software outsourcing: why, when, what

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Software Outsourcing www.softheme.com Why, When, What

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This presentation is an overview of the software outsourcing that focuses on the question of why, when and what to outsource.

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Page 1: Software Outsourcing: Why, When, What

Software Outsourcing

www.softheme.com

Why, When, What

Page 2: Software Outsourcing: Why, When, What

www.softheme.com Outsourcing to Softheme™ Software Outsourcing: Why, When, What

Table of Contents

Preface

Historical Background

Why Do Firms Outsource?

When to Outsource?

What to Do and Not Do

Factors that Support Outsourcing

The Risks of Outsourcing

Core Competencies and Critical Success Factors

Outsourcing Trends and Future Projections

Page 3: Software Outsourcing: Why, When, What

www.softheme.com Outsourcing to Softheme™ Software Outsourcing: Why, When, What

Today’s business environmental, organizational, and technological factorsrequire businesses to operate efficiently and effectively in order to be competitive.Toward those goals, managers employ many strategies to improve productivity,including standardization, automation, and business process reengineering. Additionally,they restructure the business organizations to be lean and flat so that they can becomeflexible in responding quickly to changes in environment and customers’ needs.

Outsourcing is another valuable strategy managers use to achieve the above goals.

Preface

Page 4: Software Outsourcing: Why, When, What

www.softheme.com Outsourcing to Softheme™ Software Outsourcing: Why, When, What

Historical Background

The predominant supply chain model for severaldecades was vertically integrated. Each member of a supply chainwas considered to be part of the same industry. All the ancillaryactivities that support the supply chain directly or indirectly wereincluded.

Steadily, products became complex and the scale ofoperations increased and management of entire operations within

one corporation became less feasible. This resulted in the increasingly popular use ofoutsourcing and has resulted in vertical disintegration of corporations and supply chains. Astravel and communication became easier in the 1970s and 1980s, as trade restrictionsincreased, and as the gap in wages between developed and developing countries increased,outsourcing began to move off-shore.

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Historical Background

In 2002, for instance, India had 90% of U.S. organizations’ informationtechnology (IT) off-shore business.

China looms as India’s biggest competitor, although some considerthe two as noncomparable at this time. Other countries considered tobe attractive as off-shore outsourcing sites include Malaysia, theCzech Republic, Singapore, the Philippines, Brazil, Canada, Chile,Poland, Hungary, Russia, and Vietnam.

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Historical Background

In the age of the Internet and World Wide Web, a company’s locationhardly matters. In the past, the educated and skilled labor from low-cost countriesimmigrated to the U.S. During the last decade, faster communications andimproved information allow companies to easily send information oriented workto any location on the globe. Ultimately, countries with low-paid but well-educatedworkers will benefit greatly. However, the country of origin of the outsourcing alsobenefits.

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Why Do Firms Outsource?Companies outsource functions for reasons that are organizationally

driven, improvement driven, financially driven, revenue driven, or cost driven.Outsourcing can be viewed as a component of corporate and industry internationalexpansion and restructuring.

Five horizons of the global industry value chain

Market entry

Product specialization

Value chain disaggregation

Value chain reengineering

New market creation

Page 8: Software Outsourcing: Why, When, What

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Why Do Firms Outsource?

Product specialization

Market entry

Entering a country for purposes of market expansion

Product specialization

Specialization takes place in different locations. Eachlocation may engage in final goods trade with each other

Value chain disaggregation

Product components are manufactured in a certain locationand assembled elsewhere

Value chain reengineering

Reengineering processes to capture additional advantages from production cost differentials

New market creation

New market segments are penetrated as a matter of capturingthe full value of the company’s global activities.

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When to Outsource?

Product specialization

Factors that Support Outsourcing

Characteristics of today’s outsourcing environment are many and varied. Thestrategic change to outsourcing is highly evident in the software industry. Frequent changes tosoftware especially often result in an organization turning to outsourcing as a solution. Reasonsstudied for this can be generalized to all outsourcing, and include:

The turbulent market will need corporations to be customerfocused

There are pressures on corporations to continuously develop newproduct at reduced cost

Extensive customization is enabled by IT through masscustomization

The market need can be fulfilled by flexible and adaptableorganizational structure which is possible with IT-enabled processes

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When to Outsource?

Product specialization

Factors that Support Outsourcing

Previously identified factors includetime compression, short product life cycles,strategic discontinuity, increase in knowledgeintensity, and customer-focused approach.These changes are:

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When to Outsource?

