Strategic Management Report on Outsourcing

Group 08

STRATEGIC MANAGEMENT REPORT ON OUTSOURCING

Section B, Group 8 AMAN SINGH: 066 ANUJ KHEMKA: 075 GESU MITTAL: 085 ISHA NAG: 086 KARAN MALHOTRA: 090 SHRUTI PRAKASH: 120

Strategic Management Report on Outsourcing

Group 08

Contents
Contents .................................................................................................................................................. 2 Acknowledgment .................................................................................................................................... 4 Part 1: Literature Review on Outsourcing .............................................................................................. 5 1. 1.1. 1.2. 1.3. Research Paper – 1: Time to rethink Off-shoring ........................................................................... 6 Introduction ................................................................................................................................ 6 Off-shoring .................................................................................................................................. 6 The Problem ................................................................................................................................ 6

Oil Prices ............................................................................................................................................. 6 Wage Inflation..................................................................................................................................... 7 Falling Dollar ....................................................................................................................................... 7 1.4. 1.5. 2. 2.1. 2.2. 2.3. 2.4. Example ....................................................................................................................................... 7 Conclusion ................................................................................................................................... 7 Research Paper – 2: Rethinking the model for Off-shoring services .............................................. 8 Introduction ................................................................................................................................ 8 Outsourcing/Off-shoring and the problem ................................................................................. 8 Solution ....................................................................................................................................... 9 Conclusion ................................................................................................................................... 9

PART 2: Analysis .................................................................................................................................... 10 3. 4. Introduction .................................................................................................................................. 10 Putting things in perspective ........................................................................................................ 10 4.1. Keep in house ............................................................................................................................. 10 4.2. Third party outsourcing ............................................................................................................. 10 5. 6. 7. Guideline to decide on process ownership and location .............................................................. 11 Understanding the value of outsourcing ...................................................................................... 13 Benefits of outsourcing ................................................................................................................. 14 7.1. 7.2. 8. Cost benefits ......................................................................................................................... 14 Thinking beyond costs........................................................................................................... 14

Location Selection ......................................................................................................................... 16 8.1. 8.2. Characteristics ....................................................................................................................... 16 Factors for selection.............................................................................................................. 16

9.

Vendor Selection ........................................................................................................................... 18 9.1. Choice of Model .................................................................................................................... 18

9.1.1 One Stop Shop...................................................................................................................... 18

.............................4............................................ 11............................................................. Best of Breed ........................... 10............ Causes of failure and mitigation levers ..........................................................................................................................................................................3.................................................... 20 GE-Genpact ......... 23 Deals that failed .........................................Strategic Management Report on Outsourcing Group 08 9......................... 20 HSBC . 10.......5....................................... 10.........2... 19 10........2.............. 23 10................................................... 22 Some other examples ...........1.........1.............................................................................................. 21 ABN AMRO ............. 10......................................................................................... 24 ......................................................................................................... Case Examples ....

which we are sure. we learnt a lot from him.Strategic Management Report on Outsourcing Group 08 Acknowledgment We as a group take this opportunity with much pleasure to thank all the people who have helped us through the course of this term paper report. . will be useful in different stages of our life. help. for giving this term paper topic to us and his continued guidance. Nandakumar. Prof. Apart from the subject of our term paper. We sincerely thank our Strategic Management teacher. motivation and encouragement throughout the course of this paper.

. learning and solutions suggested by our group in the area of outsourcing and off-shoring. Both manufactured goods and services are concerned and the issues discussed are the current challenges in outsourcing businesses.Strategic Management Report on Outsourcing Group 08 Part 1: Literature Review on Outsourcing In this section we have presented the findings.

