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Title: An Introduction to the Outsourcing and Offshoring Landscape


1
An Introduction to the Outsourcing and Offshoring
Landscape
2
Origins of Outsourcing
3
Origins of Outsourcing
Early American History
The production of wagon covers
Was outsourced to Scottish Manufacturers
Who used raw material imported from India
4
Origins of Outsourcing
Manufacturing Organizations
  • Outsourcing remained popular in manufacturing
    with part of the assembling being subcontracted
    to other organizations and locations where the
    work could be done more efficiently and cheaply
  • Pastin and Harrison (1974) wrote that such
    outsourcing was creating a new form of
    organization which the termed the Hollow
    Corporation

(An organization that designs and distributes,
but does not produce anything)
  • Now Virtual Organizations

The worlds largest supplier of
telecommunications product manufacturer of none
5
Origins of Outsourcing
IS/IT Outsourcing
  • In the early 1960s Electronic Data Systems (EDS)
    in Dallas, Texas, approached large corporations
    to get them to outsource their data processing
    services. for his data processing services.
  • Perot was refused 77 times before he got his
    first contract
  • EDS received lucrative contracts from the U.S.
    government in 1963, computerizing Medicare
    records.
  • EDS went public in 1968 and the stock price shot
    up from 16 a share to 160 within days.
  • In 1984 General Motors bought controlling
    interest in EDS for 2.4 billion.
  • In 1996, GM spun off EDS as an independent
    company and became one of its largest clients.
  • In 2008, Hewlett-Packard acquired EDS for 13.9
    billion.
  • In 2009, EDS (renamed HP Enterprise Services),
    employed 139,000 people in 64 countries, the
    largest locations being the United States, India
    and the UK. It was ranked as one of the largest
    service companies on the Fortune 500 list with
    around 2,000 clients..

6
Origins of Outsourcing
IS/IT Outsourcing
  • On Oct 2, 1989, Eastman Kodak announced that it
    was outsourcing its information systems (IS)
    function 1989 to IBM (IBM Global Services' first
    customer)
  • That year, the head of IT at KODAK was named
    information chief of the year by CIO Magazine.
  • Eastman Kodaks decision to outsource the
    information technology systems that undergird its
    business was considered revolutionary in 1989,
    but it was actually the result of rethinking what
    their business was about.
  • "She led Kodak to what was a counterintuitive
    move for the time She showed that running data
    centers was no more a core competency of Kodak's
    than running a power plant would be," says F.
    Warren McFarlan, senior associate dean and
    professor in the Advanced Management Program at
    the Harvard Business School.
  • While Kodak signed on with IBM to outsource its
    mainframe data management, Kodak chose to
    outsource the provisioning of its PC purchases to
    desktop systems-integration firm Businessland
    Inc. and its network operations to Digital
    Equipment Corp.
  • IBM has since taken over Digital's role and now
    provides direct PC sales to Kodak as well.

7
Outsourcing Today (These figures are dated)
  • 2003 178 Billion
  • 2007 235 Billion
  • 2008 261 Billion
  • IT outsourcing is estimated to be 67 of all
    outsourcing deals

8
Areas for IS/IT Outsourcing
  • Programming, Software testing, and software
    maintenance
  • IT research and development
  • High-end jobs such as software architecture,
    product design, project management, IT
    consulting, and business strategy
  • Physical product manufacturingsemiconductors,
    computer components, computers
  • Business process outsourcing/IT Enabled
    Servicesinsurance claim processing, medical
    billing, accounting, bookkeeping, medical
    transcription, digitization of engineering
    drawings, desktop publishing, and high-end IT
    enabled services such as financial analysis and
    reading of X-rays
  • Call centers and telemarketing.

9
Drivers of outsourcing/offshoring
  • Rapid expansion of telecommunications system
    ample, low-cost broadband availability at
    attractive rates.
  • Standardization of Software platforms(e.g., IBM
    or Oracle for database management, SAP for supply
    chain management)
  • Companies are able to use inexpensive commodity
    software packages instead of customized software
  • The increased pace of technological change and
    software investments which quickly became
    obsolete persuaded companies to chose to
    outsourcing rather than invest in technology and
    people that would soon have to be replaced or
    retrained
  • Companies felt a competitive need to offshore as
    their competition began to do so
  • Influential members from industry, such as Jack
    Welch from General Electric, became champions of
    offshoring.

Taken mostly from Aspray, W., Mayadas, F., and
Vardi, M.Y. Globalization and Offshoring of
Software, 2006
10
Drivers of outsourcing/offshoring
  • Venture capitalists pushed entrepreneurial
    startups to use offshoring as a means to reduce
    the burn rate of capital.
  • New firms emerged to serve as intermediaries, to
    make it easier for small and medium-sized firms
    to send their work offshore.
  • Work processes were digitalized, made routine,
    and broken into separable tasks by skill set
  • The increased pace of technological change and
    software investments which quickly became
    obsolete persuaded companies to chose to
    outsourcing rather than invest in technology and
    people that would soon have to be replaced or
    retrained
  • Education became more globally available with
    model curricula provided by the professional
    computing societies, low capital barriers to
    establishing computer laboratories in the era of
    personal computers and package software, national
    plans to build up undergraduate education as a
    competitive advantage, and access to Western
    graduate education as immigration restrictions
    were eased.

11
Drivers of outsourcing/offshoring
  • Citizens of India and China, who had gone to the
    US or Western Europe for graduate educations and
    remained there to work, began to return home in
    larger numbers, creating a reverse Diaspora that
    provided highly educated and experienced workers
    and managers
  • India has a large population familiar with the
    English language, the language of global business
    and law.
  • India has accounting and legal systems that were
    similar to those in the United Kingdom and the
    United States
  • Global trade is becoming more prevalent, with
    individual countries such as India and China
    liberalizing their economies, the fall of
    Communism lowering trade barriers, and many more
    countries participating in international trade
    organizations.

