Download - Session1 Global Outsourcing
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WELCOME
Global Outsourcing StrategyJune 13-15th, 2008
Ajay Bhalla
Ajay Bhalla
Agenda-June 13th, 2008Session 1:
Course Overview including coursework
modalities
Outsourcing: Literature StreamsLunch
Session 2: Seven Key Qs for building dynamicsourcing capabilities
NOTE: Slides for both sessions are in draftformat
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Course Overview Session Modalities
Course guide
Assessment- P12 onwards
Global Outsourcing Award sponsored byTCS
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Coursework- 1 COURSEWORK 1- TWO STEP PROCESS
Step1: Teams have been pre-allocated one the cases(See Page 13). They have to write a case reportbased onthe questions on page 11. The format needs to be similarto the cases you have for pre-reading. In addition youmust seek additional sources to explore the chosensubject.
Word Limit: 2000.
Delivery Date for Step 1 is: June 23rd, 2008, 16.00 hrs.
Percentage of CW mark: 40%
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Coursework - 1 COURSEWORK 1- TWO STEP PROCESS
Step 2: Following submission of the first case report, the team willthen need to interact with the second team (See page 11) which hasbeen allocated the same firm as part of their coursework. The pairsconduct a peer review for each other, and then agree on a jointposition, and produce a final joint case report based on samequestions on page 12. A joint mark for all members will be allocated.This is quite similar to a common position in firms where small teamscarry out work at local level and then collaborate with other teamsat global level to make a joint case.
Word Limit: 2000. Delivery Date for Step 2 is: June 30th, 2008 16.00hrs.
Percentage of CW mark: 40%
Coursework - 2COURSEWORK 2 (in teams)- 20% OF THE TOTAL GRADEFOR TEAMS SEE PAGE 17 Critically appraise the 2 compulsory readings (Page 16) allocated
to you (See Page 17). This needs to be an in-depth appraisalof theallocated reading. The criteria are outlined as below:
1. Abstract
2. Contributions to Academic and Managerial Practice
3. Your view on the article, which includes the logic, validity andreliability of the article
4. On the scale of 1-7, how useful is the article to your fellowstudents. Why?
Deliverable: The summary appraisalshould be maximum 750words. The due date for the Course work 2 would be June 23rd,2008, 16.00 hrs.
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Sessions
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Session 1 Introduction-Transforming Services Landscape throughGlobal Outsourcing
Session 2 Seven key questions firms need to address to builddynamic sourcing capabilities?
Session 3 Reverse Outsourcing-Bharti Airtel Case
Session 4 Outsourcing Contract Design and Service LevelAgreements in Public-Private Partnerships- Inland
Revenue/EDS Case
Session 5 BEST PRACTICES IN VENDOR MANAGEMENTSession 6 Concluding Session: What next?
Ajay Bhalla
Global Outsourcing and Offshoring-Overview
Delivered to MBA Program, 2006
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Outsourcing-Multiple Definitions exist(1) Significant contribution byexternal vendors in thephysical/human resourcesassociated with the entire orspecific components of the ITinfrastructure in the user
firms
(Loh and Venktraman, 1992)
Intro>Definitions
A highly strategic decision that has the potential tocause ripple effects through out the entire firm
(2)Reliance on externalsources for manufacturingcomponents and othervalue-adding activities
(Lei & Hitt, 1995)
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Divergent Approaches to Outsource:Tesco vs. Nike
Intro>Definitions
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Choice to Internalise is key to OS definitionSUBSTITUION
Intro>Definitions
Firms having no choice but to acquiregoods/services from an external sourceare NOT outsourcing
ABSENTATION
These firms aim for mastering project thanmanufacturing competencies
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Firms follow different trajectories toOutsourcing
Intro>Definitions
Offshoring
OverseasDomestic
Outsourcing
Outsource
In-source
CopaeBo
yDeso
Location Decision
DomesticDivisions/Affiliates
Source fromDomestic Suppliers
Source from ForeignSuppliers(International Trade)
Establishing Foreign
Affiliates
(FDI and trade)
1 5
4
3
2
Source: Aim Report (2004)
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FINANCIAL ASPIRATIONS DOMINATE THEOS DECISION1. Immediate Cost
Improvements
2. Generated by Reduction inHeadcount, or Transfer of
Staff to Vendor.
3. Enhanced Bottom
Line>>Positive impact on
market cap.
4. Helps Swiftly Reinforce
the OS decision
COST
UK headcount reduced by
34% in 2004 75:25 Onshore Offshore Ratio
Average cost of servicingp/person down by 9%
PRODUCTIVITY
Improvements by 55%
Intro>Definitions>Drivers
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although increasingly firms are deployingoffshoring for re-focusing on their competencies
Free up internalresources
System development is anon-core activity for theorganization
Take advantage ofeconomies of scale
Reduce time to market Increase process
efficiencies
Enhance knowledgecapability
Stated Objective:
A Global Services Arm building
competitive advantage for Tesco.
