outsourcing trends and issues building and leveraging for your own career and business

Outsourcing trends and issues

Building and leveraging for your own career and business

Outsourcing topics

• Outsourcing definitions and frameworks– Thomas Friedman based

• Outsourced R and D and the research findings

• Seven myths of outsourcing

• Latest trends and how you can benefit

Creative destruction

• Creative destruction, introduced in 1942 by the economist Joseph Schumpeter, describes the process of transformation that accompanies radical innovation.

• In Schumpeter's vision of capitalism, innovative entry by entrepreneurs was the force that sustained long-term economic growth, even as it destroyed the value of established companies that enjoyed some degree of monopoly power.

Per Wikipedia-October, 2007

Examples

• Watch industry in Switzerland was virtually destroyed by low cost watches from the US after WW2

• Horse and buggy industry was replaced with automobiles in the early 1900s

• Large gas guzzlers are becoming obsolete in the face of hybrids and other economical vehicles

The key macro-economic principle

• Must keep productivity growing in order to keep the economy growing– Productivity comes from innovation and

technological change– Requires individuals to re-tool themselves as

technologies change and become more sophisticated

Thomas Friedman

First published in 2005 with updates in 2006 and 2007

“Friedman just scratched the surface”

Key flatteners per Thomas Friedman

• #1: Collapse of Berlin Wall-11/'89: The event not only symbolized the end of the Cold war, it allowed people from other side of the wall to join the economic mainstream. (11/09/1989)

• #2: Netscape: Netscape and the Web broadened the audience for the Internet from its roots as a communications medium used primarily by 'early adopters and geeks' to something that made the Internet accessible to everyone from five-year-olds to eighty-five-year olds. (8/9/1995)

• #3: Workflow software: The ability of machines to talk to other machines with no humans involved. Friedman believes these first three forces have become a “crude foundation of a whole new global platform for collaboration.”

• #4: Open sourcing: Communities uploading and collaborating on online projects. Examples include open source software, blogs, and Wikipedia. Friedman considers the phenomenon "the most disruptive force of all."

• #5: Outsourcing: Friedman argues that outsourcing has allowed companies to split service and manufacturing activities into components, with each component performed in most efficient, cost-effective way.

Key flatteners per Thomas Friedman-continued

• #6: Offshoring: Manufacturing's version of outsourcing.

• #7: Supply chaining: Friedman compares the modern retail supply chain to a river, and points to Wal-mart as the best example of a company using technology to streamline item sales, distribution, and shipping.

• #8: In-sourcing: Friedman uses UPS as a prime example for in-sourcing, in which the company's employees perform services--beyond shipping--for another company. For example, UPS itself repairs Toshiba computers on behalf of Toshiba. The work is done at the UPS hub, by UPS employees.

• #9: In-forming: Google and other search engines are the prime example. "Never before in the history of the planet have so many people-on their own-had the ability to find so much information about so many things and about so many other people", writes Friedman.

• #10: "The Steroids": Personal digital devices like mobile phones, iPods, personal digital assistants, instant messaging, and voice over IP or VOIP.

Three convergences per Thomas Friedman

• CONVERGENCE I: Up until the year 2000 the ten flatteners were semi-independent from one another. However around the year 2000, all of the flatteners converged with one another. This convergence could be compared to complementary goods, in that each flattener enhanced all of the other flatteners; the more one flattener developed, the more the global playing field was leveled.

• CONVERGENCE II: After the emergence of the ten flatteners, a new platform had to be built in order to do business. Businesses had to begin collaborating horizontally as opposed to vertically (top down method of collaboration where innovation comes from the top). Horizontalization meant that companies and people had to start collaborating with other departments or companies in order to add value creation or innovation. However, the convergence occurred when horizontalization and the ten flatteners began to reinforce each other.

• CONVERGENCE III: After the fall of the Berlin Wall, countries such as: India, China, Russia, Eastern Europe, Latin America, and Central Asia that followed a Soviet economic plan began to open up their economies to the world. When these new players converged with the rest of the Global playing field, they added new brain power to that field. Therefore, the convergence enhanced horizontal collaboration across the globe. In turn, this convergence was the most important force in shaping politics and economics in the early twenty-first century.

