Title: MIT5312: Systems Analysis and Design
1Slide 1
MIT5312 Systems Analysis and Design
Outsourcing and Offshoring
2Slide 2
MIT5312 Professor Kirs
Outsourcing
Outsourcing is .
- A free market thing
- A Special form of international trade (CES IFO
Institute ,Germany) - A matter of polarized public debate (European
Foundation for ILWC,2004) - About your core
- A question of trust
- Unevenly dispersed on the globe (yet growing)
-
- Generating fear (fear of change?- Cochrane,2004)
- A relationship and arrangement
- Partner quality
3Slide 3
MIT5312 Professor Kirs
Outsourcing
Basic Terminology
- Delegation of non-core operations from internal
production to an external entity. Sharing
organizational control.
- Associating with the best of the best (Tom
Peters)
- Transferring Activities to another country by
hiring local subcontractors or by building a
facility in an area where labor is cheap (er).
- Similar to offshore (yet close distance)
- The opposite of outsourcing
4Slide 4
MIT5312 Professor Kirs
Outsourcing
Why Outsource?
- It has been reported that more than 80 of
European companies engaging in Offshoring are
satisfied with the results, and that the cost
savings realized have generally ranged between
20 and 40 UNCTAD, 2004.
- The average salary of an Indian programmer stands
at 6,000 to 12,000. But, it's much lower in
China at 5700 to 9000
- The pay range for agents at call centers in
Mumbai is INR 8,000 to INR 15,000 per month, or
183.50 to 344 at current exchange rates
5Slide 5
MIT5312 Professor Kirs
Outsourcing
Why Outsource?
- Access to Specialized Skills Expertise
- India has over 2,100,000 English-speaking
graduates are added annually and 460,000 of them
are IT grads.
- China has over 200,000 IT professionals and
50,000 new graduates are added to the pool every
year.
- China produces 52 of all Science and Engineering
graduates
6Slide 6
MIT5312 Professor Kirs
Outsourcing
Why Outsource?
- Access to Specialized Skills Expertise
- The United States has falling education standards
- The number of scientists, engineers, computer
scientist and other technical professionals has
been falling in the United States
- Bill Gates recently said there's an insufficient
amount of skilled people in the U.S. labor pool.
As he put it, "Anybody who's got good computer
science training, they are not out there
unemployed. We're just not seeing an available
labor pool."
7Slide 7
MIT5312 Professor Kirs
Outsourcing
Why Outsource?
- Access to Specialized Skills Expertise
In China today, Bill Gates is Britney Spears.
In America today, Britney Spears is Britney
Spears and that is our problem. Thomas
Friedman
8Slide 8
MIT5312 Professor Kirs
Outsourcing
Why Outsource?
- The performance gap is widening between
organizations that have achieved world-class
performance levels in their back office
operations versus typical companies, with top
performers generating significant savings while
delivering improved effectiveness and reduced
risk, according to new research released by
strategic advisory firm The Hackett Group.
- IT might improve business processes, but
capitalizing on this improvement is out of
control of the IT function.
9Slide 9
MIT5312 Professor Kirs
Outsourcing
Why Outsource?
- Focus on Core competencies
- Core competencies are the key skills,
characteristics and assets that your company
brings to the marketplace. These competencies, on
an organizational level, are a synergistic
blending of the core competencies that your
people individually bring to work every day.
- Core competencies are "focus points" that funnel
peoples skills and efforts to make a greater
effect
- Aligning IT with the business is crucial to
success, yet IT is too often seen as a "support"
service and is not included in high-level
decision-making.
- The core competency of the outsourcee is IT
10Slide 10
MIT5312 Professor Kirs
Outsourcing
Why Outsource?
- World-class standards applied
- Improved control/standardization
- Flattening of Hierarchical Structure
11Slide 11
MIT5312 Professor Kirs
Outsourcing
Why Outsource?
- It is something you cant (nor want to) avoid-
- Even if we stop, our competitors wont.
- CSIS Report
- It is irreversible.
- It is a product of free tradeit adds value to
shareholders. - Requires a society that can imagine and invent
the future demand. - Means we must go to high touch/high concept jobs
- and away from high tech jobs
- Daniel Pink
12Slide 12
MIT5312 Professor Kirs
Outsourcing
Why Outsource?
