LUISS Term 1 2008

INTERNATIONAL BUSINESS

Professor John A. Mathews

LUISS and Macquarie Graduate School of Management

Session 5: Global strategy to meet outsourcing: BPO

Global value chains and the service sector: BPO

Global value chains as organizational forms: heterarchies (vs. hierarchies)

The management of inter-organizational linkagesBusiness Process Outsourcing and rise of India as

‘back-office of world’ (cf China as ‘factory of world’)

IT outsourcing and the pressures driving itQ: What drives outsourcing? And how do firms like

Infosys take advantage of the opportunities?Case: Infosys

Strategy as stretch and leverage

Hamel & Prahalad 1993Fundamental notion: resource leverageFirms strategizing around goals that

exceed their current resources, and take them into new industry positions

Takes us beyond industry structure analysis and its equilibrium foundations

Strategy as resource leverage takes us into realm of disequilibrium dynamics

One company’s approach to outsourcing: BT

BT (formerly British Telecom) is both a recipient of IT outsourcing contracts, and a practitioner of outsourcing itself

Outsources:•Financial services•HR services•Property and facilities management•Call centres (Directory Enquiries)

Two outsourced to IndiaSecures business of customers who wish to globally outsource IT

BT approach to attracting customers

Need to release investment for business growth

Handed over transformation of global infrastructure

Supporting 234,000 people in over 100 countries

Focus on core competencies Create a world class IT

infrastructure Deliver new enhanced

services for Reuters global customer base

BT’s network perspective has identified an emerging business environment

Mirrored in customers

£500m+ pa under contract & over 7,000 people outsourced

BT: We practice what we preach

Financial services

Ledger operations, accounts payable and payroll

HR services

Pensions admin, recruitment and training

Property and FM

Major maintenance, capital projects, corporate real estate services

Facilities management, security, day to day & plant maintenance

Directory Enquiries

Optimization & rationalization of 150 call centres.

2 outsourced to India

Global trends in BPO

Four competing forces in global sourcing: 1. Global Indian BPO’s 2. Global BPO’s 3. Captives 4. Emerging countries (29+ countries)

Multi-regional BPO sourcing creating need for flexible infrastructure able to span multiple sites, multiple countries seamlessly

Competency focus – business process or application requiring global access to talent pools: BPO or BPR

Infosys Technologies Ltd

Established 1981 in India 1993 IPO in India 1996 First office in Europe 1999 Listed on NASDAQ 2000 Touched $200m in revenues 2004 Exceeded $1 billion in revenues Now a leading global player BPO services provided through Progeon (Apr 2002): “end

to end” outsourcing

E.g. Disaster recovery centre established in Mauritius, to service European clients

Source: McKinsey Global Institute

Source: McKinsey Global Institute

Source: McKinsey Global Institute

Indian ProvidersMNCs

Knowledge of client’s business Better track record than anyone else Strong executive relationships Superior global delivery model Strong operational capabilities Looks real good when

Very good at relationship building with client, working hard to bridge the cultural divide

Presents capabilities in a way that makes their work look like the client’s process, not the service provider’s process

Very flexible contractually (less rigorous around T&C)

Very price competitive Excellent sales and

delivery teams

Convergence

Indian Providers and MNCs Capabilities Are Converging

Stage 1 - Ad Hoc Outsourcing

There is an opportunity for late adopters to leapfrog competitors by leveraging early adopters’ experience and avoiding the mistakes they made:

Best practices are better established

Key service levels are better understood

Mix of control and trust needed to manage vendor relationships is better understood

Late Entrants To Global Sourcing Can Leapfrog the Competition

Stage 1 - Ad Hoc Outsourcing

Stage 2 -Relational

Outsourcing

Stage 3 –Strategic Outsourcing

Stage 4 - Global Service Delivery

Driver: cost reduction

Emphasis on longer-term relationship commitments and provider investment in infrastructure, knowledge transfer

Driver: cost optimization - improve core processes to create sustainable competitive advantage by building global operating capabilities

Sourcing rises to be a corporate-level initiative driven by the corporate center

Late Entrants (2)

Emerging countries challenging India

Global trends in BPO

Drivers for customers are moving away from “pure price play” to:

Security Intellectual property protection Requisite expertise availability Savings and benefits realisation Economies of scale Technology refresh to enable growth or reduction of unit

costs enabling cost efficiencies

IT component in BPO deals to provide: One stop shop Work closely with “inhouse” IT Use of Partners

Arenas of resource leverageFive basic means of achieving R/L:Concentrating resources -- convergence and focus

on key goalsAccumulating resources -- extracting and borrowing

(as in case of latecomer)Complementing one kind of resource with another --

blending and balancingConserving resources -- recycling, co-opting and

shieldingRecovering resources from the marketplace in

shortest possible time

Arenas of resource leverage (2)

Fits case of newcomer and latecomer firms -- always stretching to achieve more with less

Consider how Ispat stretched its financial and physical resources globally

-- and always leveraged off human resources acquired with every plant acquisition

Or consider case of Pacific Century Cyberworks launching new challenger telco in HK -- entirely through R/L

R/L: A key strategy for Asia-Pacific firms

The latecomer strategy

Formulate a strategic goal: industrial development through catchupStrategize as a latecomer: overcome barriers through utilizing knowledge availableHarness latecomer industrial dynamics: The flying geese paradigmUtilize the connections available in the global economy –

Linkage, leverage, learningThink globally; use global tools and institutions (e.g MNCs; GVCs)Build domestic institutions to support linkage, leverage and learning

Taiwan’s NSEL as exemplarInnovation as management of technology diffusion How to adapt from GVCs in manufacturing to BPO?

Ingredients of success: LLL

LinkageLinks with global players --> drawn into collaborative networksAcer: links with TI (DRAMs), IBM

LeverageTechnology leverage from links with advanced firmsLong-term focus: Capabilities enhancementSecuring more from contractual link than revenues

LearningRepeated application of linkage and leverageEnhancement of capabilitiesRapid catchup as goal

Summary: BPO and GVCs

China becoming the “factory of the world”India becoming the “back-office of the world”Manufacturing outsourcing is the vehicle for ChinaBPO is the vehicle for IndiaCreation of GVCs is the driver in each case

Latecomer firms like Infosys are taking advantage of these trends and building business models to capture the opportunities

They link to advanced firms, leverage knowledge from them, and repeat this process over and over, each time broadening the functional responsibilities, e.g. from customer call centres to disaster recovery centres, and thus enhancing their capabilities (organizational learning)