The new middleper Thomas Friedman

• The New Middle “The new middle refers to American jobs that cannot be 'outsourced, automated, or digitized.' These jobs include physicians, surgeons, dentists, orthodontists, trial lawyers, pharmacists, and teachers. These professionals have a lot of job security.”– Counterpoint 1: These are becoming saturated as well. Many law

students today cant find good paying jobs when they graduate. This is becoming a huge dis-satisfier in law schools

– Counterpoint 2: Some new robotic technologies are allowing surgery to be automated or conducted remotely

– Counterpoint 3: Tele-presence technologies allow for teaching to be conducted remotely. Private tutoring based in India is becoming very popular and is conducted over the internet

– Counterpoint 4: Pharma technicians are doing much of the work formerly done by Pharmacists at a fraction of the cost

The un-flat worldPer Thomas Friedman

• The Un-flat World

• Friedman acknowledges there are some 3 billion people in places like rural India, rural China, and Africa who still live in an "unflattened" world.

Further examples of outsourcing

• McDonalds’ drive-throughs

• Robotic surgery

• Cosmetic surgeries in India and SE Asia

• Paralegal work in low cost countries (mostly for low cost legal research)

• Outsourced teaching

• Start-ups leveraging outsourcing

Outsourced war

• Blackwater is under contract with DoD and State Department to deliver “personal security details” in Iraq

• Was also hired to maintain law and order in New Orleans after Katrina

• Originally they were privately contracted Americans, lately mercenaries have been recruited from other (South American) countries

The Globalization of Industrial Research & Development

Chris W. Grevesen, PhD

DeVry University,

Fariborz Damanpour, PhD

Rutgers UniversityPresented by Mark Werwath, PhD

Northwestern University

Globalization implications

• Globalization has become identified with a number of trends, most of which have developed since World War II. These include greater international movement of commodities, money, information, and people; and the development of technology, organizations, legal systems, and infrastructures to allow this movement. More specifically, globalization refers to:

– An increase in international trade at a faster rate than the growth in the world economy

– Increase in international flow of capital including foreign direct investment– Greater trans-border data flow, using such technologies such as the Internet,

Communication satellites and telephony – Greater international cultural exchange, for example through the export of

Hollywood and Bollywood movies – Reduction in global cultural diversity through hybridization, Westernization, and

Americanization of cultures

Reference: www. en.wikipedia.org

Innovation at risk

• In a recent article in Newsfactor.com, Lou Hirsh comments that “Tough economic times have forced major tech firms to slash enterprise research and development spending, primarily because their larger customers are more focused on reducing costs than on exploring the latest cutting-edge innovation “.

Success

• “To succeed in an environment characterized by intense competition and rapid technological progress, organizations must continuously improve their ability to innovate”– Prahalad and Hamel, 1990

Definition of innovation

• Zaltman, Duncan and Holbek (1973), for example, define an innovation as "any idea, practice or material artifact perceived to be new by the relevant unit of adoption."

Innovation

• “Organizations become better innovators both by augmenting their existing core competencies and by developing new capabilities that can provide them with sustainable competitive advantage”– Shan and Song, 1997– Teece, Pisano and Shuen, 1997

A neglected area of study

• “Little attention has been paid to the potential contribution foreign based R&D could make to the multi-national firm’s competitive advantage”

• “Little is known about the payoffs of spatial decentralization of R&D activities”– Cheng and Bolon, 1993

• “Companies have operated decentralized multinational R&D operations largely with their eyes closed”– Howells, 1995

Inward Direct Investment in R&D

• Foreign firms spent $19.7 billion on R&D in the US

• More than 115,700 U.S. R&D workers are employed by foreign firms

• Foreign multinationals owned 715 R&D centers in the U.S. in ’98

• Ref: Dalton, D.H., Serapio, M.G. & Yoshida, P.G. 1999. Globalizing industrial research and development. U.S. Department of Commerce: Office of Technology Policy.

• National Science Foundation (1998) Science and Engineering Indicators 1998. Washington, D.C.: U.S. Government Printing Office.

Outward Direct Investment in R&D

• U.S. firms spent $14.1 billion on R&D abroad

• American businesses performed 11% of their R&D offshore

• There are 186 U.S. R&D sites overseas• Ref: Dalton, D.H., Serapio, M.G. & Yoshida, P.G. 1999. Globalizing

industrial research and development. U.S. Department of Commerce: Office of Technology Policy.