falling dollar and rising wages in developing countries has questioned the success of offshoring. India and Philippines were preferred destination for services whereas China and Malaysia have become hubs for manufacturing goods. On one side it inflates the prices of raw material procured for the manufacture of goods and on the other hand it further increased the final goods exported to the destined country. Introduction In the last decade we have seen an increasing trend towards off-shoring.Ajay Goel.3. Off-shoring Off-shoring has not been a recent phenomenon and now has existence of several decades. . With this transportation cost has risen exorbitantly and as a result Cost of Shipping has increased by three times. 1. Since 2003 oil has risen from $20 to way above $100 per barrel and touched an ever high of $147. Thus. Research Paper – 1: Time to rethink Off-shoring Research Paper By . Many of the developed countries such as USA and European nations have off-shored product development and services to developing countries such as China. As of now transportation cost of one ton of iron import from Brazil to China costs around $100 which is more than the mineral itself. The primary reason is the availability of cheap labour in countries such as China and Malaysia.2. these countries also provide stable political environment and form a perfect combination to become manufacturing hub of the world. Malaysia. For the last ten to fifteen years off-shoring phenomenon has been successful but the recent soaring prices of oil. the story looks good so far but few events in the recent past have made supply chain managers to rethink in this direction. Many of Wal-Mart products are manufactured or obtained from China which sets the stage for low prices in the stores of Wal-Mart. The Problem Oil Prices – In the recent past there has been turmoil in the market because of rising oil prices. Nazgol Moussavi. 1. Growth and success of Wal-Mart is quite linked to the concept of off-shoring. India and Philippines. Srivatsan (McKinsey Research Paper) 1. China is one of the major importers of iron which is one of the main components for manufacturing.1. Secondly. A lot of production of manufactured goods has transmitted from United States to Asian countries in the last few decades.Strategic Management Report on Outsourcing Group 08 1. we can gauge that how burgeoning is the problem of rising oil prices. However. and Vats N. This increased transportation cost is like a double edge sword.

A worker which was paid $1740 in 2003 is paid $4140 in 2008. Earlier if we were able to save $100 then today we will be able to save only $45 because of wage inflation. This $36 also includes if there is any hidden cost is associated with it. 1.4. inventory. On an average wage inflation in China stays around 19%. It is time to re-evaluate that whether such production will be beneficial in neighbouring countries or in the home country itself or in the Asian countries.Strategic Management Report on Outsourcing Group 08 Wage Inflation – With the development in Asian countries wages have also increased accordingly. Similarly freight costs have risen by a huge amount and it will not be beneficial to off-shore production of server in Asian countries. Thus. In 2003. 1. it appears that future of off-shoring in manufacturing goods seems to be doubtful. the impact of high transportation and wage inflation is further heightened on US. . At one point of time wages in China were half of that in Mexico but now this percentage has increased to around 88%. On the other hand it stays around 3% in the United States itself. Also with this high wage inflation wage gap between Mexico and China is decreasing at a rapid rate. product returns. Conclusion From the above changes. production of such server had 60% labour cost advantage. There is a need to rethink the strategy. as of now. If we take labour savings as value of $100 then a further $36 of this cost will be utilized in freight. Current economic conditions are undermining supply chain advantage.5. Falling Dollar – With the weaker dollar. Thus if this scenario remains as such then advantages of off-shoring on manufactured goods in Asian countries will dwindle over time. $16 extra burden was created overall. But if we follow the entire procedure now then we will realize that earlier $64 savings are no longer retained as this value will turn out negative. and shipping charges. Example As per a study conducted by research paper comparison of landed cost of server in United States from China and cost of home produced same quality server was done. overall $64 will be saved in this process.

currency and labor risk this decision was taken. a Paris based company was looking forward to off-shore 2000 specialized. near-shored 300 jobs each to Romania & Egypt and rest of the jobs were off-shored to India. Growth in this industry has been phenomenal but there are few drawbacks attached to this growth in the future. If any of the problems such as political risk. Secondly. .Strategic Management Report on Outsourcing Group 08 2. Introduction Outsourcing and off-shoring industry started as a small scale industry few decades ago. As a result company kept 100 jobs in France itself. To limit its geographic. Most of the outsourcing and off-shoring industry is catered by three countries mainly India. Thus too much reliance on three countries only is not good for the world and hence need for diversification is high. Thus outsourcing or off-shoring must take this increased pool of talent into consideration. Availability of high-skilled people and cheap labour is one of the primary reasons for such high outsourcing business in these three countries. Based on a research it has been found out that India. surfaces in these countries then multi-fold negative consequences will be seen worldwide.2. Outsourcing/Off-shoring and the problem Outsourcing and off-shoring services are standing on a stage where the world-wide audience is changing dynamically. Research Paper – 2: Rethinking the model for Off-shoring services Research Paper By – Tor Mesey. By doing so this company significantly reduced its overall risk. Outsourcing or off-shoring should not be restricted only to back end work but other parallel activities such as R&D etc must be added to this portfolio. In the initial stage the company decided to off-shore it entirely to India but later on it switched its decision to limited off-shoring to India. and Off-shoring.1. These countries have surpassed that age and talent is developing at a very rapid rate. China and Philippines. For example. China and Philippines contribute to 70% of offshoring. But as these sectors are maturing more challenges are emerging for Outsourcing. In the few decades a turnaround took in this industry and now it has become $80 billion industry. currency risk. and Matthias Daub (McKinsey Research Paper) 2. Today this $80 billion industry has established its foundation in the areas of IT services and BPO. high-end IT jobs. outsourcing and off-shoring are still limited to activities done in the past. 2. Barnik Maitra. But as these centres cater to more and more outsourcing more the risk develops for this sector. high wage inflation etc.