12
Offshorers (Clients) ? Vendors
  • Clients are typically developed countries
  • (1) US (2) UK
  • Notable others include Germany, other countries
    in Western Europe, Japan, Korea, Australia
  • Preferred vendor attributes
  • Countries with available large workforces of
    highly educated workers and Low wage rates (e.g.,
    India and China)
  • Countries with special/Bi-Trligingual language
    skills (e.g., the Philippines can serve the
    English and Spanish customer service needs of the
    United States
  • Countries that have geographically close
    (nearsourcing) e.g., Canada and the US Czech
    Republic and Germany.
  • special high-end skills (e.g., Israeli strength
    in security and anti-virus software).

Taken mostly from Aspray, W., Mayadas, F., and
Vardi, M.Y. Globalization and Offshoring of
Software, 2006
13
Offshorers (Clients) ? Vendors
  • Clients are typically developed countries
  • (1) US (2) UK
  • Notable others include Germany, other countries
    in Western Europe, Japan, Korea, Australia
  • Preferred vendor attributes
  • Countries with available large workforces of
    highly educated workers and Low wage rates (e.g.,
    India and China)
  • Countries with special/Bi-Trligingual language
    skills (e.g., the Philippines can serve the
    English and Spanish customer service needs of the
    United States
  • Countries that have geographically close
    (nearsourcing) e.g., Canada and the US Czech
    Republic and Germany.
  • special high-end skills (e.g., Israeli strength
    in security and anti-virus software).

Taken mostly from Aspray, W., Mayadas, F., and
Vardi, M.Y. Globalization and Offshoring of
Software, 2006
14
Changing Times
  • Tata Consultancy Services (Mumbai) had a turnover
    of 8B in 2011. They employ more than 200,000
    worldwide with a significant number of those,
    believed to be around 15,000 based as outsourced
    jobs in the U.S.
  • Aegis Communications (Mumbai) is part of the
    Essar group based in with an annual revenue of
    15B. Aegis employs 9,000 in the U.S. at offices
    throughout the country
  • Wipro an IT specialist firm (Bangalore) employs
    around 4,000 people in jobs that have been
    outsourced to the U.S.
  • Genpact (formerly GE Capital International
    Services) operates from India, China, Guatemala,
    Hungary, México, Morocco, the Philippines,
    Poland, the Netherlands, Romania, Spain, South
    Africa, Australia, Brazil and the United States.
    Currently it employs over 53,600 people,
    including 1,500 people in the U.S. but that is
    expected to triple over the next two years as
    bosses find it cheaper than employing Indian
    staff at home.
  • Infosys (Bangalore), with an annual revenue of
    100M, has 130,000 employees worldwide

From Daily Mail On-Line. Is this a taste of
the future? Outsourcing goes full circle as
Indian firms look to the U.S. for cheap labour.
23rd May 2011
15
Basic Terminology
  • Outsourcing
  • Delegation of non-core operations from internal
    production to an external entity. Sharing
    organizational control.
  • Offshoring
  • Transferring Activities to another country by
    hiring local subcontractors or by building a
    facility in an area where labor is cheap(er).

The globalization of outsourcing operating models
has resulted in new terms
  • Nearsourcing
  • Offshore to a nearby country where language and
    cultural differences are smaller
  • Rightsourcing
  • Restructuring a company's workforce to find the
    optimum mix of jobs performed locally and jobs
    moved to foreign countries

Related terms
  • Insourcing
  • Keeping Operations in-house
  • Backsourcing
  • Returning outsourced operation to in-house
    operations
  • Best Sourcing
  • Associating with the best of the best (Tom
    Peters)
  • Multisourcing
  • large outsourcing agreements

16
Opinions Outsourcing is .
  • A free market thing
  • A Special form of international trade (CES IFO
    Institute, ermany)
  • A matter of polarized public debate (European
    Foundation for ILWC,2004)
  • About your core
  • A question of trust
  • Unevenly dispersed on the globe (yet growing)
  • Generating fear (fear of change?- Cochrane,2004)
  • A relationship and arrangement
  • Partner quality
  • Subject to areas of high attrition ? (ex-Call
    centers)

17
Reasons for Outsourcing
  • Every Morning in Africa, a gazelle wakes up.
  • It knows it must run faster than the fastest lion
  • or it will be killed.
  • Every morning a lion wakes up.
  • It knows it must outrun the slowest gazelle
  • or it will starve to death.
  • It doesnt matter whether you are a lion or a
    gazelle
  • When the sun comes up,
  • YOU BETTER START RUNNING!
  • African Proverb

18
Reasons for Outsourcing
  • Cost savings. The lowering of the overall cost of
    the service to the business. This will involve
    reducing the scope, defining quality levels,
    re-pricing, re-negotiation, cost re-structuring.
    Access to lower cost economies through offshoring
    called "labor arbitrage" generated by the wage
    gap between industrialized and developing nations.
  • Focus on Core Business. Resources (e.g.,
    investment, people, infrastructure) are focused
    on developing the core business. For example
    often organizations outsource their IT support to
    specialized IT services companies.
  • Cost restructuring. Operating leverage is a
    measure that compares fixed costs to variable
    costs. Outsourcing changes the balance of this
    ratio by offering a move from fixed to variable
    cost and also by making variable costs more
    predictable.
  • Improve quality. Achieve a step change in quality
    through contracting out the service with a new
    service level agreement.
  • Knowledge. Access to intellectual property and
    wider experience and knowledge.
  • Contract. Services will be provided to a legally
    binding contract with financial penalties and
    legal redress. This is not the case with internal
    services
  • Operational expertise. Access to operational best
    practice that would be too difficult or time
    consuming to develop in-house.

Some of this is taken from Wikipedia NOT
necessarily reliable
19
Reasons for Outsourcing
  • Capacity management. An improved method of
    capacity management of services and technology
    where the risk in providing the excess capacity
    is borne by the supplier.
  • Catalyst for change. An organization can use an
    outsourcing agreement as a catalyst for major
    step change that can not be achieved alone. The
    outsourcer becomes a Change agent in the process.
  • Enhance capacity for innovation. Companies
    increasingly use external knowledge service
    providers to supplement limited in-house capacity
    for product innovation
  • Reduce time to market. The acceleration of the
    development or production of a product through
    the additional capability brought by the supplier.
  • Commodification. The trend of standardizing
    business processes, IT Services, and application
    services which enable to buy at the right price,
    allows businesses access to services which were
    only available to large corporations
  • Operational expertise. Access to operational best
    practice that would be too difficult or time
    consuming to develop in-house.