Motives for Overseas R&D

• Foreign-market- targeting motives

• Foreign- technology-sourcing motives

• Competitive-interaction motives

• Cost effectiveness/labor rate differential

• Industrial offset requirements by foreign government contracts

• Knowledge of local requirements

Findings from internationalization research

• Internationalization of R&D is usually associated with large MNEs (Casson and Singh, 1993)

• Firms employing less than 1000 employees are responsible for less than 4% of all overseas R&D

• US Based companies with employee bases greater than 5000 employees represented 80% of all overseas R&D In 1996, just three industries represented 60% of all R&D expenditures in the US by foreign based companies: Pharma, chemical, and electronics/telecom

• Ref: Dalton, D.H., Serapio, M.G. & Yoshida, P.G. 1999. Globalizing industrial research and development. U.S. Department of Commerce: Office of Technology Policy.


Grevesen/Damanpour Study Methodology

• 171 companies (N. American, European and Japanese MNEs) were surveyed with employee counts greater than 1000 and in the following industries:– Pharmaceuticals– Industrial chemicals– Electrical, electronics, computer/telecom

Methodology continued

• Questionnaires sent to CEO and directed to those responsible for worldwide R&D

• Completed questionnaires received=53

• 50% of responses received from vice presidents or senior vice presidents of R&D

What R&D Executives Said

MOTIVATIONS FOR ESTABLISHINGOVERSEAS R&D (5=VERYIMPORTANT)Recruit scientific talent inforeign countries

3.95

Conduct joint researchwith foreign universities

3.90

Develop new products forforeign markets

3.52

Adapt existing productsfor foreign market

3.50

Listening post 3.36Support manufacturing 2.52Satisfy host government 2.50Cost savings 2.33Respond to rivals 2.14

What R&D Executives Said

Impediments to Conducting R&DAbroad (5=highly significant)

Coordination problems 3.41Cross-cultural problems 3.24Communication problems 3.11

Loss of scale economies 3.00Finding qualified people 2.96Prohibitive costs 2.82Risk of knowledge leaks 1.96

R&D Globalization and Innovation

• Little is known about the performance implications of R&D globalization

• Can a company under- or over-globalize R&D?

• What is the optimal level of R&D globalization?

• How can theory help us to predict the globalization-performance relationship?

Knowledge transfer risks

• “R&D is an intensely collaborative activity, characterized by frequent knowledge transfers. Much of the knowledge and organizational routines are tacit in nature”– Damanpour, 2003

• “Because such knowledge cannot be easily codified, it cannot be transferred intact across physical space without loss of content”– Globerman, 1997

Costs of doing R&D across national borders

• “The geographic decentralization of R&D is not costless”– Gassman and von Zedwitz, 1999

• “There are industry specific minimum efficient scale investments associated with creating a new R&D facility as opposed to expanding an existing facility”– Hewitt, 1980; Kuemmerle, 1998, et al

International diversification

• The relationship between a firm’s international diversification and performance is an inverse U relationship and is moderated by product diversification

•Hitt, M.A., Hoskisson, R.E., and Kim, H. 1997

Results of empirical study

• Single business firms are frequently unable to capture the benefits of international diversification. In these firms, the relationship between international diversification and performance was found to be negative– It is theorized that executives of single business firms

rarely have the experience necessary to manage the complexity caused by international diversification

– Results indicate that continual international diversification will eventually result in a positive return


More results of empirical study

• Relationship between international diversification and performance in highly diversified firms was found to be largely positive– This leveled off only for highly diversified firms

– Allows firms with high product and international diversification to achieve the transnational capability that simultaneously accomplishes global coordination and national felxibility as theorized by Bartless and Ghoshal (1989)


Conclusions from empirical study

• International diversification contributes to higher innovation– Provides larger markets and greater revenues

that enable re-investment in innovation

• Product diversification often leads to a focus on financial controls over innovation and does not contribute to higher innovation rates

Lessons to learn on internationalization of R&D

• From research:– Enter internationalization of R and D with caution, especially

single product firms. Don’t take internationalization too far as the positive effects are mitigated

• From personal experience:– Manage the communications and project planning aspects carefully– Hold all design centers to a high standard of process compliance

quality, and consistency– Formalize and document agreements and project plans. Invest in

face to face transitions and planning sessions– Don’t underestimate the effect of cultural barriers and language

issues– Complement this approach with proper portfolio mgmt

Seven myths of outsourcing

The Journal Report

Pranish Puranam

June 16, 2007


• Myth 1: We can have it all• Typical reasons to outsource

– Cost effectiveness or efficiency– Effectiveness or improvement in service– Flexibility or ability to increase and decrease

production rapidly

• Don’t expect all three in the same outsourcing project!!!

