Strategic Outsourcing LEARNING OUTCOMES 1 Explain the business benefits and challenges of outsourcing Hire expertise free resources Contracting managing relational issues Shirking poaching opportunistic renegotiation 2 Identify the primary outsourcing options 2 INTRODUCTION Outsourcing an arrangement by which one organization provides a service or services for another organization that chooses not to perform them in house Typically the outsourced process or function is a noncore business activity 3 Offshoring vs Outsourcing Offshoring the practice of outsourcing operations overseas usually by companies from industrialized countries to less developed countries with the intention of reducing the cost of doing business Chief among the specific reasons for locating operations outside a corporation s home country are lower labor costs more lenient environmental regulations less stringent labor regulations favorable tax conditions and proximity to raw materials 4 Insourcing Insourcing in house development a common approach using the professional expertise within an organization to develop and maintain the organization s information technology systems 5 People are Concerned 6 Outsourcing Growth 7 Outsourcing in the News ABC news on Outsourcing to India http video google com videoplay docid 1660737942697828939 7 04 NPR Radio India tutors US kids http www npr org templates story story php storyId 4497026 from mobile 7 43 Bringing it back to US http www youtube com watch v mh7vcnRgCKA 1 43 8 Outsourcing Outsourcing an arrangement by which one organization provides a service or services for another organization that chooses not to perform them in house 9 Outsourcing Reasons companies outsource 10 Outsourcing Benefits from outsourcing include Financial savings Increased technical abilities Market agility 11 Factors driving outsourcing growth Outsourcing include Rapid growth Industry changes The Internet 12 OUTSOURCING BENEFITS Outsourcing benefits include Increased quality and efficiency Reduced operating expenses Outsourcing non core processes allows focus on core Reduced exposure to risk Service providers economies of scale expertise and best competencies practices Access to advanced technologies Increased flexibility Avoid costly outlay of capital funds Reduced headcount and associated overhead expense Reduced frustrations and expense related to hiring retaining employees Reduced time to market for products or services 13 THE CHALLENGES OF OUTSOURCING Outsourcing challenges include Contract length 1 Difficulties in getting out of a contract 2 Problems in foreseeing future needs 3 Problems in reforming an internal IT department after the contract is finished Competitive edge Confidentiality Scope definition 14 Pros and 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 15 Why outsourcing offshoring is popular 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 16 But As long as you can manage the motivation part outsourcing can be good to you Motivation Shirking Poaching Opportunistic renegotiation 17 These risks become significant in service outsourcing especially IT Shirking Def Deliberate underperformance in something difficult to measure and claiming full payment Where to look Performance measurement is difficult due to external influences or hidden actions Monitoring is known to be costly 18 Shirking If I ask you to baby sit my daughter and you agreed not to watch TV not to chat with your friends How likely will you shirk It is so much easier to shirk in service activities than in manufacturing because monitoring and verification is hard 19 These risks become significant in service outsourcing especially IT Poaching Def 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 20 These risks become significant in service outsourcing especially IT Opportunistic Renegotiation O R Def Expropriating value created by a relationship by exploiting ex post changes in bargaining power Where to look cost Relationship specific investments switching Ex open source software business model upgrading email system 21 Opportunistic Renegotiation O R is just holdup You use the email service from a certain company all your employees are trained how to use it and you have built up many applications based on this email system such as CRM Now you want to expand the capacity of email system the vendor will charge you a very high price 22 Significant challenges ahead in outsourcing management 50 of outsourcing contracts signed between 2000 2004 failed to meet expectations Boston Consulting Group and Gartner 2005 You can outsource jobs but you can not outsource responsibilities 23 Future Trends Outsourcing is becoming less of a cost saving strategy and more an overall context for business Outsourcing is approaching commodity status Companies should look for value based pricing rather than the lowest possible price 24 Real Life IBM Campbell Soup Challenge Grow the business and revenues with a strategic approach to technology to better support business strategies Solution A standard global computing environment fully supported by a strategic outsourcing solution from IBM Global Services and delivered via a usage based pricing model Benefits Improved IT service quality increased cost efficiencies and employee productivity higher flexibility in resources availability greater responsiveness to business partners and market opportunities and access to world class IBM skills and technologies 25 Real Life Sprint IBM Sprint Scraps Major IT Outsourcing Deal With IBM Sprint is bringing back work and employees it gave to IBM under a 400 million outsourcing pact and redoing its multibillion dollar call center deal with the IT
View Full Document
Unlocking...