20
Reasons for Outsourcing
  • Risk management. An approach to risk management
    for some types of risks is to partner with an
    outsourcer who is better able to provide the
    mitigation
  • Venture Capital. Some countries match government
    funds venture capital with private venture
    capital for startups that start businesses in
    their country.
  • Tax Benefit. Countries offer tax incentives to
    move manufacturing operations to counter high
    corporate taxes within another country.
  • Scalability. The outsourced company will usually
    be prepared to manage a temporary or permanent
    increase or decrease in production.
  • Access to talent. Access to a larger talent pool
    and a sustainable source of skills, in particular
    in science and engineering.
  • India has over 2,100,000 English-speaking
    graduates added annually and 460,000 of them are
    IT grads.
  • China has over 200,000 IT professionals and
    50,000 new graduates are added to the pool every
    year.
  • China produces 52 of all Science and Engineering
    graduates
  • Work Attitudes

In China today, Bill Gates is Britney Spears.
In America today, Britney Spears is Britney
Spears and that is our problem. Thomas
Friedman
21
Criticisms of outsourcing
Loss of Jobs
  • A University of California Study that estimates
    14 million U.S. white collar jobs - one in nine -
    are at risk.
  • A 2004 report by Forrester Research suggests that
    a total of 3.4 million U.S. white collar jobs
    will move overseas by 2015, with 830,000 jobs
    leaving by the end of 2005.
  • A Progressive Policy Institute report claims 12
    million jobs are vulnerable, with most paying
    more than the U.S. median wage.

22
Criticisms of outsourcing
Loss of Control
  • "I've had people approach me and offer to save us
    money by consolidating our technical support,"
    said Monad.net President George Scott. "But I
    think technical support is a major competitive
    advantage. I therefore want control of that -- I
    don't want to give it away."
  • "Everyone knows that differentiation is the key
    in the ISP business, and this also goes for
    dealing with the pressures of handling technical
    support," said the operations manager of a
    Massachusetts ISP. "No ISP is happy with the fact
    that they have to handle so many calls from
    customers who are not adept with their PCs, but
    we understand that handing them over to a third
    party is the wrong business move."

23
Criticisms of outsourcing
Quality Risks
  • Quality Risk is the propensity for a product or
    service to be defective, due to
    operations-related issues. Quality risk in
    outsourcing is driven by a list of factors. One
    such factor is opportunism by suppliers due to
    misaligned incentives between buyer and supplier,
    information asymmetry, high asset specificity, or
    high supplier switching costs. Other factors
    contributing to quality risk in outsourcing are
    poor buyer-supplier communication, lack of
    supplier capabilities/resources/capacity, or
    buyer-supplier contract enforceability.

Quality of service
  • Quality of service is measured through a service
    level agreement (SLA) in the outsourcing
    contract. In poorly defined contracts there is no
    measure of quality or SLA defined. Even when an
    SLA exists it may not be to the same level as
    previously enjoyed. This may be due to the
    process of implementing proper objective
    measurement and reporting which is being done for
    the first time. It may also be lower quality
    through design to match the lower price. There
    are a number of stakeholders who are affected and
    there is no single view of quality. The CEO may
    view the lower quality acceptable to meet the
    business needs at the right price. The retained
    management team may view quality as slipping
    compared to what they previously achieved. The
    end consumer of the service may also receive a
    change in service that is within agreed SLAs but
    is still perceived as inadequate. The supplier
    may view quality in purely meeting the defined
    SLAs regardless of perception or ability to do
    better.

24
Criticisms of outsourcing
Language skills
  • In the area of call centers end-user-experience
    is deemed to be of lower quality when a service
    is outsourced. This is exacerbated when
    outsourcing is combined with off-shoring to
    regions where the first language and culture are
    different. In addition to language and accent
    differences, a lack of local social and
    geographic knowledge is often present, leading to
    misunderstandings or miscommunications

Public opinion
  • There is a strong public opinion regarding
    outsourcing (especially when combined with
    offshoring) that outsourcing damages a local
    labor market. Outsourcing is the transfer of the
    delivery of services which affects both jobs and
    individuals. It is difficult to dispute that
    outsourcing has a detrimental effect on
    individuals who face job disruption and
    employment insecurity however, its supporters
    believe that outsourcing should bring down
    prices, providing greater economic benefit to
    all. There are legal protections in the European
    Union regulations called the Transfer of
    Undertakings (Protection of Employment). Labor
    laws in the United States are not as protective
    as those in the European Union.

Staff turnover
  • The staff turnover of employee who originally
    transferred to the outsourcer is a concern for
    many companies. Turnover is higher under an
    outsourcer and key company skills may be lost
    with retention outside of the control of the
    company. In outsourcing offshore there is an
    issue of staff turnover in the outsourcer
    companies call centers. It is quite normal for
    such companies to replace its entire workforce
    each year in a call center. This inhibits the
    build-up of employee knowledge and keeps quality
    at a low level.

25
Criticisms of outsourcing
Social responsibility
  • Outsourcing sends jobs to the lower-income areas
    where work is being outsourced to, which provides
    jobs in these areas and has a net equalizing
    effect on the overall distribution of wealth.
    Some argue that the outsourcing of jobs
    (particularly off-shore) exploits the lower paid
    workers. A contrary view is that more people are
    employed and benefit from paid work. Despite this
    argument, domestic workers displaced by such
    equalization are proportionately unable to
    outsource their own costs of housing, food and
    transportation.
  • On the issue of high-skilled labor, such as
    computer programming, some argue that it is
    unfair to both the local and off-shore
    programmers to outsource the work simply because
    the foreign pay rate is lower. On the other hand,
    one can argue that paying the higher-rate for
    local programmers is wasteful, or charity, or
    simply overpayment. If the end goal of buyers is
    to pay less for what they buy, and for sellers it
    is to get a higher price for what they sell,
    there is nothing automatically unethical about
    choosing the cheaper of two products, services,
    or employees.
  • Social responsibility is also reflected in the
    costs of benefits provided to workers. Companies
    outsourcing jobs effectively transfer the cost of
    retirement and medical benefits to the countries
    where the services are outsourced. This
    represents a significant reduction in total cost
    of labor for the outsourcing company. A side
    effect of this trend is the reduction in salaries
    and benefits at home in the occupations most
    directly impacted by outsourcing.