2. Thus. Macroeconomic problems can be solved if these delivery centres spread themselves out in separate regions. off-shoring service providers still focus on providing transactional work to these centres.Strategic Management Report on Outsourcing Group 08 Beyond macroeconomic factors there are some microeconomic factors which are required to be dealt with. In order to solve microeconomic problems there is a need to increase the number and scale of activities in delivering centres. . Instead of relying on only these three nations they can look for other countries. 2. Thirdly. There is a need that delivery centres take steps in this regard on their own. Conclusion As the outsourcing and off-shoring is coming of age there is a need to understand the emerging challenges in this industry. providers could face few problems such as relative high cost but the longer term advantage will be more. these locations can provide better pool of talent and more expertise. However. an opportunity to talent the real potential is missing through-out off-shoring. if many companies are located in the same location then because of higher competition among firms overall input cost increases in order to recruit better talent and to provide better services. Offshore delivery centres can solve both the problems at macroeconomic level and microeconomic level. Thus. It has been found that if number of employees in an outsourcing Indian firm goes higher than 3000 then costs began to increase and performance began to deteriorate.3. Also countries like India and Malaysia now with the increasing number of better universities have better talent. Solution Offshore service providers can solve this problem by diversifying. Diversification is highly required to reduce concentration in only limited nations of the world.4. At first. They should expand their work by providing services in areas such as marketing analytics. Also there is a strong need to understand the real potential of people providing these services and accordingly advanced tasks should be given to them.

e another low cost country. which will effectively improve the overall effectiveness of the . 4. Now the process can be transferred to the new location as it is. or after undertaking an reengineering operation 4. the organization may move the process into a shared service centre (which is nothing but a centralized centre for providing the business function to all divisions of the organization) and consolidate the processes to be improved in that centre. Putting things in perspective Before we begin a deep analysis into the intricacies involved in the outsourcing and off-shoring process.2. it will be first beneficial to put things in perspective of the overall goal of the organization and then see where does the process of outsourcing lie in the overall picture. The third option is to shift the process to an offshore location i. we move to case examples and see a few detailed examples in this domain and see where they fit vis-a-vis our theoretical frameworks. Introduction Outsourcing is defined as the process of transferring a business function to another organization that has specific expertise in carrying out that function. Keep in house This is the option where the organization keeps the control of the business function in house and takes on the responsibility itself to improve the function. the organization may just undertake some business process reengineering function to improve the efficiency of the process. We end the report by talking about a few failed examples and derive our learning on the reasons that cause outsourcing deals to fail. After this section on the theoretical frameworks. thereby suggesting mitigation levers for the same 3. Keeping the process at a centralized location brings in efficiencies due to scale as well as capability. Secondly. Now there are two ways in which this can be done 4.1. Thereafter we look at the two most important steps in taking a outsourcing decision. namely location selection and vendor selection and deep dive into the steps involved in these processes. the aim of the organization is to improve a particular business function. The process that is transferred is usually a non core process and the major reason it is carried out is to save costs and to improve the quality of organizations’ products and services.Strategic Management Report on Outsourcing Group 08 PART 2: Analysis In this section we present our analysis carried out on the topic of creating value through outsourcing and discuss few detailed case studies to substantiate the model we propose henceforth. Now there are various ways in which an organization can do this. This is mainly done to bring in cost efficiencies due to the shifting of process to a low cost country. Basically. Firstly. In this the process is transferred to a third party vendor who has expertise in carrying out the process. Third party outsourcing This is the option that comes into picture if the organization relinquishes direct control over the functioning of the process. The flow of this section will start with introducing the topic of outsourcing followed by a model that we as a team have proposed to help making the outsourcing decision.

