session1 global outsourcing

8/3/2019 Session1 Global Outsourcing

1/25

5/21/2008

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

Ajay Bhalla


2/25

5/21/2008

Course Overview Session Modalities

Course guide

Assessment- P12 onwards

Global Outsourcing Award sponsored byTCS

Ajay Bhalla

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%


3/25

5/21/2008

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.


4/25

5/21/2008

Sessions

Ajay Bhalla

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


5/25

5/21/2008

Ajay Bhalla

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)

Ajay Bhalla

Divergent Approaches to Outsource:Tesco vs. Nike

Intro>Definitions


6/25

5/21/2008

Ajay Bhalla

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

Ajay Bhalla


7/25

5/21/2008

Ajay Bhalla

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)

Ajay Bhalla

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


8/25

5/21/2008

Ajay Bhalla

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

Ajay Bhalla

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


9/25

5/21/2008

Offshoring and Outsourcing also carry risks

Ajay Bhalla

Consider, 3 examples

Ajay Bhalla

When OS, managers also need to be aware offollowing disadvantages1. .

2. .

3. .

4. .

5. .

Intro>Definitions>Drivers>Disadv


10/25

5/21/2008

Ajay Bhalla

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


11/25

5/21/2008

In terms of providing functions, different implementationoptions have to be consideredImplementation options

Offshoring enables firms to alter governance modes.Consider a German engineering firm


12/25

5/21/2008

When offshoring, many factors could

influence choice of governance mode

Ajay Bhalla

Global Service Centre

Global Technical Support

Global Delivery Centre

India Development Centre

Microsoft Research


13/25

5/21/2008

Ajay Bhalla

Ajay Bhalla


14/25

5/21/2008

What factors could influence choice ofvarious offshoring models?

Ajay Bhalla

Break- 10 minutes What are the advantages of in-sourcing vs.

outsourcing

Discuss in your Groups and write down 3key points for each.

Ajay Bhalla


15/25

5/21/2008

Ajay Bhalla

Theoretical influences on Outsourcing

Delivered to MBA Program, 2006

Ajay Bhalla

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


16/25

5/21/2008

Ajay Bhalla

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)

Ajay Bhalla

TCE specifies under which conditions firmsshould manage a particular exchange within

their organizational boundary as well as theconditions under which it should be outsourced.


17/25

5/21/2008

Ajay Bhalla

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


18/25

5/21/2008

Ajay Bhalla

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..

Ajay Bhalla

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


19/25

5/21/2008

Ajay Bhalla

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


20/25

5/21/2008

Ajay Bhalla

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)

Ajay Bhalla

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)


21/25

5/21/2008

Ajay Bhalla

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

Ajay Bhalla

Outsourcing and its Effect on Firm PerformanceCore vs. Peripheral provides some clarity

PeripheralOutsourcingIntensity (+)

EnvironmentalDynamism

Strategy

CoreOutsourcingIntensity (-)

FirmPerformance


22/25

5/21/2008

Ajay Bhalla




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




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.


23/25

5/21/2008

Ajay Bhalla

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

Ajay Bhalla

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.


24/25

5/21/2008

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.

Ajay Bhalla

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.

Ajay Bhalla


25/25

5/21/2008

Key Session Takeaways1...

2..

3..

4..

5..

Ajay Bhalla

session1 global outsourcing

Documents