26
Criticisms of outsourcing
Company knowledge
  • Outsourcing could lead to communication problems
    with transferred employees. For example, before
    transfer staff have access to broadcast company
    e-mail informing them of new products, procedures
    etc. Once in the outsourcing organization the
    same access may not be available. Also to reduce
    costs, some outsource employees may not have
    access to e-mail, but any information which is
    new is delivered in team meetings.

Qualifications of outsourcers
  • The outsourcer may replace staff with less
    qualified people or with people with different
    non-equivalent qualifications. In the engineering
    discipline there has been a debate about the
    number of engineers being produced by the major
    economies of the United States, India and China.
    The argument centers around the definition of an
    engineering graduate and also disputed numbers.
    The closest comparable numbers of annual
    graduates of four-year degrees are United States
    (137,437) India (112,000) and China (351,537)

Failure to deliver business transformation
  • Business transformation promised by outsourcing
    suppliers often fails to materialize. In a
    commoditised market where many service providers
    can offer savings of time and money, smart
    vendors have promised a second wave of benefits
    that will improve the clients business outcomes.
    According to Vinay Couto of Booz Company
    Clients always use the service providers
    ability to achieve transformation as a key
    selection criterion. Its always in the top three
    and sometimes number one. While failure is
    sometimes attributed to vendors overstating their
    capabilities, Couto points out that clients are
    sometimes unwilling to invest in transformation
    once an outsourcing contract is in place

27
Criticisms of outsourcing
Productivity
  • Offshore outsourcing for the purpose of saving
    cost can often have a negative influence on the
    real productivity of a company. Rather than
    investing in technology to improve productivity,
    companies gain non-real productivity by hiring
    fewer people locally and outsourcing work to less
    productive facilities offshore that appear to be
    more productive simply because the workers are
    paid less. Sometimes, this can lead to strange
    contradictions where workers in a developing
    country using hand tools can appear to be more
    productive than a U.S. worker using advanced
    computer controlled machine tools, simply because
    their salary appears to be less in terms of U.S.
    dollars. In contrast, increases in real
    productivity are the result of more productive
    tools or methods of operating that make it
    possible for a worker to do more work. Non-real
    productivity gains are the result of shifting
    work to lower paid workers, often without regards
    to real productivity. The net result of choosing
    non-real over real productivity gain is that the
    company falls behind and obsoletes itself
    overtime rather than making investments in real
    productivity.

Security
  • Before outsourcing an organization is responsible
    for the actions of all their staff and liable for
    their actions. When these same people are
    transferred to an outsourcer they may not change
    desk but their legal status has changed. They
    no-longer are directly employed or responsible to
    the organization. This causes legal, security and
    compliance issues that need to be addressed
    through the contract between the client and the
    suppliers. This is one of the most complex areas
    of outsourcing and requires a specialist third
    party adviser.

28
Criticisms of outsourcing
Security (continued)
  • Fraud is a specific security issue that is
    criminal activity whether it is by employees or
    the supplier staff. However, it can be disputed
    that the fraud is more likely when outsourcers
    are involved, for example credit card theft when
    there is scope for fraud by credit card cloning.
    In April 2005, a high-profile case involving the
    theft of 350,000 from four Citibank customers
    occurred when call center workers acquired the
    passwords to customer accounts and transferred
    the money to their own accounts opened under
    fictitious names. Citibank did not find out about
    the problem until the American customers noticed
    discrepancies with their accounts and notified
    the bank.

Standpoint of labor
  • From the standpoint of labor within countries on
    the negative end of outsourcing this may
    represent a new threat, contributing to rampant
    worker insecurity, and reflective of the general
    process of globalization. While the "outsourcing"
    process may provide benefits to less developed
    countries or global society as a whole, in some
    form and to some degree - include rising wages or
    increasing standards of living - these benefits
    are not secure. Further, the term outsourcing is
    also used to describe a process by which an
    internal department, equipment as well as
    personnel, is sold to a service provider, who may
    retain the workforce on worse conditions or
    discharge them in the short term. The affected
    workers thus often feel they are being "sold down
    the river."

29
Criticisms of outsourcing
Hidden Costs
  • The Cost of Managing an Offshore Contract
  • "There's a significant amount of work in
    invoicing, in auditing, in ensuring cost centers
    are charged correctly, in making sure time is
    properly recorded," explains DHL's Kifer. "We
    have as many as 100 projects a year, all with an
    offshore component, so you can imagine the number
    of invoices and time sheets that have to be
    audited on any given day."
  • We knew there would be invoicing and auditing,"
    he says. "But we didn't fully appreciate the due
    diligence and time it would require."
  • Bottom line Expect to pay an additional 6
    percent to 10 percent on managing your offshore
    contract

30
Criticisms of outsourcing
Hidden Costs
  • The Cost of Managing an Offshore Contract
  • "There's a significant amount of work in
    invoicing, in auditing, in ensuring cost centers
    are charged correctly, in making sure time is
    properly recorded," explains DHL's Kifer. "We
    have as many as 100 projects a year, all with an
    offshore component, so you can imagine the number
    of invoices and time sheets that have to be
    audited on any given day."
  • We knew there would be invoicing and auditing,"
    he says. "But we didn't fully appreciate the due
    diligence and time it would require."
  • Bottom line Expect to pay an additional 6
    percent to 10 percent on managing your offshore
    contract

31
Criticisms of outsourcing
Hidden Costs
  • The Cost of Selecting a Vendor
  • With any outsourced service, the expense of
    selecting a service provider can cost from .2
    percent to 2 percent in addition to the annual
    cost of the deal. In other words, if you're
    sending 10 million worth of work to India,
    selecting a vendor could cost you anywhere from
    20,000 to 200,000 each year.
  • Some companies hire an outsourcing adviser for
    about the same cost as doing it themselves. To
    top it off, the entire process can take from six
    months to a year, depending on the nature of the
    relationship.
  • Bottom line Expect to spend an additional 1
    percent to 10 percent on vendor selection and
    initial travel costs.
  • Source The Hidden Costs of Offshore Outsourcing.
    Sep. 1, 2003 Issue of CIO Magazine

