FB58075

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FB5807-5

• IT Based Organisational Transformation
• Offshoring

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Background

• IT has the potential to integrate information
  (globally)
• IT can enable (globally) distributed people to
  communicate with ease
• Indeed, it is hard to imagine life without IT
• IT can extend the enterprise beyond its
  traditional borders
• Li Fung, Amazon, TAL Group, etc.
• These organisations are truly IT-dependent.
• They also leverage IT to ensure their competitive
  advantage

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CityU and IT-based Change

• How has IT changed CityU in terms of
• Teaching
• Web-based, groupware enabled, technically savvy
  graduates teachers
• Learning
• All students need to be IT-literate to survive!
• Do students have to be here to learn?
• Research
• Communication and collaboration with my
  colleagues
• Administration
• Online forms, portal, reporting, approving,
  email,

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Implications of IT-based Change

• Changes to processes
• Changes to structures
• Changes to the culture?
• Are we more open than before
• Are we receptive to new technology?
• Are we developing a dynamic culture, not
  reinforcing the status quo?

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IT can transform

• The inner operations of an organisation (not just
  communication processes)
• The fundamental structure of the organisation,
  its supply chain relation-ships and the way its
  employees work
• The organisation itself

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IT can transform

• Internal and External Business Processes
• The Supply Chain
• The Organisational Structure
• From physical to virtual
• From centralised to distributed
• From hierarchical to heterarchical
• Employees
• From in the office to anywhere in the world
• Telecommuters and Virtual Teams

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Business Process Re-engineering

• The fundamental rethinking and radical redesign
  of business processes to achieve dramatic
  improvements in critical, contemporary measures
  of performance....
• Hammer and Champy (1993)

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A Generic Model for BPR
1. Develop Vision
Objectives

8. Ongoing Continuous

1
Improvement

2. Identify Process
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for Redesign


2

7. Make New
Process
7

3. Understand
Operational

3

Measure
Existing
Process

6

4
6. Develop Support
5

4. Identify IT
Solutions

Levers


5. Pilot/Trial New
Process


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IT as an Enabler of BPR

• 1. Automation Elimination of human labour
• 2. Informational Capturing/tracking process
  information
• 3. Sequential Changing process sequence, or
  enabling parallel processing
• 4. Analytical Improving analysis of information
  and decision making

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IT as an Enabler of BPR

• 5. Geographical Coordinating processes across
  time and space
• 6. Integrating Coordination between tasks and
  processes
• 7. Learning Capturing and distributing
  intellectual assets
• 8. Disintermediating Eliminating intermediaries
  from a process

(adapted from Davenport, 1993)
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Choosing the Processes to Re-engineer

• Symptom - Extensive information exchange, data
  redundancy, rekeying
• Disease - Arbitrary fragmentation of a natural
  process
• Symptom - Inventory, buffers, and other assets
• Disease - System slack to cope with uncertainty
  and mistakes
• Symptom - High ratio of checking and control to
  value-adding
• Disease - Fragmentation, confusion, and mistakes

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Example AA Sabre 1970s

• Symptom Data redundancy, rekeying of data,
  double bookings, telephone calls to confirm seat
  availability
• Disease the process is fragmented across
  multiple systems, multiple technologies
• Solution - Sabre, a Reservation System for Travel
  Agents
• For all airlines, but AA flights came up first
• 50 of agents select 1st or 2nd choice on the
  screen
• What was the role of IT in coordinating
  integrating?

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Example Freq Flier Progs 1990s

• Symptom Flights are not always full passengers
  fly based on cost, convenience.
• Disease (our) passengers are fragmented across
  multiple airlines
• Solution A Frequent Flier System
• For airlines in our team, with bonus points,
  check-in and luggage privileges, occasional
  upgrades
• If your airline is not part of a major team (e.g.
  Star Alliance, Sky Team, OneWorld, Asia Miles),
  then what?
• What was the role of IT here?

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Example Outsourcing 2000s

• Symptom We lose money on packaging, logistics,
  even RD.
• Disease we are doing many things that are not
  our core competence
• Solution Stick to what we are best at and
  outsource everything else
• UPS/FedEx are no longer just transport companies.
• They do warehousing, logistics, customer delivery.