SSC provides IT and Business
services to make the Tescoexperience better, simpler and fasterfor over 300K emp. and 15 mncustomers
Intro>Definitions>Drivers
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Energizing Competencies could also be driven by acustomer re-focusing exerciseConsider, Prudential objective to simplify processes
One easy to remember freefone number0800 00
Calls answered by real people, notmachines
80% of queries answered by first personcontacted
Immediate feedback from customers
Single postal address
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Offshoring and Outsourcing also carry risks
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Consider, 3 examples
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When OS, managers also need to be aware offollowing disadvantages1. .
2. .
3. .
4. .
5. .
Intro>Definitions>Drivers>Disadv
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When OS, managers also need to be aware offollowing disadvantages Declining innovation by Outsourcer
Loss of long-run R&D competitiveness
Potential to loose touch with new techbreakthroughs that offer opp. for productand process innovations.
Suppliers gaining knowledge of the productthat may be used for own advantage
Intro>Definitions>Drivers>Disadv
Governance mode, location and support functions havean impact on a companys specific configuration of anoffshoring activity.3 offshoring dimensions
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In terms of providing functions, different implementationoptions have to be consideredImplementation options
Offshoring enables firms to alter governance modes.Consider a German engineering firm
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When offshoring, many factors could
influence choice of governance mode
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Global Service Centre
Global Technical Support
Global Delivery Centre
India Development Centre
Microsoft Research
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What factors could influence choice ofvarious offshoring models?
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Break- 10 minutes What are the advantages of in-sourcing vs.
outsourcing
Discuss in your Groups and write down 3key points for each.
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Theoretical influences on Outsourcing
Delivered to MBA Program, 2006
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Boundary Choice Decisions are of primary strategicrelevance to todays senior managers1. Which business activities should be brought
within the boundary of the firm?
2. Which business activities should be outsourced?
This is because
Firms that bring the wrong business activities within their boundaries riskloosing strategic focus. HPs decision to be a hardware leader.
Firms that fails to bring the right business activities with their boundariesrisk losing their competitive advantage and becoming hollow corporations.Consider Sonys response to Apple
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Two different views of firm aid our understanding ofSourcing Decisions
Transaction Cost RBV
Basic nature Allocation of resources throughauthority relations
A collection of productiveresources
Behaviouralassumptions
Opportunism and boundedrationality
Bounded rationality
Objective Economising o n transactioncosts through choosing anappropriate governancestructure
Maximising long run profits throughexploiting and developing firmresources
Entrepreneurialfunction
Coordinating production withinthe firm
Identifying and taking advantages ofproductive possibilities
Constraints onstrategic options
Asset specificity,uncertainty,infrequency
Firm specificity of resources
Limit oforganisation
Due to top down control lossand managerial opportunism
Due to managerial diseconomies
Source: Adapted from Tsang (2000)
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TCE specifies under which conditions firmsshould manage a particular exchange within
their organizational boundary as well as theconditions under which it should be outsourced.
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It further posits that transaction properties determine thegovernance structure
Market Governance
1. Discrete short-termcontracts.
2. Bargainingrelationshipsbetween highlyautonomous buyersand suppliers
designed tofacilitateeconomicallyefficient transfer
Degree of Asset Specificity and Uncertainty
Intermediate Governance
1. Use of Complexcontracts* and bilateralrelations to form hybridforms such as JVs tomanage the exchange.
2. Degree of collaborativearrangements guards
opportunism byrecognising the benefitsof working together formutual benefit.
Low High
Hierarchical Governance
1. High Asset Specificityand uncertainty leadto transactiondifficulties and firmsopting for carrying thetransaction in-house.
* Complexity of contract is related to
the difficulty in measuring performance
Markets as imperfect exchange mechanism
Market inefficiencies occur as a result of 3
conditions:
Bounded Rationality of managers
Asymmetric distribution of relevant information
Inability to completely specify behaviour in
presence of multiple contingencies
All contracts are therefore subject torenegotiation and the possibility ofopportunistic behaviour.
Transaction cost theory-Key points 1
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TCT posits that economic actors,
i.e. managers are boundedly
rationale and potentially
opportunistic, and explains how
unfavorable exchange conditions
can increase the costs of writing
enforceable contracts and createex postmaladaptation and hold-up
problems (Williamson, 1985)
In case of hold-upconcerns, firms preferVertical Integrationbecause:
(a)Hierarchical gov.aligns the interests ofexchange parties
(b) Provides forreconciliation of
differences viaextensiveadministrative rulesand procedures.
And under these assumptions..
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However, TCE it places overemphasis on marketand hierarchical forms of governance Focus on single transactions
Emergence of collaborative arrangementsleads to repeated transactions between thesame parties
Discounts role of trust
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RBV has emerged a preferred theoretical platformin OS literature
To qualify core competencies must meet thefollowing 7 point criteria:
1. Skills or knowledge sets, not products orfunctions
2. Flexible, long-term platforms that are adaptable
3. Limited in number
4. Unique sources of leverage in the value chain5. Areas where the organisation can dominate
6. Elements important to customers in long run
7. Embedded in the systems of the organisation.
Theses: Firms should retain Core activities and outsource the non-core activitiesto specialist vendors.