32
Criticisms of outsourcing
Hidden Costs
  • The Cost of Transition
  • The transition period is perhaps the most
    expensive stage of an offshore endeavor. It takes
    from three months to a full year to completely
    hand the work over to an offshore partner. If
    company executives aren't aware that there will
    be no savingsbut rather significant
    expensesduring this period, they are in for a
    nasty surprise..
  • It took an awful lot of time to bridge the
    Pacific and getting that to work correctly,"
    remembers Textron Financial's Raspallo, who spent
    six months and 100,000 to set up a transoceanic
    data line with Infosys in 1998, It also cost an
    extra 10,000 a month to keep that network
    functional..
  • Bottom Line Expect to spend an additional 2
    percent to 3 percent on transition costs.
  • Source The Hidden Costs of Offshore Outsourcing.
    Sep. 1, 2003 Issue of CIO Magazine

33
Criticisms of outsourcing
Hidden Costs
  • The Cost of Layoffs
  • To begin with, you have to pay workers severance
    and retention bonuses. You need to keep employees
    there long enough to share their knowledge with
    their Indian replacements. People think if they
    give generous retention bonuses it will destroy
    the business proposition. They cut corners
    because they want quick payback. But then they
    lose the people that can help with the transition
    and incur the even bigger cost of not doing the
    transition right."..
  • Bottom line Expect to pay an extra 3 percent to
    5 percent on layoffs and related costs.
  • Source The Hidden Costs of Offshore Outsourcing.
    Sep. 1, 2003 Issue of CIO Magazine

34
Criticisms of outsourcing
Hidden Costs
  • The Cultural Cost
  • You simply cannot take a person sitting here in
    America and replace them with one offshore
    worker," GE Real Estate's Zupnick says. "Whether
    they're in India or Ireland or Israel
  • a project that's common sense for a U.S.
    workerlike creating an automation system for
    consumer credit cardsmay be a foreign concept
    offshore.
  • Bottom line Expect to spend an extra 3 percent
    to 27 percent on productivity lags.
  • Source The Hidden Costs of Offshore Outsourcing.
    Sep. 1, 2003 Issue of CIO Magazine

35
Critical areas for a successful outsourcing
program
  • Understanding company goals and objectives
  • A strategic vision and plan
  • Selecting the right vendor
  • Ongoing management of the relationships
  • A properly structured contract
  • Open communication with affected individual/groups
  • Senior executive support and involvement
  • Careful attention to personnel issues
  • Short-term financial justification

36
The Pre-Outsourcing Process
Program Initiation
  • At the start of any outsourcing program, there
    are a variety of ideas and opinions about the
    purpose and scope of the program, what the final
    result of the program will be, and how the
    program will be carried out. The Program
    Initiation Stage is concerned with taking these
    ideas and intentions and documenting them to form
    the basis of a draft contract.

Service Implementation
  • Service Implementation covers the activities
    required to take these ideas and intentions and
    develop them into a formal, planned outsourcing
    program and to make the transition to the
    outsourced service.
  • Specifically these activities are
  • Defining the transition project
  • Transferring staff
  • Defining the Service Level Agreement (SLA)
  • Defining service reporting
  • Implementing and handing over the service
  • Implementing service management procedures
  • During the handover phase it is imperative that
    continuity of service is maintained at all times,
    that there is no reduction in the quality of the
    delivery and that timescales and deadlines are
    not compromised.

37
The Pre-Outsourcing Process
Final Agreement
  • The draft contract produced at the Initiation
    stage is generally amended during negotiations
    and the final Contract is produced on completion
    of the negotiation cycle.

Program Closure
  • In order to gain maximum benefit, the program
    should go through a formal close down. There is
    no point in continuing to argue lost causes once
    irrevocable decisions have been taken. Staff and
    companies alike need to accept the new situation
    and move forward. However, there will be a lot of
    information generated during the life of the
    program, and this will have been stored with
    varying degrees of formality by the team members.
    This information needs to be formally filed away
    for future reference.

38
Types of Sourcing Arrangements
  • There are four fundamental parameters that
    determine the kind of outsourcing arrangement
    that a firm may enter into degree (total,
    selective, and none) mode (single vendor/client
    or multiple vendors/clients) ownership (totally
    owned by the company, partially owned, externally
    owned) and time frame (short term or long term).
    The combination of specific instances of these
    parameters yields different types of sourcing
    arrangements such as joint ventures, facilities
    sharing, and spin-offs.

Degree of   Ownership  
Outsourcing Internal Partial External
Total Spin-offs Joint Traditional Outsourcing
Selective (Wholly Owned Subsidiary) Venture Selective Outsourcing
None Insourcing / Backsourcing Facilities Sharing among multiple clients N/A
Dibbern, J. and Goles, T. and Hirschheim, R.
and Jayatilaka, B. (2004) "Information Systems
Outsourcing A Survey and Analysis of the
Literature In The DATA BASE for Advances in
Information Systems, Volume 34, Issue Number 4,
pp 6-102
39
Stage model of IS outsourcing
40
Theories of Outsourcing
What is a Theory???
  • A well-substantiated explanation of some aspect
    of the natural world an organized system of
    accepted knowledge that applies in a variety of
    circumstances to explain a specific set of
    phenomena "theories can incorporate facts and
    laws and tested hypotheses" "true in fact and
    theory"
  • A tentative insight into the natural world a
    concept that is not yet verified but that if true
    would explain certain facts or phenomena) "a
    scientific hypothesis that survives experimental
    testing becomes a scientific theory" "he
    proposed a fresh theory of alkalis that later was
    accepted in chemical practices"
  • An unproven conjecture I have a theory about who
    broke into the school last night, but I have no
    proof to back it up.
  • An expectation of what should happen, barring
    unforeseen circumstances. So well be there in
    three hours? Thats the theory.