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Common IT Problems in BPR Projects

• 1. Team members unfamiliar with IT possibilities.
• 2. IT professionals not part of BPR teams.
• 3. IT people dont understand the business.
• 4. IT professionals not knowledgeable about how
  IT can support BPR.
• 5. IT consultants brought in too late to have any
  major impact on process redesign.
• 6. BPR team members too preoccupied with process
  analysis and redesign to explore IT applications.

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IT Lessons Learned

• IT is not a solution
• It must be applied sensitively
• IT-enabled BPR should be part of the corporate
  agenda
• IT people must be involved from the beginning
• But BPR is about business processes, so
• Business people should lead the effort
• Processes should be redesigned with IT in mind
• Targets should be realistic
• BPR is not trivial. It requires creative
  thinking.

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Getting Serious about BPR

• 1. What is likely to be the hardest part of
  reengineering for our company?
• 2. How can we develop our people so that they can
  do the jobs that re-engineering will create, and
  use the IT appropriately?
• 3. Are we prepared to adapt our HR policies to
  the needs of a reengineered environment?
• 4. How may we have to adapt our organizational
  structure for the aftermath of re-engineering?

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Will Re-engineering work in China?

• Does anyone have experience of process
  improvement in China?

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Changes to the Organisational Structure

• The extension of organisational boundaries
• Including customers, suppliers partners
• Not just process redesign, but structural
  redesign
• X-engineering (BPR-II)(Champy, 2002)
• Realisation that success involves managing
  dependencies (with IT), and perhaps changing our
  culture

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WalMart

• US4B investment in IT to develop the Retail
  Link private exchange
• All manufacturers/suppliers wishing to do
  business with WalMart must buy and use it
• Top 100 suppliers must use RFID as well.
• Huge cost advantage over competitors because
  they integrate with IT.

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But IT is not just for the big

• Anyone can leverage IT to their advantage
• IT is for both radical incremental change
• IT can be used to transform an industry
• IT can be used to drive up the competitive
  advantage of the traditionally small and weak.

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Case TAL Group (talgroup.com)

• Founded in 1947, HQ in Hong Kong
• Turnover of US590M in 02/03
• 11 factories
• 23,000 employees
• 50M garments a year
• 78 of sales in the US market

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TALs IT Investments

• Integrating ERP SCM systems (US10M)
• End-to-end fully integrated system for
• Capacity planning
• Production scheduling
• Inventory management
• Raw material purchases
• Finished garment sales
• Extensive R_at_D gt manufacturing patents

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Vendor Managed Inventory

• Persuade the customers (retailers) to let TAL
  control the Inventory Management.
• TAL is the sole supplier for those goods
• TAL has total control of inventory monitoring
  replenishment no more purchase orders
• TALs systems constantly monitor inventories at
  the store level
• Reduce stock levels (and wastage) On-demand
  production Rapid stock replacement

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From Linear and Sequential to Integrated and
Synchronised

• Traditional information flows are linear and
  sequential.
• Information quality degrades down the value chain
• Coordination problems are frequent
• TAL have an integrated synchronised hub
  arrangement
• This connects all their suppliers, customers and
  partners seamlessly and enforces mutual
  dependence.
• Collaboration information exchange are routine.

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A Sequential/Linear Value Chain for Apparel
Manufacturing and Retailing
Inbound Logistics
Outbound Logistics
Marketing Sales
Operations
Service
Purchase receive raw materials (natural /
synthetic fibre, yarn, etc.)
Manufacture according to customer specs (cut
fibre, sew, buttonhole, iron)
Package ship to retailers warehouse
Manufacturer's Value Chain (TAL)
Retailers Value Chain (J.C. Penney)
Marketing, merchandizing, and selling to end
consumers
Receive consumer feedback for product
enhancement/ new product
Re-pack distribute to retail outlets
Perform inventory control, sales monitoring
forecast place replenishment orders
Purchase receive garment from manufacturer at
central warehouse
Lee et al., 2004
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An Integrated and Synchronized Value Network for
Apparel Manufacturing and Retailing
Inbound Logistics
Outbound Logistics
Marketing Sales
Operations
Service
Monitor retail sales, replenish inventory, and
design new products
Select order raw materials according to sales
patterns new design requirements
Design product according to sales pattern
manufacture according to design specs
Distribute orders directly to customers retail
outlets
Perform test marketing of new products at retail
stores
Manufacturer's Value Chain (TAL)
Hub (shared data and processes)
Retailers Value Chain (J.C. Penney)
Focus on after-sales service to end consumers
Focus on marketing sales service to end
consumers
Streamlined product delivery vendor-managed
inventory at the store level
Lee et al., 2004
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Impacts?