The other important parameter to decide on the “sourcing”. Outsourcing model where the control is transferred to a third party provider and interaction is done through a contract. 5. However. On the other extreme is the Off-shore model in which the ame shore process is located in a different far off country (mostly a low cost location). When we talk about the concept of outsourcing. Guideline to decide on process ownership and location In this section we will talk about a model that we as a team have proposed to decide on what should be the appropriate mode chosen for location as well as process ownership. there are two main parameters that are important in driving the decision. there is also a middle path known as Near-shore which is nothing but locating the process in a neighbouring shore location to have a greater degree of control. The other extreme is the Captive model in which the organization retains complete governance control over the centre and it is like a subsidiary of the parent organization. it is the shaded area that comes into off-shoring. There is also a third middle way possible. .Strategic Management Report on Outsourcing Group 08 process. When we talk about the concept of outsourcing or off shoring. On one extreme in the O . First factor is the “location” where the process is to be carried ou from. the purview of this domain and all the options shown form a part of the decision making orm alternatives. which is nothing but the formation of joint venture or alliances. the vendor chosen can be local (call an (called onshore outsourcing) or the vendor belong to another country (knows as offshore outsourcing) outsourcing). On out one extreme end comes the On On-shore model which means that the process has to be carried out in odel the same country as the organization. While transferring the process to a vendor.

is there a need for the organization to ourcing retain governance control over the activity. we developed a set of key questions that should be asked and critically analysed by the organization to help in the decision. The things described above are very well captured in the block diagram shown below ings below. does the company actually has the skills and the capabilities to improve the process itself.Strategic Management Report on Outsourcing Group 08 Now to decide on which of these nine possible alternatives to choose. the first question to ask is “Are the operation transferable to a foreign location?” which should address the question whether the process is core or not. On the sourcing front. the key questions to be asked is firstly. . Yes and no answers to these questions will help make the appropriate decision. ed For location parameter. The second and ” the third question are to check whether the foreign location meets the requirements to handle the function and whether there are any barriers to be overcome. and secondly.

in times economic uncertainty and recession. there is this lever of improved capability which primarily deals with the things like • • • • Superior technology and methods Ability to focus on core competencies Accessing the skills and capabilities if the vendor kills Efficient processes It is only after understanding the source of values that come out of an outsourcing relationship. For example. Understanding the value of outsourcing For successful outsourcing. it is extremely important foe organizations to understand the sources of value for outsourcing and from where the benefits are derived. On s ence the other hand in times of growth and optimism. the organization can decide in which future state it wants to be in and then formulate strategies accordingly. as shown below Beginning at the starting position. Firstly. the primary focus of an organization is to cut costs and streamline its processes. Hence stage A is the most desired end state at that time. state C shall gain precedence over others. there is the improved efficiency bucket which included things like • • • Ability to convert fixed to variable costs with the help o outsourcing of Leveraging the vendors’ economies of scale Cost efficiencies Secondly.Strategic Management Report on Outsourcing Group 08 6. In the long run of course the objective has to be to reach state C and reap full benefits of both the reap capabilities . There are basically two primary where levers which drive the value in outsourcing relationships. can a firm define its improvement objectives.