41
Theories of Outsourcing
Why Theories???
  • Krumboltz and Nichols (1990) argue that theories
    are developed to inform guidance practice are
    generally based on research evidence which can be
    scrutinized and judged independently by others. 
  • They propose that theory for research purposes
    should help
  • understand a complex phenomenon,
  • make predictions about future outcomes and
  • decide on courses of action.

Krumboltz, J.D. Nichols, C. W. (1990)
Integrating the social learning theory of career
decision making, in Walsh, W.B. Osipow, S.H.
(Eds) Career Counseling contemporary topics in
vocational psychology, New Jersey, Lawrence
Erlbaum Associates, pp.159-192.
42
Theories of Outsourcing
Why Theories???
  • They also identify characteristics that can be
    used to identify a theory, which include the
    following
  • Represents reality - theory represents various
    aspects of reality in an understandable way.
  • Omits non-essentials - theory simplifies reality
    by ignoring a large number of variables (like a
    map).
  • Emphasis - to make features clear, theories often
    stress the importance of certain variables (e.g.
    by giving them special names, stressing their
    importance in words, figures or formulas).
  • Abstracts - a theory may include unobservable
    constructs and ideas believed to be important
    which are abstractions.
  • Practically useful - a good theory enables people
    to derive answers to innumerable questions (e.g.
    how are preferences for occupations developed?
    What interventions are needed to help clients
    make sound career decisions, etc.).

Krumboltz, J.D. Nichols, C. W. (1990)
Integrating the social learning theory of career
decision making, in Walsh, W.B. Osipow, S.H.
(Eds) Career Counseling contemporary topics in
vocational psychology, New Jersey, Lawrence
Erlbaum Associates, pp.159-192.
43
Theories of Outsourcing
Theory and Research
Academic research consists of three main
interdependent elements that together form the
triad network of justification (Laudan, 1984,
p.63)
  • Aims
  • the research problem/question or objectives being
    addressed.
  • Problem Importance
  • Why addressing the problem is important
  • Theories
  • the conceptual underpinnings used to address the
    particular problem area.
  • Methods
  • The techniques used to collect, analyze, and
    interpret the data (for empirical research), or
    the construction and use of a mathematical/model/s
    ystem/ application (in non-empirical research).

Laudan, L. (1984). Science and Values An Essay
on the Aims of Science and Their Role in
Scientific Debate, Berkely, CA University of
California Press.
44
Theories of Outsourcing
IS Outsourcing Theories
  • There is neither a single research question nor a
    single method nor theory that all researchers
    have adopted (Dibbern et al., 2004).
  • Even single papers address more than one research
    objective, and draw on several different theories.
  • For example, Loh (1994) looked at why
    organizations outsource, and the resulting
    outcomes, through the twin theoretical lenses of
    transaction cost economics and agency theory.

Loh, L. (1994). "An Organizational-Economic
Blueprint for Information Technology Outsourcing
Concepts and Evidence," Proceedings of the 15th
International Conference on Information Systems,
Vancouver, Canada, pp. 73-89.
45
Theories of Outsourcing
Theoretical Foundation Level of Analysis Basic Assumptions Main Variables/ focus Key Authors
Agency theory Organizational Asymmetry of information, differences in perceptions of risk and uncertainty Agent costs, optimal Contractual relationships Jensen and Meckling (1976)
Game theory Organizational, individual Every player under the same conditions, make rational decisions to maximize profit Decisions under certain situations Kreps et al. (1982) Nash (1953) Fudenberg Tirole (1990)
Innovation theories Individual, organizational Innovation occurs in stages, some models not based on stages Adoption, and diffusion Daft (1978) Rogers (1983) Zaltman et al. (1973)
Power and Politics theories Individual, organizational Power, idiosyncratic interests, and politics play major roles in Organi-zational decision-making Different degrees of power, organizational politics Pfeffer, (1981 1982) Markus (1983)
Relationship theories Organizational Parties in a relationship assume that the outcome of a relationship is greater than achieved by individual parties separately (Synergy) Cooperation, interactions, social and economic exchanges Klepper (1995) Kern (1997)
Dibbern, J. and Goles, T. and Hirschheim, R. and
Jayatilaka, B. (2004) "Information Systems
Outsourcing A Survey and Analysis of the
Literature In The DATA BASE for Advances in
Information Systems, Volume 34, Issue Number 4,
pp. 6-102
46
Theories of Outsourcing
Theoretical Foundation Level of Analysis Basic Assumptions Main Variables/ focus Key Authors
Resource theories Organizational A firm is a collection of resources, and resources are central to a firms strategy Internal resources, resources in the task environment Barney (1991) Penrose (1959) Pfeffer Salancik, (1978) Thompson, (1967)
Social Exchange theory Individual, organizational Participation in exchange occurs with the assumption of rewards and obligation to return rewards Exchange of activities, benefits/costs, recip-rocity, balance, cohesion, and power in Exchanges Blau (1964) Emerson (1972) Homans (1961)
Strategic Management theories Organizational Firms have long-term goals, and they plan and allocate resources to achieve these goals Strategic advantage, strategies, choice of individuals Chandler, (1962) Miles Snow (1978) Porter (1985) Quinn, (1980)
Transaction Cost theory Transaction Limited rationality, opportunism Transaction costs, production costs Coase (1937) Williamson (1975 1981 1985)
Dibbern, J. and Goles, T. and Hirschheim, R. and
Jayatilaka, B. (2004) "Information Systems
Outsourcing A Survey and Analysis of the
Literature In The DATA BASE for Advances in
Information Systems, Volume 34, Issue Number 4,
pp. 6-102
47
Theories of Outsourcing
Theoretical Foundation Level of Analysis Basic Assumptions Main Variables/ focus Key Authors
Resource theories Organizational A firm is a collection of resources, and resources are central to a firms strategy Internal resources, resources in the task environment Barney (1991) Penrose (1959) Pfeffer Salancik, (1978) Thompson, (1967)
Social Exchange theory Individual, organizational Participation in exchange occurs with the assumption of rewards and obligation to return rewards Exchange of activities, benefits/costs, recip-rocity, balance, cohesion, and power in Exchanges Blau (1964) Emerson (1972) Homans (1961)
Strategic Management theories Organizational Firms have long-term goals, and they plan and allocate resources to achieve these goals Strategic advantage, strategies, choice of individuals Chandler, (1962) Miles Snow (1978) Porter (1985) Quinn, (1980)
Transaction Cost theory Transaction Limited rationality, opportunism Transaction costs, production costs Coase (1937) Williamson (1975 1981 1985)
Dibbern, J. and Goles, T. and Hirschheim, R. and
Jayatilaka, B. (2004) "Information Systems
Outsourcing A Survey and Analysis of the
Literature In The DATA BASE for Advances in
Information Systems, Volume 34, Issue Number 4,
pp. 6-102
48
Agency Theory
  • Agency Theory is based on the conceptualization
    of the firm as a a connected series or group of
    contracts between principals or stakeholders and
    agents.
  • The stakeholders are represented by different
    groups or persons within the firm as well as
    outside the firm, such as customers, suppliers or
    shareholders (Jensen Meckling, 1976, p.
    310-311).
  • The basic argument is that the principal
    transfers decision rights to the agent.
  • The principal-agent problem treats the
    difficulties that arise under conditions of
    incomplete and asymmetric information when a
    principal hires an agent.
  • To make sure that the agent behaves in the
    principals best interest the latter sets
    incentives and controls. When calculating the
    magnitude of these incentives the anticipated
    costs of controlling the agent are considered.
    The total cost is the sum of monitoring and
    bonding including issues such as residual loss.
  • Various mechanisms may be used to try to align
    the interests of the agent with those of the
    principal, such as piece rates/commissions,
    profit sharing, efficiency wages, the agent
    posting a bond, or fear of firing.
  • The principal-agent problem is found in most
    employer/employee relationships, for example,
    when stockholders hire top executives of
    corporations.