• US2M in annual savings for J.C. Penney
• 35 increase in inventory turnover
• 19 increase in sales
• 5 increase in gross margin
• Reduced out of stock situations and zero local
  (warehouse) inventory

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Implications?

• Radically transformed industry structure new
  rules of competition
• Much higher switching costs for customers.
• Access to real-time sales data at the store level
• Useful for TAL as it seeks new customers.

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Lessons

• Innovation can be driven by a weak member
• Strong networks, manufacturing expertise
• Use IT to leverage strengths
• IT changes the value chain
• Develop an integrated and synchronised value
  network
• Shared data, systems, processes and performance
  indicators

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Blog Questions

• How did TAL leverage IT to re-engineer its supply
  chain?
• What kinds of barriers would normally exist to
  hinder such leveraging and re-engineering?
• What is the strategic advantage for TAL?
• Why should a retailer like JC Penney trust TAL?
• Can we replicate TALs success in other HK
  industries?

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The Virtual Organisation

• Depends on a seamlessly integrated federation of
  alliances partnerships with other organisations
• Extract value from partners, with minimal
  investment in staff, assets and capital
• Outsource as much as possible
• Use technology to overcome barriers of time
  space
• Employees telework
• and then to offshored work.

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Sun Microsystems Nike

• Sun - An intellectual holding company that
  designs computers
• Product ordering, manufacturing, distribution,
  customer service handled by partners
• Nike An intellectual holding company that
  designs footwear
• Manufacturing is outsourced to suppliers in
  Taiwan, South Korea, Indonesia,

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MRO Software

• Global software firm
• Focusing on the property management sector
• Global HQ New York
• Regional HQ - Shanghai
• Staff in Hong Kong, Taipei, Singapore
• Wide use of Executive Suite offices
• Staff work from home, from their PDA, from
  Internet cafes, from anywhere
• I meet my boss once every 18 months, but I am in
  touch most days.

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Advanced Book Exchange

• Helps buyers find sellers and v.v.
• Provides a search engine.
• Takes a commission for the tie-up.
• Does not handle books or publishers (unlike
  Amazon).
• It has information and a core process.
• Very few employees.
• Sweet, simple and effective.

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Airbus Consortium

• Airbus Consortium designs and builds aircraft
• Component parts come from 1500 suppliers in 30
  countries
• RD is shared with selected component developers
• Technical innovations are routinely shared in a
  drive for quality

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Telecommuters or Teleworkers

• Work at home, on the road, from hotels or from
  other non-office locations
• They need communications technology and access to
  corporate databases
• They are often in sales, customer support and
  research.

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Telecommuters

• ATT increased the number of sales people working
  from home 15-20 more time with customers.
• ATT saved US550M from 1991-1998 by eliminating
  unused office space.
• IBM saved US100M in one US unit through TC.
• Perkin-Elmer encouraged TC and shut 35 branch
  offices altogether.
• Texaco see TC as a key to increasing
  competitiveness

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Telecommuting Problems/Opportunities

• Monitoring the quality of work
• What is the measure of work done?
• Who pays for the technology?
• Out of sight, out of mind?
• How can we control people we cant see?
• Keeping in touch with colleagues.
• Where is the boss?