- Every Morning in Africa, a gazelle wakes up.
- It knows it must run faster than the fastest lion
- or it will be killed.
- Every morning a lion wakes up.
- It knows it must outrun the slowest gazelle
- or it will starve to death.
- It doesnt matter whether you are a lion or a
gazelle - When the sun comes up,
- YOU BETTER START RUNNING!
- African Proverb
13Slide 13
MIT5312 Professor Kirs
Outsourcing
Why Outsource?
We arent going any further until the class comes
up with at least three other reasons why
outsourcing is a good idea.
14Slide 14
MIT5312 Professor Kirs
Outsourcing
Some arguments for NOT outsourcing
- A University of California Study that estimates
14 million U.S. white collar jobs - one in nine -
are at risk.
- A 2004 report by Forrester Research suggests that
a total of 3.4 million U.S. white collar jobs
will move overseas by 2015, with 830,000 jobs
leaving by the end of 2005.
- A Progressive Policy Institute report claims 12
million jobs are vulnerable, with most paying
more than the U.S. median wage.
15Slide 15
MIT5312 Professor Kirs
Outsourcing
Some arguments for NOT outsourcing
- "I've had people approach me and offer to save us
money by consolidating our technical support,"
said Monad.net President George Scott. "But I
think technical support is a major competitive
advantage. I therefore want control of that -- I
don't want to give it away."
- "Everyone knows that differentiation is the key
in the ISP business, and this also goes for
dealing with the pressures of handling technical
support," said the operations manager of a
Massachusetts ISP. "No ISP is happy with the fact
that they have to handle so many calls from
customers who are not adept with their PCs, but
we understand that handing them over to a third
party is the wrong business move."
16Slide 16
MIT5312 Professor Kirs
Outsourcing
Some arguments for NOT outsourcing
- "You have to take a total business view of
outsourcing technical support," said the customer
service manager of a New York ISP who chose to
remain anonymous. "And first of all, you have to
look at the overall importance of offering
quality technical support. When you're talking
about capacity and how much you can sell, you
have to look not only at technical capacity, but
also your customer service capacity. If you're
selling within your technical capacity but over
your technical support capacity, you're in for
ruin. Outsourcing technical support is certainly
an option, but it's not something we would do."
17Slide 17
MIT5312 Professor Kirs
Outsourcing
Some arguments for NOT outsourcing
- "In the three years ending in 2003, more than 5.3
million U.S. workers who had held their jobs for
at least three years were displaced," Outsourcing
America states. "In January 2004, only 65 percent
of them had found full or part-time work, and a
third of the employed suffered a pay cut of at
least 20 percent."
- A July 2004 survey in the San Francisco Bay area
found 27 percent of those polled are worried
about losing their jobs. "Economists could
attempt to estimate the lost wages and benefits
from unemployment and reemployment at lower
salaries, but there is no way that they can
calculate the costs extracted from individuals,
their families and their social networks."
18Slide 18
MIT5312 Professor Kirs
Outsourcing
Some arguments for NOT outsourcing
- The Cost of Selecting a Vendor
- With any outsourced service, the expense of
selecting a service provider can cost from .2
percent to 2 percent in addition to the annual
cost of the deal. In other words, if you're
sending 10 million worth of work to India,
selecting a vendor could cost you anywhere from
20,000 to 200,000 each year.
- Some companies hire an outsourcing adviser for
about the same cost as doing it themselves. To
top it off, the entire process can take from six
months to a year, depending on the nature of the
relationship.
- Bottom line Expect to spend an additional 1
percent to 10 percent on vendor selection and
initial travel costs.
- Source The Hidden Costs of Offshore Outsourcing.
Sep. 1, 2003 Issue of CIO Magazine
19Slide 19
MIT5312 Professor Kirs
Outsourcing
Some arguments for NOT outsourcing
- The transition period is perhaps the most
expensive stage of an offshore endeavor. It takes
from three months to a full year to completely
hand the work over to an offshore partner. If
company executives aren't aware that there will
be no savingsbut rather significant
expensesduring this period, they are in for a
nasty surprise..