Jensen, M. C. and Meckling, W. H. (1976). "Theory
of the Firm Managerial Behavior, Agency Costs
and Ownership Structure," Journal of Financial
Economics, Vol. 3, pp. 305-360.
49
Game Theory
The Prisoners dilemma
Two suspects are arrested by the police. The
police have insufficient evidence for a
conviction, and, having separated both prisoners,
visit each of them to offer the same deal. If one
testifies (defects from the other) for the
prosecution against the other and the other
remains silent (cooperates with the other), the
betrayer goes free and the silent accomplice
receives the full 10-year sentence. If both
remain silent, both prisoners are sentenced to
only six months in jail for a minor charge. If
each betrays the other, each receives a five-year
sentence. Each prisoner must choose to betray the
other or to remain silent. Each one is assured
that the other would not know about the betrayal
before the end of the investigation. How should
the prisoners act?
50
Game Theory
The Prisoners dilemma
  • If we assume that each player cares only about
    minimizing his or her own time in jail, then the
    prisoner's dilemma forms a non-zero-sum game in
    which two players may each cooperate with or
    defect from (betray) the other player.
  • In this game, as in most game theory, the only
    concern of each individual player (prisoner) is
    maximizing his or her own payoff, without any
    concern for the other player's payoff.
  • The unique equilibrium for this game is a
    Pareto-suboptimal solution, that is, rational
    choice leads the two players to both play defect,
    even though each player's individual reward would
    be greater if they both played cooperatively.

Pareto efficient situations are those in which
it is impossible to make one person better off
without necessarily making someone else worse off
51
Game Theory
  • Game theory (Kreps, et al., 1982 Nash, 1953
    Spence, 1976) attempts to explain the strategic
    behavior of players or actors (e.g., companies)
    in particular game situations.
  • These situations are characterized by specific
    assumptions concerning the production function of
    a company, the environment and informational
    structures.
  • It is assumed that all players work under the
    same conditions and make rationale and
    intelligent decisions to maximize their profits.
  • The only determinant for these decisions is the
    perception of the expected actions of the
    antagonist, i.e. other player (Fudenberg
    Tirole, 1990).

52
Innovation Theories
  • Innovation Components
  • Adoption. The decision to use the innovation
  • Diffusion. The process by which an innovation
    spreads out into social systems (e.g., in
    organizations, industries, countries).
  • A number of different models - stage based as
    well as models without stages are used in
    explaining the innovation process (Schroeder et
    al., 1989 Zaltman et al., 1973).
  • Diffusion of Innovation (DOI) theory sees
    innovations as being communicated through certain
    channels over time and within a particular social
    system (Rogers, 1995). Individuals are seen as
    possessing different degrees of willingness to
    adopt innovations and thus it is generally
    observed that the portion of the population
    adopting an innovation is approximately normally
    distributed over time (Rogers, 1995).

53
Innovation Theories
  • Breaking this normal distribution into segments
    leads to the segregation of individuals into the
    following five categories of individual
    innovativeness (from earliest to latest adopters)
  • Innovators - venturesome, educated, multiple
    info sources
  • Early adopters - social leaders, popular,
    educated
  • Early majority - deliberate, many informal social
    contacts
  • Late majority - skeptical, traditional, lower
    socio-economic status
  • Laggards - neighbors and friends are main info
    sources, fear of debt
  • When the adoption curve is converted to a
    cumulative percent curve a characteristic S curve
    is generated that represents the rate of adoption
    of the innovation within the population (Rogers,
    1995).

54
Innovation Theories
  • The rate of adoption of innovations is impacted
    by five factors (Rogers, 1995). The first four
    factors are generally positively correlated with
    rate of adoption while the last factor,
    complexity, is generally negatively correlated
    with rate of adoption (Rogers, 1995).
  • Relative advantage may be economic or
    non-economic, and is the degree to which an
    innovation is seen as superior to prior
    innovations fulfilling the same needs.
  • Compatibility is the degree to which an
    innovation appears consistent with existing
    values, past experiences, habits and needs to the
    potential adopter.
  • Observability is the perceived degree to which
    results of innovating are visible to others
  • Trialability is the perceived degree to which an
    innovation may be tried on a limited basis, and
    is positively related to acceptance. Trialability
    can accelerate acceptance because small-scale
    testing reduces risk.
  • Complexity is the degree to which an innovation
    appears difficult to understand and use the more
    complex an innovation, the slower its acceptance.

