Outsourcing

1
Outsourcing
2
Outline

• Drivers and Benefits
• Risks and Disadvantages
• Some technologies that influence outsourcing
• Some current Collaboration Tools
• Outsourcing
• Friend or Foe?

• What is outsourcing?
• Some examples of outsourced activities
• Poor candidates of activities for outsourcing
• Terminology
• U.S. outsources to India

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What is Outsourcing?

• Outsourcing
• Client hires vendor to perform task(s) for client
• Example GM (client) hires another company
  (vendor) to perform telephone related services
  for GM.

4
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

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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.

6
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 Jerseys welfare help line calls were
  answered in India
• Medical diagnostics?
• Tax returns?

7
Terminology (continued)

• Multisourcing
• Multiple vendors for clients outsourced project
• Example GMs Brazilian e-commerce site crashed
  in 2003
• Vendors Oracle, ATT, 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 ATT (vendor)
• Nearshoring
• Vendor in a country closer to clients home
  country
• Example Nike (Beaverton) could hire Indosoft
  (Canada)

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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)

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Global Sourcing An irreversible trend
10
HP Servers Path to Market
11
U.S. Outsources to India

• 80 percent of U.S. offshore outsourcing dollars
  go to India
• The U.S. is Indias biggest customer/60-70 of
  Indian market
• Indias software export market was about 8
  billion last year 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

Source Nasscom Marty McCaffrey Giga
Information Group
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Video CBS (2004)

• 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?

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SWOT Factors for India

• Weaknesses
• Infrastructure
• Cultural Differences
• Distance from US
• FUD 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

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Examples of activities outsourced to India

• Call Centers
• Debt Collection
• Tech Support
• Customer Service
• Stock analysis
• Tax returns
• Medical Diagnostics
• Software Development (e.g., Y2K)

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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

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Drivers of Outsourcing

• Productivity gains
• 24x7 workforce
• Using time zone differences to clients benefit
• Economic benefits to client and vendor
• For every 1 dollar off shored, U.S. benefits
  1.12 - 1.14
• (McKinsey Global Institute - 2003)

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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

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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 vendors
  employees (cafeteria, transportation)

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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)

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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)

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Risks of Outsourcing

• Strategic Risks
• Lose touch with customer or suffer negative image
• Sensitive information of client shared with
  vendor.
• Vendor serves client and clients 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

22
Some key technologies that have influenced
outsourcing

• Computer Networks
• Fiber Optics
• Multiplexing
• Satellite
• Scanning technology
• Voice Communication (Voice Over IP)
• Wiki

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Some key technologies that have influenced
outsourcing

• Video Conferencing Tools
• WebEx
• Halo
• Telepresence
• http//newsroom.cisco.com/Newsroom/flash/evp/Flash
  7/main.html?videoXML../xml/high/BA812487042B1FCE0
  4B8C01254B51541_video.xmldefaultTopicTechnologie
  sdefaultSubTopicTechnology20Innovation
• http//video.aol.com/video-detail/ciscos-on-stage-
  telepresence-experience/2113592145

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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

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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

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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)

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Benefits of Halo/Telepresence

• Allows for perfect audio collaboration of
  overlapping conversations
• Eliminate distance constraints
• Cheaper travel expenses
• No missing childrens birthday party, piano
  recital, and softball games
• Telepresence Different products for different
  target markets Interoperability
• http//www.cisco.com/

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Outsourcing A friend or foe?

• Opportunities
• The offshore outsourcing industry is predicted to
  grow and expand
• Dont 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)