- It took an awful lot of time to bridge the
Pacific and getting that to work correctly,"
remembers Textron Financial's Raspallo, who spent
six months and 100,000 to set up a transoceanic
data line with Infosys in 1998, It also cost an
extra 10,000 a month to keep that network
functional..
- Bottom Line Expect to spend an additional 2
percent to 3 percent on transition costs.
20Slide 20
MIT5312 Professor Kirs
Outsourcing
Some arguments for NOT outsourcing
- To begin with, you have to pay workers severance
and retention bonuses. You need to keep employees
there long enough to share their knowledge with
their Indian replacements. People think if they
give generous retention bonuses it will destroy
the business proposition. They cut corners
because they want quick payback. But then they
lose the people that can help with the transition
and incur the even bigger cost of not doing the
transition right."..
- Bottom line Expect to pay an extra 3 percent to
5 percent on layoffs and related costs.
21Slide 21
MIT5312 Professor Kirs
Outsourcing
Some arguments for NOT outsourcing
- You simply cannot take a person sitting here in
America and replace them with one offshore
worker," GE Real Estate's Zupnick says. "Whether
they're in India or Ireland or Israel
- a project that's common sense for a U.S.
workerlike creating an automation system for
consumer credit cardsmay be a foreign concept
offshore.
- Bottom line Expect to spend an extra 3 percent
to 27 percent on productivity lags.
22Slide 22
MIT5312 Professor Kirs
Outsourcing
Some arguments for NOT outsourcing
- "If you're an organization that develops and
maintains by the seat of your pants, or it's a
case where Mary Jo and Fred have been here for 30
years and they know how to do everything, you are
in trouble"
- If a company doesn't create solid in-house
processes, the vendor will have to put more
people onsite to compensate for your
inadequacies, and they'll spend all of your
savings," says Meta Group's Davison.
- When you have to package specs to go outside the
company, that has to be done exceptionally well
and that is time-consuming and costly
- Bottom line Expect to spend an extra 1 percent
to 10 percent on improving software development
processes.
23Slide 23
MIT5312 Professor Kirs
Outsourcing
Some arguments for NOT outsourcing
- The Cost of Managing an Offshore Contract
- "There's a significant amount of work in
invoicing, in auditing, in ensuring cost centers
are charged correctly, in making sure time is
properly recorded," explains DHL's Kifer. "We
have as many as 100 projects a year, all with an
offshore component, so you can imagine the number
of invoices and time sheets that have to be
audited on any given day."
- We knew there would be invoicing and auditing,"
he says. "But we didn't fully appreciate the due
diligence and time it would require."
- Bottom line Expect to pay an additional 6
percent to 10 percent on managing your offshore
contract
24Slide 24
MIT5312 Professor Kirs
Outsourcing
Some arguments for NOT outsourcing
We arent going any further until the class comes
up with at least three other reasons why
outsourcing is a BAD idea.
25Slide 25
MIT5312 Professor Kirs
Outsourcing
Organization-specific considerations in
Outsourcing
26Slide 26
MIT5312 Professor Kirs
Outsourcing
Structuring the Outsourcing Alliance
- Frequent Renegotiation necessary due to
- Changing business/economic conditions
- Emerging competitive services
- Performance Standards for System response time,
availability of service, responsiveness
- Safeguards against disruption of operations
support
27Slide 27
MIT5312 Professor Kirs
Outsourcing
Structuring the Outsourcing Alliance (Cont.)
- Can the outsourced area be readily separated from
the rest of the firm?
- Does the outsourced area require expertise not
possessed by the firm?
- Realistic determination of Cost Savings
- IT departments will view outsourcing as a threat
- Outsourcing Consultants tend to skew outcomes
- Senior Management Involvement necessary
- Post implementation audits a must
28Slide 28
MIT5312 Professor Kirs
Outsourcing
Structuring the Outsourcing Alliance (Cont.)
- Supplier Stability and Quality
- Need to examine suppliers financial structure
Insourcing is a more difficult than outsourcing
- Similarity in Corporate Cultures
- Expertise/Information gained by Outsourcer
- Resolution of Internal Staff hiring/Lay-offs
- Career paths/job security
29Slide 29
MIT5312 Professor Kirs
Outsourcing
Managing the Outsourcing Alliance
- A Strong CIO should be retained
- Partnership/Contract management
- Long-term vision of architecture/interconnectivity
- Assimilation of emerging technologies/
discontinuation of obsolete applications/technolog
ies
- Establishment of continuous internal learning/
training programs
- Establishment of realistic performance Measures
- Must include intangible measures
30Slide 30
MIT5312 Professor Kirs
Outsourcing
Managing the Outsourcing Alliance (Cont.)
