:
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Messages, Whiteboards, files, presentations,
applications, desktops
Save/Record/Playback meeting
Benefits of Halo/Telepresence
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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
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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
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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
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Don’t fight the trend---find out how you can engage in it!
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Become conversant with the offshore industry dynamics
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Project management and leadership
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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)