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IT Offshoring

• Contracting software development or the provision
  of IT services to an overseas firm
• It is often seen as being cheaper, faster.
• But there are many hazards as well
• Managerial, HR, Work Style, Political,
• Offshoring should be a strategic choice, not an
  accidental mistake
• Failing to plan for it is planning to fail at it

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Inshore or Offshore?Insource or Outsource?

• Outsource
• Ask someone else to do it (outside the
  organisation)
• Insource
• Do it yourself (perhaps with non-local employees)

• Inshore
• Do it in your own country
• Near shore
• Do it in a nearby country
• Offshore
• Do it somewhere else, usually a less developed
  country

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Background

• Providing IT services is big business
• India, China, Philippines, Russia, Brazil
• Technology parks, IT parks, lots of engineering
  graduates
• China graduates 4 times as many engineers as the
  US annually
• The cost of calling IDD has dropped 80-90, if
  you still call, with VoIP at 100 below.
• Bandwidth has increased similarly, with some
  developing countries now connected by gigabit
  lines. Only 10 years ago, it was close to 0.

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Software Commoditisation

• Standard practices and tools
• Established industry benchmarked procedures
• Some software tasks have been commoditised
• They can be offshored to the lowest cost, most
  productive bidder
• Like shopping in an online supermarket

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Strategic Advantages of Offshoring

• Cost reduction but is this strategic?
• Enable cost efficiencies that promote better
  competition
• Is offshore or die a strategic choice?
• Speed, agility and flexibility
• Respond to opportunities and get products to
  market faster
• Accessing talent unavailable elsewhere
• Both quality and quantity

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Follow the sun, round the clock

• Take advantage of time zone differences
• Send work from time zone to time zone
• US to S or SE Asia to Europe
• Non-stop work
• But coordination must be perfect
• And that is very hard in reality
• Few success stories
• Tasks with low complexity and small size are more
  suitable

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Why are so few firms offshoring?

• It is not as easy as it seems
• Breakdowns can occur in
• Communication proximity
• Coordination spontaneity and proximity
• Control managers cannot manage by walking
  around so easily
• Cohesion barriers socialisation that doesnt
  take place
• Culture clash sensitivity and adaptiveness

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Who is offshoring? - US

• IBM
• RD in US, IL, CH 16 sw devt centres
• MS
• most RD in the US, but also IN, CN, IL UK.
• Google
• RD in IN.
• All the top 20 US tech firms do offshoring, but
  only about 10 of the Fortune 1000 devote more
  than 10 of their budget to offshored activities

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Who is Offshoring? - Europe

• Fewer than in the US, due to more conservative
  business culture, as well as stricter labour laws
  (redundancies)
• Language is an issue few Indian programmers
  read French or Danish manuals, or can build
  interfaces in FR/DK
• The UK is an exception, with much work outsourced
  to IN, PK, BD, LA
• Germany 80 of the large firms have yet to
  offshore language, culture,
• 60 of German offshoring is to E Europe
  (nearshoring)
• Dutch extensive offshoring to 35 countries,
  but India preferred

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And what about Nearshoring?

• Germany to E Europe
• Japan to China, Vietnam, S Korea
• NEC started offshoring to China in 1982, with 40
  firms and 3000 employees now involved
• Several JP firms are spending US10-30M/year in
  China
• US to CA and MX growing potential here

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The big three destinations

• China, India Russia
• Large population, number of qualified employees
• 1000 software exporting firms
• But around 100 countries provide some offshoring
  services (RO, BR, PH, VN, PO, HU, MY, AR, FJ,)
• The Indian firms in particular are now global
  firms in their own right
• TCS, the largest Indian firm, had 2003 revenues
  of US1B. It has its own offshore sites in HU,
  CN, UY, AU, US, UK, JP
• All are a great threat to US- and Europe- based
  firms

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Offshoring IT Services

• If you want the loan application processed
  today, click 1 and it will be done in Fiji.
  Otherwise press 2, it will be done in the US,
  and will take a lot longer
• What clicked 1?
• There is increasing offshoring of IT services
• Application processing, telemarketing,
  help-desking, airline reservations, data entry,
  etc.