Product specialization

Factors that Support Outsourcing

Customer focus

Shrinkage in product/systems life cycle

Competition and real-time operations

Societal, political, and ethical factors3

4

1

2

Global economy

Changing workforce and job loss

Technological innovations and obsolescence

Organization structure and corporate culture

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6

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What to Outsource?

Product specialization

The Risks of Outsourcing

Despite the purported benefits of outsourcing and the widerange of success stories that have stimulated an unprecedented growthrate, there are potential risks as well. An outsourcing project might failbecause of poor selection of the vendor, mismanagement of theoutsourcing contract, inferior performance by the vendor, lack ofacceptance by the end consumer, or other reasons

Selection of the Vendor

Mismanagement of the Outsourcing Contract

Inferior Performance by the Vendor

Lack of Acceptance by the End Consumer

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What to Do and Not Do?

Product specialization

Core Competencies and Critical Success Factors

Decisions as to what and whether to outsource should be tied to anidentification and understanding of an organization’s core competencies andits critical success factors. Such an identification and understanding can be alengthy process. However, it is the one true way to determine whether aproject should be or should not be outsourced.

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What to Do and Not Do?

Product specialization

Core Competencies and Critical Success Factors

If a task is a both a core competency and a critical success factor, it should not be

considered for outsourcing. Such tasks are at the heart of the company.

Tasks that are core competencies but not critical success factors should be reassessed.

Those tasks which are not core competencies are the most likely candidates for outsourcing.

If an organization intends to bring an outsourced task back in-house a some future time, managers should be cautious. Once the

expertise has been released to the outsourcer, it is difficult — if not impossible — to regain

such expertise in-house.

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What to Do and Not Do?

Product specialization

Outsourcing Trends and Future Projections

Outsourcing of information technology functions

Outsourcing of pharmaceutical functions

Outsourcing of customer care functions

Outsourcing finance and accounting (F&A) functions

Outsourcing of human resource (HR) functions

Outsourcing of research and development (R&D) functions

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What to Do and Not Do?

Product specialization

Outsourcing Trends and Future Projections

Outsourcing of information technologyfunctions is a huge marketplace. IT outsourcingbegan as a cost-reduction tool, but has evolved intoa component of businesses’ overall corporatestrategies. It has grown from simple applications to amuch wider set of business functions: logistics,payroll, human resources, legal, and so forth. It hasbecome pervasive and strategic.

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What to Do and Not Do?

Product specialization

Outsourcing Trends and Future Projections

“Back-sourcing”

IT off-shoring

Web-based and e-business

outsourcing partnerships

Application service provider (ASP) industry

Growth Areas in

IT Outsourcing

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What to Do and Not Do?

Product specialization

Outsourcing Trends and Future Projections

Outsourcing of pharmaceutical functions traditionally has taken the form ofoutsourcing drug development and manufacturing to contract research organizations(CROs) and contract manufacturing organizations (CMOs).

Outsourcing of customer care functions by moving entire contact centersoff-shore has become very popular. The functions performed by customer servicecenters are more important than their location. The discrepancy between labor, realestate and infrastructure costs on-shore vs. off-shore, makes this a logical function tooutsource. Customer contact centers are a $650 billion industry (Cleveland, 2003).

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What to Do and Not Do?

Product specialization

Outsourcing Trends and Future Projections

Outsourcing of human resource (HR) functions, such aspayroll, recruitment, hiring, training, benefits management, employeeassistance programs, executive compensation, as well as health, safety,and regulatory compliance, is gaining momentum.

Outsourcing finance and accounting (F&A) functions havebeen prevalent since the beginning of business. Now, there is a growingtrend for F&A functions to be outsourced off-shore, primarily to savelabor costs.

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What to Do and Not Do?

Product specialization

Outsourcing Trends and Future Projections

Outsourcing of research and development (R&D) functions takesvarious forms. Drug companies contract with outside firms to explore newcompounds for possible testing and launching. A different form of R&Doutsourcing is used by companies such as Dell, Motorola, and Philips which buycomplete design of digital devices from Asian developers, tweak them to their ownspecifications, and attach their own brand names. Another approach is that usedby Boeing Co. which contracts with India’s HCL Technologies to co-developsoftware for everything from the navigation systems and landing gear to thecockpit controls for its upcoming 7E7 Dreamliner jet.

Page 21: Software Outsourcing: Why, When, What

Thank you!

2010 | Softheme Team | Kyiv, Ukraine | Software Outsourcing Solutions

www.softheme.com » Outsourcing to Softheme™

Questions? → [email protected]