- Mix and Coordination of In-house/ Outsourced Tasks
- Customer/outsourcer Interfaces
- Outsourcing may imply delegation of final
authority to the outsourcer
- Internal Coordination necessary
31Slide 31
MIT5312 Professor Kirs
Outsourcing
A General Strategy
- Instead of the traditional hierarchical
organization, world-class organizations
understand that "flatter" management structures
are more effective. For example, an IT leader who
interacts with other business leaders as an equal
is more likely to be tuned into their needs and
to the overall business strategy. Hackett's
research shows that world-class CIOs are twice as
likely to report directly to the CEO or chairman
as CIOs at typical companies.
- Aligning IT with the business is crucial to
success, yet IT is too often seen as a "support"
service and is not included in high-level
decision-making. Having a "seat at the table" is
essential to improved performance. At 77 percent
of world-class organizations, the senior IT
executive is a member of the company's primary
management committee, compared to just 52 percent
of typical companies.
- Source Performance Gap Seen Widening in the Back
Offices of Large Global Corporations
http//www.sdcexec.com/online/article.jsp?id8962
siteSection13
32Slide 32
MIT5312 Professor Kirs
Outsourcing
A General Strategy
- While words like "streamlining" and
"standardization" have become overused terms,
world-class organizations achieve tangible
benefits by abolishing unnecessary complexity in
business processes. For example, world-class
procurement organizations reduce complexity
through strategic sourcing, consolidating their
purchases among 78 percent fewer suppliers than
typical companies. They also centralize
processes Hackett found that a typical company
with 1 billion in annual spend can save 8
million in process costs alone by increasing the
percentage of contracts negotiated centrally from
20 percent to 80 percent.
33Slide 33
MIT5312 Professor Kirs
Outsourcing
A General Strategy
- Companies with world-class IT organizations now
spend significantly more on IT 7 percent more
per end user than their peers, making IT the
only area studied by Hackett where world-class
companies spend more than typical ones. While
world-class organizations spend more on IT, their
use of technology results in improved performance
across other SGA areas. Hackett's research found
that of the companies that achieved world-class
status in multiple functions, IT was one of those
functions 86 percent of the time suggesting
that cross-functional excellence relies on
world-class IT performance.
- Examples of the value of IT abound in Hackett's
research. In part by using technology to
streamline and automate operations, world-class
organizations spend 45 percent less than typical
companies on finance operations, while at the
same time generating tens of millions of dollars
in savings by getting clients to pay their bills
28 percent
34Slide 34
MIT5312 Professor Kirs
Outsourcing
A General Strategy
- Business Process Sourcing
- Understanding how to effectively leverage
business process sourcing options such as
outsourcing, shared services and offshoring is a
hallmark of a world-class company. They do this
at the process level and do not hesitate to
change sourcing solutions if they fail to produce
the desired result. Most executives miss the
potential impact of service globalization due to
"under-scoping" of initiatives, not realizing
that offshore resources have matured
significantly in the last few years.
- A good example of this is in IT. World-class IT
organizations spend 17 percent more on
outsourcing technology infrastructure than
typical organizations, but this enables them to
spend 20 percent less in IT labor, resulting in 8
percent lower overall technology infrastructure
process costs.
35Slide 35
MIT5312 Professor Kirs
Outsourcing
A General Strategy
- Cross-Functional Partnering
- World-class organizations seek synergies across
business functions through cross-functional
cooperation to achieve common goals. For
instance, procurement staff work alongside their
functional peers to understand business needs,
plan spending and supplier selection (at the best
price), taking into account both current and
future needs. World-class procurement
organizations are more than three times as likely
as typical companies to rely on cross-functional
teaming for supplier development. World-class HR
managers are up to four times as likely as their
peers to partner with management in key areas
such as developing business strategies.
36Slide 36
MIT5312 Professor Kirs
Outsourcing