OutsourcingDiscuss the reasons for outsourcingDiscuss disadvantages of outsourcingDiscuss conditions when outsourcing

is appropriateDefine backsourcing and describe the

reasons for backsourcingDiscuss structuring and managing

the outsourcing arrangement

Offshore sourcing

❚ Define offshore sourcing, captive center, nearshoring

❚ Discuss reasons for and challenges of offshore sourcing

❚ Describe steps clients take in finding a provider

❚ Describe steps providers take in acquiring clients

Outsourcing

❚ The purchase of a good or service that was previously provided internally

❚ Farm out data center operations (facilities management)

❚ Farm out tasks and services❚ Farm out systems development❚ May transfer IS function to vendor

Our Survey

❚ Companies written up in trade press for having signed outsourcing agreements (1988 - 1993)

❚ Telephone interviews❚ 34 of 129 companies participated❚ 30% financial institutions❚ 25 private vs. 9 public❚ Provided broad range of services

Goals: Determinants of Outsourcing Success

❚ Core vs. commodity❚ Partner vs. vendor❚ Tight vs. loose contract

❚ Success: Economic, Technical, Strategic, Overall Satisfaction with Contract

Findings: Primary Reasons for Outsourcing

❚ Technological considerations (8)❚ Cost Savings (6)❚ Strategic considerations (infrastructure building

- quickly) (5)❚ Human resource considerations (3)❚ Mandated by central office/Acquired by another

company (3)❚ Consolidate Data Centers (2)❚ Efficiency (1)❚ Cash Infusion (1)

Findings: Other

❚ Need tight contracts❚ May be successful for core

functions… especially if linked to tight contract

❚ Can have successful partnerships

Saving $$$: Provider Advantages

❚ Tighter overhead cost control❚ More aggressive use of low-cost labor pools❚ More effective bulk purchases and leasing

arrangements❚ Better management of excess hardware capacity❚ Better control over software licenses❚ Hustle (Staying alive)❚ Creative and more realistic structuring of leases❚ Leaner management structure because of increased

competence and critical mass volumes of work

Outsourcing Disadvantages

❚ Reliance on vendor/partner❚ Loss of control❚ Considerations about

security/confidentiality❚ Evaporization of cost savings❚ Loss of competitive advantage❚ Slight of hand with employees

Outsourcing strategies

DECISIONCRITERIA

“MAKE”PRESSURE

“BUY”PRESSURE

CoreCompetency

Often core* Oftensupport*

Security/Confidentiality

Veryconfidential

Not highlyconfidential

SoftwareAvailability

Uniqueapplication

Softwareavailable forcommonproblem

Outsourcing strategies

DECISION CRITERIA

“MAKE” STRATEGY

“BUY” STRATEGY

Partners No reliable, competent, motivated, or financially stable partners available

Suitable partners available

Time Frame Time available for application development

Available time too limited

IT Professionals

Available in- house

Not available in-house

Backsourcing

❚ Bringing an outsourcing arrangement back in house

❚ Reasons❙ Economic❙ Strategic❙ Relationship❙ Power

Structuring the Alliance

❚ Flexible contract ( a lot can happen over 10 years)❙ Shorten length❙ Termination clause

❚ Detailed performance standards❙ Service levels (terminal response times)❙ Baseline period measurement❙ Growth rates❙ Service volume fluctuations❙ Resolution of performance disputes

Structuring the Alliance

❚ Partial vs. complete outsourcing❚ Multiple vendors❚ Cost savings

❙ Multiple evaluations❙ Outside consultants

Structuring the Alliance

❚ Supplier stability and quality❙ Conflict of interests

❚ Management fit❚ Conversion problems

Managing the Alliance

❚ Strong CIO function❙ Partnership/contract management❙ Architecture planning❙ Emerging technologies❙ Continuous learning

