Outsourcing

1
Outsourcing A New Frontier of Opportunity

• Stephen Sharpe
• ECON 428
• June 08, 2006

2
OutsourcingA New Frontier of Opportunity

• Agenda
• Introduction
• Why Do Firms Outsource
• When Should Firms Outsource
• Where Should Firms Outsource
• Key Strategies for Successful Outsourcing
• Key Capabilities for Outsourcing Managers
• Recent Arguments Against Outsourcing
• Conclusion

3
OutsourcingA New Frontier of Opportunity

• Outsourcing Seeking a Solution Outside the
  Boundaries of the Firm
• Services
• Research Development
• Intermediate Goods
• Finished Products
• FDI Subsidiary or Joint Venture

4
OutsourcingA New Frontier of Opportunity

• Firms are Under Immense Pressure
• CEO Chapman We can compete and create great
  American jobs, but not without offshoring.
• Leverage Efforts of Key Employees
• Two Prospects for Savings
• Increased Productivity of Key Employees
• Lower Overall Costs with Outsourcing
• Function Overhaul / Restructuring

5
OutsourcingA New Frontier of Opportunity

• Why Do Firms Outsource?
• Rapid Technological Change
• Increased Risk Search for Flexibility
• Emphasis on Core Competencies
• Globalization

6
OutsourcingA New Frontier of Opportunity

• When Should Firms Outsource?
• Two Articles, Two Approaches
• Management / Organization Costs
• Marginal Costs
• Both Approaches Must Be Included

7
OutsourcingA New Frontier of Opportunity

• When Should Firms Outsource?
• Management / Organization Costs
• Variables
• Management Effort ? Probability of Success
• Cost for Management Effort
• Monitoring Costs

8
OutsourcingA New Frontier of Opportunity

• When Should Firms Outsource?
• Management / Organization Costs

9
OutsourcingA New Frontier of Opportunity

• When Should Firms Outsource?
• Marginal Costs
• May Not Always Lead to Lower Prices
• Expanded Model to Include Tariffs, Taxes,
  Transportation

10
OutsourcingA New Frontier of Opportunity

• Where Should Firms Outsource?
• Outsourcing as Partnership, Not Just a
  Contractual Agreement
• Three Key Components
• Partners with Expertise / Capability
• Convincing Partner to Customize
• Encourage Partner to Invest

11
OutsourcingA New Frontier of Opportunity

• Where Should Firms Outsource?
• Model with Two Regions
• North High Wages
• South Low Wages
• Thickness Number of Supplying Firms in a
  Specific Area
• Marginal Cost Analysis

12
OutsourcingA New Frontier of Opportunity

• Key Strategies for Outsourcing
• Go Offshore for the Right Reasons
• Choose Your Model Carefully
• Get Your People on Board
• Be Prepared to Invest Time Effort
• Treat Your Partners as Equals

13
OutsourcingA New Frontier of Opportunity

• Key Capabilities for Outsourcing Managers
• Strategic Thinking
• Deal Making
• Partnership Governing
• Managing Change

14
OutsourcingA New Frontier of Opportunity

• Key Capabilities for Outsourcing Managers
• 60 of Responding Firms Willing to Pay 6 Premium
  for Each Quality
• 40 of Responding Firms Willing to Pay 11
  Premium for Each Quality

15
OutsourcingA New Frontier of Opportunity

• Recent Arguments Against Outsourcing
• Comparative Advantage vs Absolute Advantage
• Where are Replacement Jobs?
• Law of One Price

16
OutsourcingA New Frontier of Opportunity

• Conclusion
• Firms Have a Strong Incentive to Outsource
• Opportunities
• Hardships
• Government Encouragement
• Detractors Have Valid Points
• Continued Growth In Outsourcing as a Competitive
  Strategy

17
OutsourcingA New Frontier of Opportunity

• Sources
• Chen, Yongmen, Jota Ishikawa, and Ahihao Yu,
  Trade Liberalization and Strategic Outsourcing,
  Journal of International Economics 63, 2004
  419-436.
• Colander, David, The Long Run Consequences of
  Trade and Outsourcing, Challenge,
  January-February 2005 94-103.
• Deavers, Kenneth L., Outsourcing A Corporate
  Competitiveness Strategy, Not a Search for Low
  Wages, Journal of Labor Research, Volume 18,
  Number 4, Fall 1997 503-519.
• Engardio, Pete, Michael Arndt, and Dean Foust,
  The Future of Outsourcing, Business Week,
  January 30, 2006 50-56.

18
OutsourcingA New Frontier of Opportunity

• Sources
• Grossman, Gene and Elhanan Helpman, Managerial
  Incentives and the International Organization of
  Production, Journal of International Economics
  63, 2004 237-262.
• Grossman, Gene and Elhanan Helpman, Outsourcing
  in a Global Economy, Review of Economic Studies
  72, 2005 135-159.
• Kripalani, Manjeet, Dean Foust, Stanley Holmes,
  and Pete Engardio, Five Offshore Practices that
  Pay Off, Business Week, January 30, 2006 60-61.
• Roberts, Paul, The Harsh Truth About
  Outsourcing, Business Week, March 22, 2004 48.
• Useem, Michael and Joseph Harder, Leading
  Laterally in Company Outsourcing, Sloan
  Management Review, Winter 2000 25-36.

19
Outsourcing A New Frontier of Opportunity

• Stephen Sharpe
• ECON 428
• June 08, 2006