Outsourcing

1
Outsourcing

• A world of work
• The Economist, November 2004.
• www.economist.com/outsourcing

2
Definitions

• Outsourcing Hiring another company to perform a
  business process.
• May or may not be in another country
• Offshoring Moving a business process to another
  country.
• May or may not be outsourced
• Insourcing Hiring another company to come in and
  perform a business process (e.g. logistics).
• We will talk about all three as outsourcing.

3
A world of work

• Is outsourcing new?
• No, been doing it for decades (almost a century).
• Why all the fuss now?
• New type of outsourcing - white collar jobs
• What two forces have led to outsourcing?
• Telecommunication bandwidth
• Shipping costs
• How much further can outsourcing go?
• Currently outsourced 8
• Estimated up to 50

4
Men and Machines

• According to this article, what is the reason for
  outsourcing?
• Growing complexity of organizational work
• Three forces of complexity (introduced by
  computer)
• Saving costs but adding options
• Regulation and information requirements
• IT systems themselves.
• Solution to complexity?
• Hire an expert to do it.

5
Men and Machines

• Business Process Outsourcing (BPO)?
• Outsourcing primary value chain functions
• BPO secondary value chain functions
• Examples of BPO
• Credit card processing
• Payroll
• HR/ benefits
• Expense receipts (extreme specialization).
• IT Support

6
The Value Chain (M. Porter)

• Infrastructure general mgmt, planning, finance,
  IS
• HRM recruiting, hiring, training, and
  development
• Tech. Development RD
• Procurement

Inbound Operations Outbound Marketing Service logi
stics logistics Sales
Supply Chain
7
A desperate embrace

• Whats the story here?
• KPN, Dutch telecom, agrees to outsource 300m/
  year of IT for 6 years.
• KPN forced to downsize by 1/3, still stuck with
  contract.
• Have tried to work out an agreement, but
  difficult for both.
• Lesson Outsourcing isnt always easy. Contracts
  are VERY important.

8
The place to be

• How much of outsourcing business does India have?
• 80
• How did India become the outsourcing king (the
  history behind it).
• Y2K overwhelming US software engineers, hire
  Indian workers to come to US (or to US companies)
  to fix code.
• Dot-com bust follows, IT budgets slashed. Indian
  workers return to India, retain relationship with
  US companies.
• These engineers begin to hire local help conduct
  workand the rest is history.

9
The place to be

• Growth of outsourcing in India
• Infosys grown eight-fold in five years.
• Moving from routine to skilled work
• Lowering cost and improving quality
• Why does US like to work with India?
• English language
• Cultural similarities (both former British
  colonies).
• Strong educational system
• Lots (1B) of low-cost workers.

10
The place to be

• What will Indias continued outsourcing success
  depend on?
• Supply of high quality graduates
• Quality currently mixed
• Improved infrastructure
• Employee retention (call-center jobs stink).
• 50 turnover vs. 70-80 in US/Britian

11
Faster, Cheaper, Better
The Layer Cake 3 tiers of IT services
Tailored technology services (e.g. Accenture, IBM)
How aggressive?
How fast?
The Middle (e.g. ERP implementation)
Pure commodity services (e.g., data entry, call
centers, software support, hardware assembly)
12
Into the unknown

• Mechanical devices are already ousting skilled
  clerical workers and replacing them with
  operators
• Opportunity in the white-collar services is being
  steadily undermined.
• Whats important about this quote?
• It was made in 1929

13
Into the unknown

• People ALWAYS worry about being phased out of
  jobs.
• What percentage of jobs in 1900 still exist in
  some form or fashion today?
• 30
• Can forget that loss of old jobs creates new
  ones.
• Schumpeters Creative Destruction

14
Into the unknown

• We travel in vehicles that were not yet invented
  that are powered by fuels not yet produced,
• Communicate through devices not yet manufactured,
  
• Enjoy cool air on the hottest days
• Are entertained by electronic wizardry that was
  not dreamed of, and
• Receive medical treatments that were unheard of.

15
Into the unknown

• Predicting jobs is hard.
• BLS predicted increase of travel agents and gas
  station attendants.
• Now these jobs are almost non-existent
• Extra 179,000 software engineers and 185,000
  analysts.
• This one is actually proving true
• Estimate 11 of US (14m people) work force is at
  risk for outsourcing.
• Not just low-end jobs
• Radiology, accounting, legal work.

16
Sink or Schwinn

• What happened to Schwinn?
• Lesson have to outsource or die.
• Cycle develops
• Cheaper goods higher demand
• Higher demand more profits
• More profits more investment
• IT as an example
• Outsourcing production 10-30 cheaper
• Created 230B of additional US GDP

17
Sink or Schwinn

• McKinsey estimates that for every 1 spent on
  outsourcing to India
• The American economy receives 1.14 in return.
• How?
• Savings for customers
• Direct benefits (e.g. imports/ trade)
• Indirect benefits (re-employed labor)
• Heavily depends on ability to re-employ workers.
• US creates and destroys 30m jobs/ year.

18
Sink or Schwinn

• Europe struggling with outsourcing
• Europe higher unemployment, stronger unions makes
  more difficult to reemploy workers.
• Cultural links with India not strong as US
• 80 of top 500 European firms will not even
  consider outsourcing.
• Cycle might work in opposite direction
• Protectionist policies
• Limit outsourcing
• Raise cost of goods
• Increase unemployment

19
A World of Opportunity

• People who support outsourcing/ offshoring often
  unpopular.
• Has anyone seen Greg Mankiw?
• US and Britian close to full employment whats
  that?
• Most of the outsourced jobs US workers wont
  do.

20
A World of Opportunity

• Other developing problems
• Baby boomers retiring
• Health care costs rising
• Is outsourcing a good or a bad thing for US?
• Depends on rate of change
• If workforce can realign, its good
• If not, it can be bad.
• Is it a good or bad thing for India?
• Sweatshops vs. opportunity for global playing
  field.

21
Discussion

• What do you think about outsourcing?
• Is it good, bad, otherwise?
• For whom?
• What jobs are most at risk for outsourcing?
• Who benefits most (and least) from outsourcing?