Managing the Alliance

❚ Performance measurements – continuous❙ Low-structured tasks more difficult to

outsource❙ Low-structured task provide higher margins

for provider

❚ Customer-outsourcer interface❙ Specified account manager in provider

company

Offshore sourcing❚ Offshore sourcing – sourcing to a company

outside the home country❚ Captive center – offshore center owned by

the client company❚ Nearshoring – sourcing to a company in a

country near to home country❚ Most common offshore sourcing IT

activities❙ Maintenance❙ Testing❙ Coding

Estimates on Market SizesCarmel & Tjia, 2006

$21 billion; total savings from offshoring by US corps -$31 billion

$10 billion; total savings from offshoring by US corps -$6.7 billion

Global [offshore] sourcing of software & services

$9.1 billion$1.3 billionIndian R&D sourcing

$680 billion$405 billion at 8%Global Market of IT-enabled Services

N/A$536 billion at 6.2%

Global Market of IT Services

2008 (est)2003

Demand for offshore work

❚ Most aggressive offshore consumers are in US; Within Europe, UK is most active

❚ Most active industries: financial services (banks, investment firms, insurance cos) and technology firms (software, hardware & telecommunications)

❚ Motivation: cost savings, flexibility, accessing talent, follow-the-sun

❚ 100 nations are now exporting software services and products

Wages for Software Professionals Carmel & Tija 2005

$1,400Vietnam$18,000South Africa$3,000China$20,000Brazil$3,600Pakistan$23,000Ireland$4,800Poland$39,500Israel$5,000Ukraine$43,000Singapore$5,000Indonesia$44,000Japan

$5,500- $7,500

Russia$45,000- $99,000

UK$5,000India$57,000Canada

$7,000Mexico$63,000USA

Extra offshore costs (%)Carmel & Tija 2005

15-57%12-52%Total Extra Costs5-8Restructuring/transitioning

1-2Turnover – offshore site2-3Travel3-8Communication/cultural

6-105-7Governance3-270-20Efficiency/lost productivity1-101-10Process changes

0.02 - 21-2Search & ContractCIOMeta Grp

Offshore challenges

❚ Communication breakdown❚ Coordination breakdown❚ Control breakdown❚ Cohesion barriers❚ Culture clash

Offshoring from a client perspective

❚ Laying the foundation❚ Identifying providers❚ Assessing and selecting the provider

Laying the foundation

❚ Assess your offshoring readiness (project management maturity, risk assessment, organizational flexibility, offshore experience)

❚ Set up powerful launch team❚ Hire external expert❚ Create a strategy and a plan❚ Select right project

Identifying the providers

❚ Locate providers❚ Select country (language, general

software skills, government, travel time)❚ Develop criteria for provider selection❚ Write RFI/RFP

Assessing and selecting the provider

❚ Due diligence❙ Check references❙ Set up local meetings to discuss their abilities

and your criteria❙ Pay attention to soft elements (i.e., trust,

feeling comfortable

❚ Offshore visit❚ Make recommendation and contract

negotiations

Marketing offshore services: Provider perspective

❚ Fierce competition: 4000 companies in low cost countries

❚ Quality of service can’t be judged until after the service is consumed

❚ Many IT services companies founded by technical professionals – not marketeers

Characteristics: Successful IT Services Exporters International Trade Center

❚ A truly international outlook (and desire) for exporting

❚ A long-term commitment to exporting❙ May take 2-3 years to generate business

❚ Thorough research into new markets and development of export plans

❚ An international reputation for quality.

First Steps❚ Create realistic business plan

❙ Types of offshore services required by market❙ Assess competitors and their place in market❙ Best ways to enter target market

❚ Seek business intelligence ❚ Define target markets

❙ Market size❙ Linkages (linguistic, historic, geographic, diaspora)

❚ Set up local base (sales office; representative)❚ Conduct SWOT analysis

Local Marketing Activities

❚ Generate client leads❙ “numbers game”

❚ Trade fairs❚ Marketing material❚ Seminars❚ Public relations

Business Discussions with Clients

❚ Know client types❙ Know offshoring champions in firm❙ Start with low-risk projects❙ Cultivate long-term relationships

❚ Know clients’ cultures❚ Build trust❚ Create country branding (with trade

associations and government offices)