Outsourcing the Global Way

1
Outsourcing the Global Way

• The World According to McFarlan, circa 1996

2
Trends at the Time

• Cheap memory chips
• Cheap broadband fiber
• IOS and interconnectivity on the rise
• Firms only developing about 10 of their coding
  needs
• The Kodak example

3
The Oracle Speaks

• Technology and cost performance will continue to
  evolve for another 20-30 years
• We dont yet understand the impact of global
  networks
• 50-70 years were needed to decipher what
  railroads and interstate highways meant
• Society will change in ways we cant predict
• Expertise and capital will be hard to come by as
  companies try to deal with the new world
• Outsourcing will help
• The decline of the corporate IT department?
• As compared to the previous decline of the
  corporate electricity generating plant between
  1880 1910.

4
Analytically, its Two Key Issues

• Software development
• Corporate IT operations
• Including desktop and network maintenance
• Maybe, most importantly, desktop and network.

5
Who Noticed Software Outsourcing?

• Microsoft
• Novell
• Oracle
• IBM
• Nobody writes their own office applications
  anymorebut large, custom packages still must be
  built from scratch by the company or its agent

6
Issues in Outsourcing

• Project Size
• Bigger is better for outsourcing, since you get
  benefit from a larger base of support.
• Coordination costs are less for large projects
• Experience with Technology
• Less experience means more complexity for the
  project
• Project Structure
• Highly structure projects are easy to outsource
• Payroll
• Tax reporting
• A Truism
• Big, simple, non-core, non-strategic, expensive
• Applegate, McKenny and McFarlen (1999)

7
Resources in Different Markets

• Cost of development labor
• Impacts domestic versus foreign outsourcing of
  development
• Domestic outsourcing has been popular
• Foreign outsourcing is becoming highly cost
  effective
• At time of publication over 100,000 developers in
  India were engaged in foreign code outsource
  projects

8
What to do if youre the boss?

• How to decide if outsourcing works for you?
• Visit the potential outsource country/company.
• Youll get the best savings by sending work there
  rather than importing your labor here
• Try a few sample (modest) projects with an
  outsourcer first
• Check references (if you can)
• Keep perspective development outsourcing does
  not mean full outsourcing
• The Internet makes it easy for all companies to
  access the same pool of labor. If you dont, your
  competitors will

9
Operational Outsourcing

• Issues
• IT costs and response time are not improving
  under internal operational control
• Just keeping up with current constituency needs
  leaves little time for new projects and
  development
• Its expensive to maintain networked resources
• 10-13K per year for a typical networked client
• You can save 4-5K with an outsourcer
• Hypercompetition in the global market
• Need to simplify the managerial agenda
• What are your core competencies?
• What are the core competencies of EDS, Accenture,
  IBM, and CSA?

10
Operational Issues

• Money, money, money
• When you outsource your operation, you take
  assets off the balance sheet
• Fixed costs become variable
• You generally sell your assets to your outsource
  operator, so its a cash generator
• GD, Kodak
• Sometimes, outsourcing shifts the blame in
  periods of cultural upheaval
• Its a dandy way to hire an official bad guy
  during BPR and ERP implementations.
• Like the SAP effect in BPR
• The outsider sees objectively, and has no
  political stake with internal power bases.

11
Outsource Risks

• Global operations, when outsourced, become a big
  control issue
• Operations feel at a loss without direct control
  of important world-wide assets
• Of course, as McFarlen points out, we use
  outsourcers every day.
• Office Max and Kinkos
• The power company
• Microsoft
• Is it worth the savings
• Can you reach efficiencies yourself? Save all the
  
• Outsourcers will require a profit margin to do
  business with you
• Stability of outsourcersits a long term deal,
  typically 8-10 years. Youre in deep trouble if
  your outsourcer buys your assets and then goes
  belly-up.

12
Final Analysis

• Its about downsizing, not eradicating, IT in the
  company.
• The CIO is still (maybe even more) vital
• Now a contract manager who knows what has to be
  done to meet his companys needs
• Take a good hard look at your ability to
  internally reach efficiencies and diagnose core
  competencies.
• GE is a prime case.