Outsourcing 11 27 12 Outsourcing an arrangement by which one organization provides a service or services for another organization that chooses not to perform them in house This is not just overseas Can be hiring a consulting company hiring IBM to do something for you Typically the outsourced process or function is a noncore business activity like a payroll or customer relations management hire someone to answer the phone 1800 or something You don t outsource a core competency offshoring is a special form of outsourcing It is outsourcing overseas taking it outside our borders Hiring IBM is outsourcing hiring Windpro in India is offshoring Offshoring the practice of outsourcing operations overseas usually by companies from industrialized countries to less developed countries w the intention of reducing the cost of doing business Chief among specific reasons for locating operations outside a corporation s home country lower labor costs more lenient environmental regulations less stringent labor regulations favorable tax conditions and proximity to raw materials Insourcing usually only applies to IT IS functions Insourcing in house development a common approach using the professional expertise within an organization to develop and maintain the organization s information technology systems were on laptops connected to a wireless network Running our servers at Smith are run in house Lots of concern about outsourcing Are we taking key skills and sending them overseas Example with couple who left house and everything that wasn t made in America was removed All that was left was a lamp Outsourcing is growing Many see it as a cost effective way of running a business IT leading item that s outsourced then HR 1 reason for outsourcing tap into outside sources of expertise Benefits from outsourcing include Financial savings Increased technical abilities Market agility Factors driving outsourcing growth include Rapid growth Industry changes The Internet Imp Outsourcing benefits Reduced op expenses Outsourcing non core processes allows focus on core competencies Service providers economies of scale expertise best practices Avoid costly outlay of capital funds Challenges of Outsourcing Contract length Difficulties in getting out of a contract Problems in foreseeing future needs hard to predict how things will be 2 years from now Problems in reforming an internal IT department after the contract is finished if you change your mind the employees you screwed over before wont want to come back Competitive edge Confidentiality Scope definition Pros cons of outsourcing offshoring Possible benefit of market mechanism lower production cost flexible specialization and high quality etc Offshoring Global labor arbitrage 1 8th of the cost of US workers global team work But it also suffers from the cost of market mechanism Search match signing contract verify quality Relational risks shirking poaching and opportunistic renegotiation if outsourcer calls Boeing saying we need more money and time they ll say no If a Boeing guy called Boeing and told them this they would be more likely to believe trust them since they are one of them Why is outsourcing still popular Mainly because of IT IT has greatly reduced the cost of using market mechanism coordination part IT makes it possible Broadband connection between US and India etc IT makes it profitable Transaction cost in market mechanism Coordination search match create the right price Shirking Deliberate underperformance in something difficult to measure and then claiming full payment Where to look Performance measurement is difficult due to external influences or hidden actions Monitoring is known to be costly Hard to measure performance monitor so easy to deliberately underperform Poaching Use of an asset that was contributed to a relationship for purposes other than intended damaging the party that contributed the asset Where to look Exchanges of unprotected intellectual property trade secrets unpatented business rules Requires use of information assets e g customer lists Ex venture capitalist steals business model Gates was a poacher Jobs was a poacher Edison was a poacher Ability to take someone s idea that they didn t know what to do with and do something with it yourself Ex guy w windshield wipers Opportunistic Renegotiation O R Expropriating value created by a relationship by exploiting ex post changes in bargaining power Where to look Relationship specific investments switching cost Ex open source software business model upgrading email system We re in a contract and you wont be able to find anyone else to do it You hire someone and when its time to renegotiate contract you realize it would be hard or impossible to go to another competitor and have no choice Like babysitting Taking advantage of the relationship because you know they cant do anything about it You can outsource jobs but you can not outsource responsibilities Walmart cant say they didn t know outside contractors were hired its their job to know Reverse outsourcing outside companies now hiring US people Want to sell products to Americans and want people who speak English well watch video on last slide 12 31 12 Impact of the Internet The Internet has changed the way the world accesses views finds and uses information Disruptive Technology Easy to compile searching for information on products prices customers suppliers and partners is faster and easier when using the Internet Increased richness Businesses and customers can collect and track more detailed information when using the Internet Increased reach Businesses can share information with numerous customers all over the world Improved content Data and product descriptions establish the common understanding between both parties to the transaction Disruptive Technology How can a company like Polaroid or Kodak go bankrupt Digital Darwinism implies that organizations which cannot adapt to the new demands placed on them for surviving in the information age are doomed to extinction o Use of Porter s Five Forces Model If Polaroid executives had used Porter s Five Forces analysis would they have Disruptive Versus Sustaining Technology discovered the threat of substitute products of the digital camera What do steamboats transistor radios and Intel s 8088 processor all have in common THEY ARE ALL DISRUPTIVE TECHNOLOGIES o Disruptive technology a new way of doing things that initially does not meet the needs of customers Transistor Radio Example o
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