OVERVIEW OF THE GLOBAL SOURCING MARKETPLACE

IS SOURCINGUNIT 1

DEFINITIONS

• Sourcing – the act through which work is contracted or delegated to an external or internal entity that could be physically located anywhere. Sourcing encompasses various in-sourcing and outsourcing arrangements such as offshore outsourcing, captive offshoring, nearshoring and onshoring.

• Outsourcing – contracting with a third service provider for the mgmt and completion of a certain amount of work, for a specified amount of time, cost, and level of service. • Backsourcing – bringing previously O/Sed

activities back in-house

DEFINITIONS

• Offshoring – relocation of organizational activities to a wholly owned subsidiary or an independent service provider in another country. • Captive – if the center is owned by the org• Offshore outsourcing – work done by independent third

party

• Nearshoring – work relocated to a neighboring country

Insource Outsource

Onshore

Offshore

THE DECISION

• First decide whether to outsource or insource• Decision based on:• Characteristics of that activity• How that activity relates to other functions in the company

• Then decide location• Decision based on:• Market conditions• Extra mgmt time needed to manage relationships

WHY COMPANIES OUTSOURCE

• Intuition• Fear• Imitation• Frustration• Avoid regulatory constraints• Costs (HR is largest in many cases)

• In poor financial condition• Have poor IT functions• IT functions with little org status

REASONS TO OUTSOURCE

• 1. Reduce IT costs• 2. Improve technology or technical service• 3. Jump on the bandwagon; outsourcing perceived as a viable, irreversible trend within

their industry• 4. Focus business on core competencies; IT perceived as non-core• 5. Restructure IT budgets from capital budgets to fixed operating budgets• 6. Play good corporate citizen; IT managers perceive an outsourcing evaluation

demonstrates their willingness to subordinate the good of IT department for the good of the overall business.

• 7. Focus internal IT staff on critical IT activities, such as development, while outsourcing more stable and predictable IT activities, such as data center operations.

• 8. Prove efficiency; invite bids to receive a free benchmark• 9. Eliminate an IT burden; assume a vendor will solve problematic IT function(s)• 10. Downsizing—the entire company is pressured to reduce headcount• 11. Preemptive move by IT managers to expose exaggerated claims made to senior

executives by consultants or vendors• 12. Improve cost controls• 13. Forced market testing by the UK government• 14. Justify new IT resources by bundling capital budget requests with "proof" that

vendors cannot do it cheaper• 15. Facilitate mergers and acquisitions—vendors are perceived as experts in merging

data centers quickly(Lacity and Willcocks, 1998)

OUTSOURCING - BENEFITS

1. Is a well-proven process2. Achieves improvements that cannot be attained by internal

group3. Improves business and IT processes4. Offers cost-mgmt controls not available with internal IT units5. Increased certainty over costs6. Improves quality of service7. Enables a company to keep pace with its competitors8. Allows a focus on core competencies and revenue generation9. Valid ways of achieving required cultural change10. Introduces qualities not found in internal IT depts11. Offers flexibility in staff quantity12. Provides access to specialist skills and knowledge

(Aalders, 2001)

OUTSOURCING - DISADVANTAGES

1. Lack of control (timing, quality)2. Uncertainty3. Loss of critical skills, ability to learn4. Overdependence 5. Security / lack of data confidentiality6. Loss of knowledge to vendor

1. Hurt competitiveness

7. Fear and employee resistance due to potential loss of job, etc

8. Table 1.3- OKW book

OUTSOURCING STATISTICS

• http://statisticbrain.com/outsourcing-statistics-by-country/

DECIDING WHAT TO OUTSOURCE

• Value creation• Organizations create value and increase shareholder

value based on a product or service that is core to the business.

• IP, knowledge, skills, etc• Systems in place to provide support

(Tadelis, 2007)

ACTIVITY COMPONENTS

• Activities should be viewed by considering the function that it performs or by considering what inputs are used to create it and how these inputs need to be managed.

• The make or buy decision• What can be purchased vs. managing and optimizing

• Adapted from Tadelis, 2007

WHAT TO OUTSOURCE

• Not core

• R&D? • App development? • Mfg?• Sales? • ????

REASONS TO OFFSHORE

• Foreign labor costs• Other low costs• Ex: Ireland has 43% standard tax rate; 10% for BPOs• Ex: Jamaica: 34%, 0%

• Global strategy• Regulatory constraints (to get around local laws)• Other reasons, similar to O/S

OFFSHORING PROBLEMS

• Geographical distance• Language and cultural distance• Difficult to quantify cultural distance

• Regulatory and policy distance• Can be beneficial (incentives from foreign govts)

• Legal distance• China - IP

IN-HOUSE SOURCING

• For complicated activities that cannot be carefully specified advance –or-• Need for flexibility that cannot be anticipated or

described in a contract

WHY IN-HOUSE?

• A core-related activity• Peripheral activity that may require the transfer

of company-specific knowledge

PROS AND CONS OF IN-HOUSE

• Pros:• No need for externally enforced contracts• Flexible process: “own” the process itself• Keep broad set of expertise and IP

• Cons• Can’t use the market mechanism• Internal production lacks cost incentives• Have more clutter and less focus

FOUR ARCHETYPES OF INSOURCING

1. Senior execs enable internal IT managers to cut costs

2. IT managers terminate failing outsourcing contracts

3. IT managers defend insourcing4. Senior execs confirm the value of IT

(Hirschheim/Lacity, 2000)

TIPS FOR SUCCESS

• Outsource for good reasons• Don’t outsource problems

• Timing • Perform due diligence

• Well-defined contract• Accountability• Every contractible action has an accountability entity

• Life cycle• Long-term contract for high up-front costs• L-T contracts require changes, etc

• Good vendor selection

THE FUTURE OF O/S & OFFSHORING

• Spending continue to rise• Developing countries beyond India become more important• Large companies look more at ASP• BPO will overshadow IT O/S• HR, procurement, call centers, legal, etc

• New value propositions• Ex: Network consol similar to data center consols

• Selective sourcing continues to be a trend• Clients control driving and designing deals• >80% of contracts written today by clients

Willcocks and Lacity, 2006

THE FUTURE OF O/S & OFFSHORING

• Clients will invest more in contract mgmt *• O/S will help in-sourcing• Ex: concepts of SLAs in use in-house

• O/S failures continue• 30% of selective, 50% large

• Clients will move from “hype and fear” to maturity• Stages: hype costs quality strategy