Martin V Smith School of Business Economics California State University Channel Island BUS 550 The Contemporary Firm Spring 2011 Instructor Dr Minder Chen Associate Professor of MIS Student Natalia Gorbunova A US Client s learning from outsourcing IT work offshore OUTSOURCING Today more than 75 percent of companies outsource some IT functions to outside service providers Strategic Advantages Offshore Outsourcing Cost Generally outsourced services cost you a fraction of US 30 50 costs with equal quality Focus The most valuable resource within your management resources is Time Once a process is successfully outsourced the management gets more and effective control over time Rapid Migration to New Technology Exploit the Time Zone Advantage and reap the benefits of 24 hour development cycle Summary Case present analyses of IT offshore outsourcing of the abstract Biotech company The company employs 15 000 people has 400 locations in 40 countries Biotech is a Fortune 500 company and a leading provider of biotechnology products In 2001 it experienced flat revenues and was need to cut the budget For 2002 the IT budget were reduced by 5 Doing more with less became the CIO s major challenge for 2002 Summary The CIO and IT Leads replaced domestic contractors with cheaper offshore IT workers 65 per hour compare with 25 per hour in India Biotech launched 21 projects offshore in 2003 to 2005 Program Management Office PMO always reported that offshore outsourcing is successful in meeting Biotech s cost saving targets IT Leads and CIO did not agree with PMO The case is analyzing data of the company offshore outsourcing Summary Analytics interviewed 45 participants and explored 2 000 significant documentation They asked participants to give grades for the projects Considering the degree to which projects objectives were met budgets and schedules and the quality of delivering product Project Number of participants who assign a grade Letter grades assigned by participants Average project rating using A 4 A B 3 5 B 3 B C 2 5 C 2 C D 1 5 D 1 D F 0 5 F 0 Standard deviation of average project rating A 3 C D F 1 17 1 26 B 1 C 1 5 N A C 3 D D A 2 1 32 D 5 F F F F F 0 0 E 3 F C B 1 67 1 53 F 4 C B B D 2 25 0 96 G 5 A A A B B 3 6 0 55 H 4 F F F D 0 25 0 5 I 1 D 1 N A J 2 B C 2 25 1 06 K 2 F D 0 5 0 71 L 3 A A C 3 33 1 15 M 4 C D C B 1 88 0 85 N 4 C F F F 0 5 1 O 3 B B B 3 5 0 P 3 B C D 2 33 0 76 Q 9 D C D D B B F B B 1 89 1 17 R 2 C D 1 75 1 06 S 1 C 1 5 N A T 1 D 1 N A U 3 C B B 2 5 0 87 1 73 mean 1 75 median 1 02 Overall Issues Organizational Issues Strong social networks between Biotech IT employees and domestic contractors were not replicated with offshore suppliers they worked in same cubicles attended same meetings Biotech s sneaker net culture were not possible to duplicated Researches could not transfer information outside before everybody just had notebooks for the reason to avoid the licking of information Cultural differences IT Leads summed The place could be on fire but Indian IT workers would say Oh it s great a little warm but it s great Project Level Analysis Offshore Supplier Size 1 For Biotech bigger was better Table 1 Project rating vs size and number of offshore suppliers Offshore supplier size Number of more Successful projects Number of less Successful projects Percentage of more Successful projects Large supplier greater than 1 billion in revenue 4 1 80 Multi sourced 2 1 67 One small supplier 50 million in revenue 5 7 42 Captive center 0 1 0 Project Level Analysis Supplier Engagement Model 2 Projects with some offshore supplier employees onsite were more successful But cost saving was lost Table2 Project rating vs supplier engagement model Offshore supplier Engagement model Number of more Successful projects Number of less Successful projects Percentage of more Successful projects Some supplier managers and developers onsite 4 1 80 Some supplier developers onsite but no managers onsite 3 1 75 No supplier managers and developers onsite 4 8 33 Project Level Analysis Contract Value Projects with greater value rated higher than projects with lesser value Table 3 Project rating vs contract value using mean and median Contract value Number of more Successful projects Number of less Successful projects Percentage of more Successful projects Greater value greater than 93K mean spent 5 2 71 Lesser value lesser than 93K mean spent 6 8 43 Greater value greater than 64K median spent 7 3 70 Lesser value less than 64K median spent 3 7 30 Project Level Analysis Project Duration With the larger projects allow to build relationships and understanding between suppliers and Biotech Table 4 Project rating vs project duration using mean and median Contract duration Number of more Successful projects Number of less Successful projects Percentage of more Successful projects Longer more than 1 year mean 5 3 63 Shorter less than 1 year mean 6 7 46 Longer longer than 272 days median 7 3 70 Shorter less than 272 days median 3 7 30 Project Level Analysis Organizational Units Projects within the R D area required the supplier to have very specific scientific knowledge whereas the Web and ERP units required more common knowledge Table 5 Project rating vs organizational unit Organizational unit within Biotech Number of more Successful projects Number of less Successful projects Percentage of more Successful projects Web 3 0 100 ERP 2 0 100 Marketing 3 2 60 R D 3 7 30 Enterprise architecture 0 1 0 Project Level Analysis Project Type It did not matter the types of works Participants rated both development and maintenance nearly equally Table 6 Project rating vs project type Project type Number of more Successful projects Number of less Successful projects Percentage of more Successful projects New software development 8 7 53 Support or maintenance of existing software 3 3 50 Project Level Analysis Project start year Recent contractors have higher frequencies of success than older contractors Table 7 Project rating vs project start year Project start year Number of more Successful projects Number of less Successful projects Percentage of more Successful projects During 2003 6 8 43 During 2004 or 2005 5 2 71 Four Insights for Clients and Suppliers 1 An offshore strategy should fit with the client s norms and practices or the client have to change norms sneaker net culture and social network did not fit offshore Documentation outsourcing 2 Clients and suppliers should invest in social capital transfer knowledge