Activities which meetthe following 2conditions qualify asnon-core:
1. External suppliersbecome morecompetent atperforming the activity
than the firm.2. A competitor of the
customer organisationbecomes morecompetent inperforming the activity.
Firm specific effects on governance choices must befactored in when considering outsourcing Firms are hetrogenous in
terms of their resources and
capabilities (Wernerfelt,
1984)
Some of the resources andcapabilities are limited in
supply or costly to imitate
(Barney, 1991)
Firms governance choices
are directed by their
attempts to leverage and
protect idiosyncratic
capabilities (Barney, 1999)
Firm specific governance choices may
be influenced by:
1. Prior commitments and extant
governance form
2. Governance inseparability, i.e.interdependencies may exist
between gov. decisions as a result
of formal and informal
commitments embedded in the
existing portfolio of contractual
relationships.
3. Firm specific capability
differences
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Today, managers often use core vs. peripheralframework to determine what to outsource-Occurs when firms
acquire less strategically
relevant, peripheral
activities from external
Suppliers.Example: IT Support or
IT infrastructure OS
-Occurs when firms acquire
activities that are
considered highly important
to long-run success.Example: ABN Amros strategic
decision to OS all IT related
activities to Five vendors in August
(Deal size: $2.2bn per annum)
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What is Core vs. Peripheral is debatable..VARIATIONS EXIST AMONG FIRMS WITHIN A INDUSTRY
We would be nuts to outsource- LindaDillman, CIO
(Walmarts approach towards IT OS:http://www.informationweek.com/story/showArticle.jhtml?
articleID=47902662)
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1.1 What is the impact of Outsourcing on FirmsPerformance?(Firm performance interpreted as: financial, Innovation, Stakeholders)
THINK OF ONE EXAMPLE? DISCUSS IN PAIRS?
1. Can Firms Make More by Doing Less?
Task: 2 Minutes
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Outsourcing and its Effect on Firm PerformanceCore vs. Peripheral provides some clarity
PeripheralOutsourcingIntensity (+)
EnvironmentalDynamism
Strategy
CoreOutsourcingIntensity (-)
FirmPerformance
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Outsourcing and its Effect on Firm PerformanceCore vs. Peripheral provides some clarity
PeripheralOutsourcingIntensity (+)
EnvironmentalDynamism
Strategy
CoreOutsourcingIntensity (-)
FirmPerformance
1. Peripheral Outsourcing:
Reducing Peripheral activities allowsfirms to focus
Outsourcing Peripheral activities maygreatly improve their quality
May lead to incremental improvement ina firms overall cost position
2. Core Outsourcing
Intensity with which a firm outsourcesits near-core, strategically relevant
activities May lead to declining innovation
Eventual competition from suppliers
Resulting in reduced firm performance.
Ajay Bhalla
Outsourcing and its Effect on Firm PerformanceCore vs. Peripheral provides some clarity
PeripheralOutsourcingIntensity (+)
EnvironmentalDynamism
Strategy
CoreOutsourcingIntensity (+-
FirmPerformance
MODERATING RELATIONSHIPS ARE AT PLAY
1. Generic Firm Strategy:
Benefits of OS are more likely to be realised by cost leaders
than by differentiators, and
Any costs are more likely to be borne by differentiators than by
cost leaders.
2. Environmental Dynamism (ED) Benefits of OS increase with increasing levels of ED, and the
costs associated with OS decrease with increasing levels of ED.
E.g. By relying on OS for peripheral and near-core activities in more
dynamic env., firms are able to take advantage of emerging tech.
without investing large amount of capital. CONSIDER SOFTWARE
IND.
Conversely, in more stable environments, the benefits of OS
decline and the costs of OS increase.
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Outsourcing Intensity is a key measure tounderstand a firms overall reliance on OS
Breadth of Outsourcing Activities Number of activities outsourced/
Maximum number of activities that
could be outsourced.
Depth of Outsourcing Activities Average percentage of each outsourced
activity that is being provided by external suppliers.
Outsourcing Intensity can be defined as: Breadth X Depth
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Final thoughts on OS and Firm Performance Difficulties of drawing direct relationships
between OS and aggregate firmperformance.
OS has an effect on the individual functionalareas in which it occurs.
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Additional Note: Relational Contracting as 3rdinfluential literature stream
Primary theses:
Formal contractsundermine trust andencourage theopportunistic behaviourthey are designed todiscourage.
Relational exchangearrangementssupported by trust actas substitutes forcomplex contracts.
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Alternative theses:
Managers useFormal Contractsand RelationalGovernance ascomplements
PreviousBusiness
Relations
ExchangePerformance
ExchangeHazards
RelationalGovernance
CustomizedContracts
IT Size
ManagerialExperience
+ or -
+ or -
Source: Laura and Poppo (2002)
Summary Thoughts Outsourcing has emerged as a key
competence for firms aiming to deliver on
various fronts, e.g. costs, service etc.
Managers need to develop competenciesto differentiate between Myths of
Outsourcing and as a organisation fertilizer.
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Key Session Takeaways1...
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