7. taking an initial cost base of 100.2. Cost benefits The most talked about benefit is considered to be the cost saving that comes as a result of the effort. Thinking beyond costs Although it is widely accepted that costs are the major advantages of outsourcing. In outsourcing.Strategic Management Report on Outsourcing Group 08 7. there are a few reasons due to which costs rise like vendor margin. Benefits of outsourcing In this section we try and dig deeper into understanding the benefits associated while undertaking outsourcing and off-shoring activities shoring activities. it is the labo r arbitrage that is the major cause of cost savings shoring. The other most important sets of benefits that are realized are . and in this section we have tried to understand it in greater detail to see what exactly the levers are that cause the advantage. This is in line what we talked about in the previous section of the report when we talked about the two dimensions of sources of value. 7. result • • • • • The cost savings are different in case of outsourcing and off off-shoring. present a case that leaving aside costs. the major cost savings come from the economies of scale and operational improvement Other than that. There are certain points that come into light as a result of our study. labour Additionally. we will like to outsourcing.1. re-engineering the process can cause further savings engineering We have tried to map all of this information through a waterfall chart and see what will be the most information likely cost base after the process has been carried out. there are a number of other benefits that are realized. taxes like and transition and governance costs In the case of off-shoring.

low intensive. improvement in all the other business parameters as well. based on seasonal fluctuations. increasing attention and improving volume on high high-end. and in addition to the usual cost benefits. it saw an India. etc Off-shore talent pool comprised of highly qualified undergraduates and graduates Access to the skills and capabilities of the vendor Just to substantiate this view point. we will look at the example of HSBC that outsourced its call centre operations from UK to India. customer satisfaction etc. new product offerings.Strategic Management Report on Outsourcing Group 08 Vendors are able to easily ramp up and reduce number of employees per process. continuous work-flow processes allows firms to flow focus on core competencies. . there was a huge improvement in all the metrics like call abandonment rate. low-end. For example. average time to answer. highvalue processes. due to increased availability of low low-cost talent Vendors pool employees acro different clients across Off-shoring of labour-intensive.

2. cost and control. the selection of the location of where to transfer the process. To typical analyze this.1. Philippines. On the other end we have what is called a “Onshore” location which is nothing but carrying out the operations in the same country or location. mainly chosen because of cost advantages and related other things. This ranks low both i terms of in cost and control and is typically a far off country. Factors for selection There are various factors that play a role while selecting a location for the purpose of outsourcing. 8. Example will be carrying out the operations in US itself by opening up a shared service centre at the same location There is also a middle way around which is called “Near-shore” where we have moderate level of cost as well as control. The first kind of location that comes into picture is called “Offshore”. as shown below . This is nothing but doing your business in a neighbouring country. or from US to places like Mexico or Canada. Malaysia. China. Examples in this category will be like operations being relocated from west to eastern Europe. Characteristics First let is look at what are the typical characteristics of different kinds of location options. Malaysia etc.Strategic Management Report on Outsourcing Group 08 8. 8. Typical examples are US and European firms relocating to processes to countries like India. This will rank high both in terms of cost and control. we look at the location options from the purview of two points. Location Selection In this section we look at the first of the most important steps in the gambit of outsourcing/ off offshoring decisions. We have tried to consolidate everything in 6 major heads.

capital country including things like power. regulatory risks. say the status of IT or BPO industry in India Talent pool is a very important aspect as it talks about the potential employment scenario in the country in terms of its number of graduates or other degrees whatever is required Infrastructure. IT. another important aspect refers to the capit as well as IT infrastructure in the . SG&A and all other expenses r. the living standard of people etc Based on these criteria. country specific risks etc Environment talks about the general government. infrastructure. real estate etc Risk refers to the uncertain scenarios in terms of data protection. several locations have become viable alternatives for outsourcing and offalternatives shoring . It will involve running processes like cost of labour.Strategic Management Report on Outsourcing Group 08 Cost refers to the total expenses involved in running the process in that country. Sector maturity refers to the capability and maturity of the sector in the country. political and economic environment in the political country. transport.

