Outsourcing

1
Outsourcing

• Discuss the reasons for outsourcing
• Discuss disadvantages of outsourcing
• Discuss conditions when outsourcing is
  appropriate
• Define backsourcing and describe the reasons for
  backsourcing
• Discuss structuring and managing the outsourcing
  arrangement

2
Offshore sourcing

• Define offshore sourcing, captive center,
  nearshoring
• Discuss reasons for and challenges of offshore
  sourcing
• Describe steps clients take in finding a provider
• Describe steps providers take in acquiring clients

3
Outsourcing

• The purchase of a good or service that was
  previously provided internally
• Farm out data center operations (facilities
  management)
• Farm out tasks and services
• Farm out systems development
• May transfer IS function to vendor

4
Our Survey

• Companies written up in trade press for having
  signed outsourcing agreements (1988 - 1993)
• Telephone interviews
• 34 of 129 companies participated
• 30 financial institutions
• 25 private vs. 9 public
• Provided broad range of services

5
Goals Determinants of Outsourcing Success

• Core vs. commodity
• Partner vs. vendor
• Tight vs. loose contract
• Success Economic, Technical, Strategic, Overall
  Satisfaction with Contract

6
Findings Primary Reasons for Outsourcing

• Technological considerations (8)
• Cost Savings (6)
• Strategic considerations (infrastructure building
  - quickly) (5)
• Human resource considerations (3)
• Mandated by central office/Acquired by another
  company (3)
• Consolidate Data Centers (2)
• Efficiency (1)
• Cash Infusion (1)

7
Findings Other

• Need tight contracts
• May be successful for core functions especially
  if linked to tight contract
• Can have successful partnerships

8
Saving Provider Advantages

• Tighter overhead cost control
• More aggressive use of low-cost labor pools
• More effective bulk purchases and leasing
  arrangements
• Better management of excess hardware capacity
• Better control over software licenses
• Hustle (Staying alive)
• Creative and more realistic structuring of leases
• Leaner management structure because of increased
  competence and critical mass volumes of work

9
Outsourcing Disadvantages

• Reliance on vendor/partner
• Loss of control
• Considerations about security/confidentiality
• Evaporization of cost savings
• Loss of competitive advantage
• Slight of hand with employees

10
Outsourcing strategies
11
Outsourcing strategies
12
Backsourcing

• Bringing an outsourcing arrangement back in house
• Reasons
• Economic
• Strategic
• Relationship
• Power

13
Structuring the Alliance

• Flexible contract ( a lot can happen over 10
  years)
• Shorten length
• Termination clause
• Detailed performance standards
• Service levels (terminal response times)
• Baseline period measurement
• Growth rates
• Service volume fluctuations
• Resolution of performance disputes

14
Structuring the Alliance

• Partial vs. complete outsourcing
• Multiple vendors
• Cost savings
• Multiple evaluations
• Outside consultants

15
Structuring the Alliance

• Supplier stability and quality
• Conflict of interests
• Management fit
• Conversion problems

16
Managing the Alliance

• Strong CIO function
• Partnership/contract management
• Architecture planning
• Emerging technologies
• Continuous learning

17
Managing the Alliance

• Performance measurements continuous
• Low-structured tasks more difficult to outsource
• Low-structured task provide higher margins for
  provider
• Customer-outsourcer interface
• Specified account manager in provider company

18
Offshore sourcing

• Offshore sourcing sourcing to a company outside
  the home country
• Captive center offshore center owned by the
  client company
• Nearshoring sourcing to a company in a country
  near to home country
• Most common offshore sourcing IT activities
• Maintenance
• Testing
• Coding

19
Estimates on Market SizesCarmel Tjia, 2006
20
Demand for offshore work

• Most aggressive offshore consumers are in US
  Within Europe, UK is most active
• Most active industries financial services
  (banks, investment firms, insurance cos) and
  technology firms (software, hardware
  telecommunications)
• Motivation cost savings, flexibility, accessing
  talent, follow-the-sun
• 100 nations are now exporting software services
  and products

21
Wages for Software Professionals Carmel Tija
2005
22
Extra offshore costs ()Carmel Tija 2005
23
Offshore challenges

• Communication breakdown
• Coordination breakdown
• Control breakdown
• Cohesion barriers
• Culture clash

24
Offshoring from a client perspective

• Laying the foundation
• Identifying providers
• Assessing and selecting the provider

25
Laying the foundation

• Assess your offshoring readiness (project
  management maturity, risk assessment,
  organizational flexibility, offshore experience)
• Set up powerful launch team
• Hire external expert
• Create a strategy and a plan
• Select right project

26
Identifying the providers

• Locate providers
• Select country (language, general software
  skills, government, travel time)
• Develop criteria for provider selection
• Write RFI/RFP

27
Assessing and selecting the provider

• Due diligence
• Check references
• Set up local meetings to discuss their abilities
  and your criteria
• Pay attention to soft elements (i.e., trust,
  feeling comfortable
• Offshore visit
• Make recommendation and contract negotiations

28
Marketing offshore services Provider perspective

• Fierce competition 4000 companies in low cost
  countries
• Quality of service cant be judged until after
  the service is consumed
• Many IT services companies founded by technical
  professionals not marketeers

29
Characteristics Successful IT Services Exporters
International Trade Center

• A truly international outlook (and desire) for
  exporting
• A long-term commitment to exporting
• May take 2-3 years to generate business
• Thorough research into new markets and
  development of export plans
• An international reputation for quality.

30
First Steps

• Create realistic business plan
• Types of offshore services required by market
• Assess competitors and their place in market
• Best ways to enter target market
• Seek business intelligence
• Define target markets
• Market size
• Linkages (linguistic, historic, geographic,
  diaspora)
• Set up local base (sales office representative)
• Conduct SWOT analysis

31
Local Marketing Activities

• Generate client leads
• numbers game
• Trade fairs
• Marketing material
• Seminars
• Public relations

32
Business Discussions with Clients

• Know client types
• Know offshoring champions in firm
• Start with low-risk projects
• Cultivate long-term relationships
• Know clients cultures
• Build trust
• Create country branding (with trade associations
  and government offices)