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Title: MIT5312: Systems Analysis and Design


1
Slide 1
MIT5312 Systems Analysis and Design
Outsourcing and Offshoring
2
Slide 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

3
Slide 3
MIT5312 Professor Kirs
Outsourcing
Basic Terminology
  • Outsourcing
  • Delegation of non-core operations from internal
    production to an external entity. Sharing
    organizational control.
  • Best Sourcing
  • Associating with the best of the best (Tom
    Peters)
  • Offshoring
  • Transferring Activities to another country by
    hiring local subcontractors or by building a
    facility in an area where labor is cheap (er).
  • Nearsourcing
  • Similar to offshore (yet close distance)
  • Insourcing
  • The opposite of outsourcing

4
Slide 4
MIT5312 Professor Kirs
Outsourcing
Why Outsource?
  • Cost Concerns
  • 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

5
Slide 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

6
Slide 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."

7
Slide 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
8
Slide 8
MIT5312 Professor Kirs
Outsourcing
Why Outsource?
  • Lagging IT Performance
  • 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.

9
Slide 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

10
Slide 10
MIT5312 Professor Kirs
Outsourcing
Why Outsource?
  • And other reasons
  • Economies of scale
  • Bulk Purchasing
  • Better use of capacity
  • World-class standards applied
  • Improved control/standardization
  • Flattening of Hierarchical Structure

11
Slide 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

12
Slide 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

13
Slide 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.
14
Slide 14
MIT5312 Professor Kirs
Outsourcing
Some arguments for NOT outsourcing
  • Loss of jobs
  • 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.

15
Slide 15
MIT5312 Professor Kirs
Outsourcing
Some arguments for NOT outsourcing
  • Loss of control
  • "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."

16
Slide 16
MIT5312 Professor Kirs
Outsourcing
Some arguments for NOT outsourcing
  • Concerns about quality
  • "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."

17
Slide 17
MIT5312 Professor Kirs
Outsourcing
Some arguments for NOT outsourcing
  • Social Impacts
  • "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."

18
Slide 18
MIT5312 Professor Kirs
Outsourcing
Some arguments for NOT outsourcing
  • Hidden Costs
  • 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

19
Slide 19
MIT5312 Professor Kirs
Outsourcing
Some arguments for NOT outsourcing
  • Hidden Costs
  • The Cost of Transition
  • 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.

20
Slide 20
MIT5312 Professor Kirs
Outsourcing
Some arguments for NOT outsourcing
  • Hidden Costs
  • The Cost of Layoffs
  • 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.

21
Slide 21
MIT5312 Professor Kirs
Outsourcing
Some arguments for NOT outsourcing
  • Hidden Costs
  • The Cultural Cost
  • 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.

22
Slide 22
MIT5312 Professor Kirs
Outsourcing
Some arguments for NOT outsourcing
  • Hidden Costs
  • The Cost of Ramping Up
  • "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.

23
Slide 23
MIT5312 Professor Kirs
Outsourcing
Some arguments for NOT outsourcing
  • Hidden Costs
  • 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

24
Slide 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.
25
Slide 25
MIT5312 Professor Kirs
Outsourcing
Organization-specific considerations in
Outsourcing
  • Development Portfolios
  • Organizational Learning
  • IT Currency
  • IT Organization

26
Slide 26
MIT5312 Professor Kirs
Outsourcing
Structuring the Outsourcing Alliance
  • Contract Flexibility
  • 8-10 Years
  • Frequent Renegotiation necessary due to
  • Technology changes
  • Changing business/economic conditions
  • Emerging competitive services
  • Performance Standards for System response time,
    availability of service, responsiveness
  • Controls
  • Safeguards against disruption of operations
    support

27
Slide 27
MIT5312 Professor Kirs
Outsourcing
Structuring the Outsourcing Alliance (Cont.)
  • Partial Outsourcing
  • 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

28
Slide 28
MIT5312 Professor Kirs
Outsourcing
Structuring the Outsourcing Alliance (Cont.)
  • Supplier Stability and Quality
  • Need to examine suppliers financial structure
  • Note

Insourcing is a more difficult than outsourcing
  • Management Fit
  • Similarity in Corporate Cultures
  • Conversion Problems
  • Expertise/Information gained by Outsourcer
  • Resolution of Internal Staff hiring/Lay-offs
  • Career paths/job security

29
Slide 29
MIT5312 Professor Kirs
Outsourcing
Managing the Outsourcing Alliance
  • A Strong CIO should be retained
  • CIO responsibilities
  • 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

30
Slide 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

31
Slide 31
MIT5312 Professor Kirs
Outsourcing
A General Strategy
  • Strategic Alignment
  • 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

32
Slide 32
MIT5312 Professor Kirs
Outsourcing
A General Strategy
  • Complexity Reduction
  • 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.

33
Slide 33
MIT5312 Professor Kirs
Outsourcing
A General Strategy
  • Technology Enablement
  • 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

34
Slide 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.

35
Slide 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.

36
Slide 36
MIT5312 Professor Kirs
Outsourcing
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