RFP process involves Clear definition of scope Binding vendor bids Clear expectation management Very detailed documentation of scope and IT requirements Length: Generally exceeds 100 pa pages After this 2-3 vendors are further selected 3 Negotiations are carried out and contracts are signed with the Final vendor that is selected • • • 9. 9. Request for information (RFI) co consist of Rough translation of value proposition No binding bid or final decisions on implementation scope Length: 5-30 pages 30 Check of vendor competencies First estimation of price ranges Based on RFI. One large contract is given to the vendor to be the total solution provider . there are different models which can be chosen.1. Choice of Model When an organization engages in a contract with a vendor.1. 5-8 vendors are shortlisted on which the RFP (Request for Proposal) process is 8 for done and further due diligence is carried out. Vendor Selection This is the next most important step while making an outsourcing decision and talks about the process of vendor selection.1 One Stop Shop This model is about the organization choosing just one vendor to carry out all its processes.Strategic Management Report on Outsourcing Group 08 9. out of which we have talked about the two most practiced ones hosen. The process is supposed to be quire rigorous and the basic steps followed are as follows Start with a master list of vendors calle as a universal list called • • A rough first screening criteria is applied based on which 10 15 vendors are shortlisted for 10-15 the next round Next in line is the process of conducting RFI’s to gather more information about the vendors.

best-in in-class vendor for each task possible Lower resource capacity risk And the negatives are o o Very large coordination effort required Risk of inconsistencies .Strategic Management Report on Outsourcing The positives of this method are Limited coordination effort required Clear responsibilities Simple contract And the negative’s include o o Potential resource capacity risk of vendor Vendors might not be “best “best-in-class” in all tasks Group 08 9.1.2. Thus the organization tries to work with the best vendor available for that particular process The positives include “Cherry picking”. Best of Breed In this approach the organization works with a number of vendors and outsources only those parts to a particular vendor in which it is good at.

e. 3 outside India (Mexico.1. China) o 7 deals signed in 2005 with non-GE clients • . e-mail-based customer services Set up other centres and offered services externally Spin Off – 2005 • From GECIS to Genpact o GE sold 60% of GECIS to private equities for $500mn in Nov 2004 o Official name changed to Genpact in Sept 2005 to clearly position itself as a thirdparty player Genpact today and tomorrow o 1. GE-Genpact The example of GE is a classic example in the area of captive off-shoring and they were the pioneers in this domain by setting up a captive unit in India. Case Examples In this section we take some case example to substantiate the models and theoretical concepts we learnt during our analysis 10. Hungary.g.Strategic Management Report on Outsourcing Group 08 10.000 processes including 25-30% of high-end work o 8 delivery centres.. targeted to grow to 100% Added higher value-added services such as e-commerce support services. The growth story of Genpact can be traced back into 3 distinct phases Setup Phase: 1993 – 1999 • • • Started operations in 1993 as a captive unit of GE Capital Invested in infrastructure to build scale Demonstrated cost and quality benefits to GE group companies all over the world: $200mn/year o Implemented 6 Sigma process to improve quality Expansion: 2000 to 2004 • • • Generated higher demand internally. 30% of all account closings for GE worldwide done in India.

including on-shoring. HSBC HSBC as we all know is one of th major banks in the south-east Asia region.2. The reason for taking up the sia the case study of HSBC is that it is perfect example where an organization follows a mix of all forms or captive units.Strategic Management Report on Outsourcing Group 08 10. off shoring. off-shoring and near-shoring. Shown below is a snapshot of the captive centres of HSBC across the Asia Pacific region with details of the activities carried out .

3. ABN AMRO The case of ABN AMRO is also a very interesting case as it uses a mix of off shoring and outsourcing off-shoring strategy. For all the business processes it has setup captive centres.Strategic Management Report on Outsourcing Group 08 10. it uses third party outsourcing and employs a best of breed approach for vendors Shown below is the footprint for the bank . where as for IT.

Strategic Management Report on Outsourcing Group 08 10.5. 10. Explained below are some such examples with reasons why they failed . Some other examples Given below is a snapshot of some other successful examples to show successful partnerships partnerships. there are some that fails as well.4. Deals that failed Not all deals are successful.

We have analyzed the top 5 reasons out of this and suggested mitigation levers for the same Customer service adversely affected • • • SLAs Service delivery frameworks Transition and planning design Cost of outsource higher than expected • • Contract and pricing management Project management Outsourcer does not understand core business • • • Vendor selection process Scope selection mechanism Transition and planning design Outsourcer is nonresponsive • • Contract and pricing management SLAs Relationship has not evolved • • Organizational structure Transition and planning design .Strategic Management Report on Outsourcing Group 08 11. described below are the major below reasons given by organizations for the failure of outsourcing effort. Causes of failure and mitigation levers Based on a survey conducted by an independent analyst firm.

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