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Offshoring IT Services

• All these various services are highly dependent
  on both IT and language
• The relevant data is mobile it can be sent
  through the Internet easily
• HSBC in 2003 had 1500 employees in China and 2000
  in India for clerical work 500 in MY for data
  processing.
• English speaking countries (populations) have a
  distinct advantage

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It all depends on language

• UK, US, CA, AU, NZ gt IN, PK, LA
• FR gt MU, MA, DZ, TN (Mauritius, Morocco, Algeria,
  Tunisia)
• NL gt ZA, SR (Surinam)
• ES gt ??
• DE gt ??
• IT gt ??

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What do IT Professionals cost?

• US
• Canada
• Japan
• Singapore
• Brazil
• Mexico
• India
• Russia
• China
• Vietnam

• 63,000
• 57,000
• 44,000
• 43,000
• 20.000
• 7,000
• 8,000-9,000
• 5,000-18,000
• 3,000-14,000
• 1,400-6,000

All salaries US/year
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But, this is the basic

• What about housing, medical insurance,
  transportation, loans, 13th month bonus, etc.
• The full costs of an Indian programmer are
  30-40k, compared to 120K in the US.
• Chinese programmers (3-4 yrs exp) cost
  US12.50/hour about 20 of the US rate.

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And what about?

• Transaction costs
• Infrastructure costs
• Knowledge transfer costs
• Currency movements
• Dispute resolution
• Travel costs in the early stages
• Unpredictable risks wars, financial collapse,
  terrorism, regulatory changes (e.g.
  nationalisation, tax breaks), IP theft,
  corruption, proprietary knowledge, etc.

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The IT Offshoring Journey

• SunnySystems (SS) is a small sized HK software
  house. It needs to reduce costs, so it decided
  that the next version of its software would be
  developed in India. The project manager met a
  rep. of a large India provider at a US IT fair
  and designed to sign a contract. Problems started
  almost immediately SS used a development
  platform called Progress, but this is little used
  in India. SS overlooked the fact that the Indian
  programmers had no experience with the latest
  version of Progress. Knowledge transfer from SS
  to India was fraught with problems. One year
  later, the project was written off as a failure
  and abandoned. Clients now started to lose
  confidence in a company that could not deliver.
  The project manager had already lost his job.

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Ill Never Do It Again!

• Offshoring can be exciting or scary
• Depends on your appetite for adventure, for the
  exotic, for risks
• Many lessons have already been learned, and can
  be read, so companies considering offshoring have
  no excuse not to know in advance what they are
  getting into.
• But are the risks over stated? Is it really that
  dangerous?
• What should be done?

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Three steps (not that special)

• Laying the foundations
• Do we have a plan, a strategy? Who is involved?
  Are we ready? a year? 18 months?
• Identifying the providers
• Which country? Which providers? Selection
  criteria? RFI and RFP. 6 months
• Assessing Selecting the Provider
• Visit the offshore location. Meet the people.
  Observe their work. Sign the contract. at least
  a month

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Laying the Foundations 1

• Assessing if we are ready
• How good is our project management?
• Can we manage an offshore project?
• Can our people work with them?
• Are changes in work norms acceptable?
• What is our appetite for risk?
• The hardest step is re-engineering internal
  processes so as to ensure that they are ready.

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Laying the Foundations 2

• The launch team
• Offshoring is complex it needs a powerful team
• Build a strategic vision, commitment and push for
  implementation
• Agile and able to make quick decisions
• Expertise in offshoring
• Learn from others experiences (including
  consultants)

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Laying the Foundations 3

• Strategy Plan
• Why are we doing this? (specifically why?)
• How are we going to achieve this goal?
• What are the risks?
• Operational issues
• HR costs, skill sets, current future
  operations, exactly what are we offshoring,
• Develop a business case for offshoring
• With performance indicators to measure later
  success
• Costs, satisfaction rates, productivity rates,
  delivery times, benchmarking against competitors,
  
• Planning for resistance to change
• How to keep key people, retrain some, let others
  go

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Identifying the Providers

• In India, there are thousands of providers!
• Many have offshore agents in your country!
• Globally, there are tens of countries that do
  offshore work
• Which one do you want?
• General skills or specific?
• Risks? IP protection? Security? Culture? Time?
• What is your strategic concern? Cost, quality,
  efficiency?