• Answer: Prioritize!!!


• Myth 2: Outsourcing services is like buying commodities– Most managers believe that outsourcing is a

frictionless market: with no or little transaction costs

– Finding a vendor, negotiating a contract, expenses from moving the operation and keeping it in sync with the rest of the company

– Costs for ongoing management and oversight


• Myth 3: We need an ironclad contract– Outsourcing is not a one time transaction– It is an exchange that evolves over time– A protracted contracting process can sour the

relationship


• Myth 4: Contracts don’t matter– Sometimes companies rush into an outsourcing

deal – A MOU or letter of intent is not a good

substitute for a contract– They are often as elaborate as contracts– They are usually replaced with contracts in the

short term


• Myth 5: Vendors are insurance companies– Common perception is that vendors should bear

greater liability for failure than regular, in-house employees

– Unreasonable for the vendor to take on unlimited liability or unlimited indemnities

– Outsourcing does not relieve you of your obligation to deliver a quality product


• Myth 6: Its not our headache anymore– Sometimes the client company thinks they can

abdicate control to their vendor– Outsourcing does not mean that the process is

not your headache– If you lose all knowledge of the process you are

outsourcing, you cant investigate new vendors and you cant evaluate the vendors you already have


• Myth 7: Our first failure should be our last attempt– Very few companies achieve or report great

success in their first outsourcing project– There is significant learning in both directions:

client and vendor– Over time, the communication and management

processes become established

Recent trends in outsourcing

• Total contract values for US initiated outsourcing is down 16% in 3Q07

• Growth in outsourcing deals by region for 2007 (YOY):– Europe new scope is up 36%– Asia/Pacific new scope is up 72%– US new scope is DOWN 50%

• One explanation: Weakness in the US Dollar– Suggestion: This is an opportunity for US based firms!

Source: Stepahnie Overby, PCWorld magazine, October, 2007

•Will the large industrial corporation dominate the twenty-first century as it did the twentieth?

Maybe not. Business will be carried out autonomously by independent contractors connected through personal computers and electronic networks.

• These electronically connected freelancers -- e-lancers -- would join together into fluid and temporary networks to produce and sell goods and services. When the job is done -- after a day, a month, a year -- the network would dissolve and its members would again become independent agents.

Blue Ocean confidential and proprietary

Free-lancing is taking off!

• Freelancing sites, in the last 10 years, allow buyers and sellers to link up on services and development– Web development, software development, design are

very commonly free-lanced offerings• Several websites support freelancing:

– E-lance.com– Freelance.com– Rentaguru.com

• Currently freelancing sites are a $500Million industry. It will be a $2Billion industry by 2015

How is free-lancing different?

• As a free-lancer, you are running your own business, you are not an employee, but a contractor working with clients

• Your intellectual property belongs to you• You work on the projects you choose and at the

pay you negotiate for that specific project– Your loading is determined by you

• Your clients can be all over the world and you interact with them through email and websites such as elance.com

Two views

• As buyer: Freelancing lets you be the initiator. Create your own projects and get them built at low cost and usually with high quality– Be your own boss– Start your own technology based business!

• As seller: Freelancing lets you be a more mobile employee– Working for multiple clients on your own terms

• Both of these views require that you establish your own “personal brand”. What do you bring to the party?

Steps to freelancing

• Develop your network (start by building up your linked-in network)

• Develop your own brand (experience, IP, expertise, network of satisfied “clients”)

• Learn who freelances now in your domain and how they got started

• Develop a business plan• Get started now• Avoid conflicts of interest with your current

employer

Why should I freelance now??

• Weakening US dollar• Baby boomers started to retire in May 2007 at the rate of

10,000 per day-technologists leaving the job• Tech boom-let happening now

– Cisco and other world class techs like Apple and Microsoft are doing very well

– Internet based startups are booming now (mini-bubble?)– Web 2.0 is a technological shift that enables growth

• Shortage of skilled resources in the US• Increased prices overseas-some bad experiences• With downsizing-you may have to freelance anyways

outsourcing trends and issues building and leveraging for your own career and business

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