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Selecting a Country

• While selection of the provider is often done
  carefully, selection of the country is the
  subject of much less care.
• It may relate to personal factors or connections.
  
• Who is going to have to go and work there, to
  supervise and control? Can they cope?
• Is makes no sense to select a country that no one
  wants to visit or live in.

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Provider Selection Criteria

• General Criteria
• Company size stability
• HR policies
• Quality management
• Technical expertise
• Business domain knowledge
• Track record
• Methodologies used
• Costs
• Quality initiatives ISO, CMM, 6 Sigma, etc.

• Extra care criteria
• Infrastructure
• SW production environment
• Interntional experience
• Language skills
• Employee turnover
• Org culture flexibility, responsiveness, soft
  skills
• Global presence
• Disaster recovery backup
• 24-hour support

Weight the criteria matrix the providers
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Send an RFI, using the criteria

• Who we are
• What we are looking for
• Questions about the provider
• History, customers, management, geo-locations,
  turnover, infrastructure, security
• Questions on services offered
• Domain expertise, platforms, skills,
  subcontractors
• Questions on strategy
• Vision, market share, alliances

67
Send an RFP to the most promising firms

• What we expect in the proposal
• How are you going to undertake a specific project
• Need to provide sufficient project details
• Try to stimulate the providers creativity by
  asking more specific/difficult questions
• Ask for references of work they have done.

68
Assessing Selecting the Provider

• Evaluate the RFPs
• Identify false promises, too good to be true
  offers
• Learn what yes means.
• Check the references
• Ask what worked, and what didnt.
• Technology always has problems.
• Look at soft issues culture, values, trust,
  wavelength.
• Dont only look at cost. Too good to be true is
  almost certainly too good to be true. Quality
  costs.

69
The Offshore Visit

• Important for large/complex projects, long-term
  cooperation and situations where there is a high
  degree of dependence on the provider (i.e. it is
  hard to switch)
• Launch team members should be involved, but also
  other members of senior management and those who
  are not yet convinced about offshoring.

70
Offshore Things to Do

• Dont just visit the HQ, but also the work site,
  national software association,
• Talk to other foreigners who are already there
• Plan the site visit carefully not on the plane
• Dont visit too many and dont only listen to
  sales pitches they are all the same.
• Do speak to project managers and programmers
• Walk around - literally

71
Recommendations Contract Negotiations

• To offshore or not.
• Project objective, functionality scope,
• Comparison of providers
• Financial justifications to top mgt.
• Legal/contract issues price, IP
  confidentiality, penalties incentives

72
Concluding Lessons

• Dont underestimate the importance of careful
  planning, or of allowing enough time to lay the
  foundations carefully.
• The project launch team should be small, agile,
  open-minded and pro-offshoring
• A low-risk pilot project will help a company find
  out if it is ready for offshoring
• Contracts are important, but developing a
  relationship with the provider is probably more
  critical.
• The two parties need to align their business
  interests for the duration of the project.

73
Lessons for IT Based Org Change

• Top Management must be the change architects
• IT cannot transform an organisation IT enables
  transformation
• Enterprise-wide business-IT Partnerships are
  needed
• The pace of change must match the rate of
  acceptance
• Individual transformation is as important as
  organisational transformation
• Change champions must be diverse, yet work
  together
• Offshoring IT development sounds attractive, but
  it is not just an IT project.

74
Consequences of Transformation

• Organisational culture and identity
• There will be pressure for change here too
• People who support the old way will feel left
  out, marginalised or discriminated against
• A new, more flexible set of cultural norms may be
  necessary
• Guided by new principles, new values, and
  perhaps new managers?
• A Culture of Blogging? The CEOs blog-desk?

75
The Value of IT?

• IT can enable transformation
• But IT is not cost-free
• The price is the price of change, the
  acceptability of change
• If management doesnt want change, then handle IT
  carefully
• IT is only IT, but IT enables people to do things
  that were previously impossible
• Even email can produce radical changes in
  organisations