55
Diffusion of Innovation Theory in IS
  • Moore and Benbasat (1991), working in an IS
    context, expanded upon the five factors impacting
    the adoption of innovations presented by Rogers,
    generating eight factors (voluntariness, relative
    advantage, compatibility, image, ease of use,
    result demonstrability, visibility, and
    trialability) that impact the adoption of IT.
    Scales used to operationalize these factors were
    also validated in the study.
  • Since the early applications of DOI to IS
    research the theory has been applied and adapted
    in numerous ways. Research has, however,
    consistently found that technical compatibility,
    technical complexity, and relative advantage
    (perceived need) are important antecedents to the
    adoption of innovations (Bradford and Florin,
    2003 Crum et. al., 1996) leading to the
    generalized model presented below (see figure on
    right).

56
Power and Politics theories
  • These theories assume that power, idiosyncratic
    interests, and politics play major roles in
    organizational decision-making (Pfeffer, 1981
    Pfeffer, 1982).
  • According to this perspective organizations are
    political entities and people within
    organizations have different degrees of power.
  • Power is often defined as the basic energy to
    initiate and sustain action to translate
    intentions into reality
  • As attempts are made to implement idiosyncratic
    objectives and decisions of people with power,
    organizational politics transpire.
  • Power and politics can play an important role in
    decisions on IS in general (Markus, 1983) and in
    outsourcing decisions (Lacity Hirschheim,
    1993b).
  • idiosyncrasy
  • a characteristic, habit, mannerism, or the like,
    that is peculiar to an individual.
  • the physical constitution peculiar to an
    individual.
  • a peculiarity of the physical or the mental
    constitution, esp.

57
Relationship theories
  • Relationship theories focus on cooperation,
    interactions, and social and economic exchanges
    as major factors in interorganizational
    relationships.
  • they focus on interactions between parties that
    are geared towards the joint accomplishment of
    the individual party's objectives.
  • Relationship theories often appear in the
    strategic management and marketing literature,
    addressing topics such as alliances and
    partnerships, competitive advantage, supply chain
    management, and supplier-buyer relationships.
  • As Klepper (1995) and Kern (1997) have pointed
    out, underlying this work is the notion that at
    the root of all relationships is some type of
    exchange.
  • In this view, parties to an exchange are in
    mutual agreement that the resulting outcomes of
    the exchange are greater than those that could be
    attained through other forms of exchange, or from
    exchange with a different partner.
  • This motivates the parties to consider the
    relationship important in and of itself, and to
    devote resources towards its development and
    maintenance.

58
Resource Theories
There are two types of resource theories
  • resource-based theory
  • resource-dependency Theory

Both note the centrality of a firms resources as
being the foundation for a firms strategy.
The difference is
  • resource-based theory focuses on a firms
    internal resources and capabilities
  • resource-dependency focuses on resources in the
    external environment.

59
Resource Based Theory
According to classical economics, the capacity of
a company to obtain a profit margin higher than
its cost of capital depends on two principal
factors
  • the attraction of the industry in which it
    operates, and the establishment of a competitive
    advantage over its rivals (Porter and Millar,
    1985).
  • the establishment of a competitive advantage over
    its rivals (Porter and Millar, 1985).

This approach rests on the premise that the
source of competing advantage derives mainly from
the positioning of the company inside a given
industry. Moreover, it assumes that the
companies have free access, at least in the
medium term, to the resources required to offset
or influence the market forces.
Resource-based thinking considers that a
companys resources include all assets,
organizational characteristics, processes,
aptitudes, information and knowledge controlled
by that company and its employees (Barney, 1991).
A firms competencies stem from its ability to
reconfigure and exploit its assets in such a way
as to attain a competitive advantage.
60
Resource Based Theory
  • The resource-based view (RBV) argues that firms
    possess resources, a subset of which enable them
    to achieve competitive advantage, and a subset of
    those that lead to superior long-term
    performance. Resources that are valuable and rare
    can lead to the creation of competitive
    advantage. That advantage can be sustained over
    longer time periods to the extent that the firm
    is able to protect against resource imitation,
    transfer, or substitution. In general, empirical
    studies using the theory have strongly supported
    the resource-based view.
  • RBV defines resources as inputs required for
    performing a firms tasks. competitive advantage
    can occur only when there is heterogeneity and
    immobility of the firms resources (Barney, 1991
    Penrose, 1959).

61
Resource Dependency Theory (RDT)
  • RDT in general states that all organizations are
    dependent on some elements of their external
    environments to varying degrees due to the
    control these external environments have on the
    resources (Pfeffer Salancik, 1978 Thompson,
    1967).
  • Organizational success in RDT is defined as
    organizations maximizing their power (Pfeffer
    1981). RDT characterizes the links among
    organizations as a set of power relations based
    on exchange resources.
  • RDT proposes that actors lacking in essential
    resources will seek to establish relationships
    with (i.e., be dependent upon) others in order to
    obtain needed resources. Also, organizations
    attempt to alter their dependence relationships
    by minimizing their own dependence or by
    increasing the dependence of other organizations
    on them. Within this perspective, organizations
    are viewed as coalitions alerting their structure
    and patterns of behaviour to acquire and maintain
    needed external resources. Acquiring the external
    resources needed by an organization comes by
    decreasing the organizations dependence on
    others and/or by increasing others dependency on
    it, that is, modifying an organizations power
    with other organizations.

62
Resource Dependency Theory (RDT)
  • RDT rests on three underlying assumptions
  • Organizations are assumed to be comprised of
    internal and external coalitions which emerge
    from social exchanges that are formed to
    influence and control behavior
  • The environment is assumed to contain scarce and
    valued resources essential to organizational
    survival. As such, the environment poses the
    problem of organizations facing uncertainty in
    resource acquisition.
  • Organizations are assumed to work toward two
    related objectives acquiring control over
    resources that minimize their dependence on other
    organizations and control over resources that
    maximize the dependence of other organizations on
    themselves. Attaining either objective is thought
    to affect the exchange between organizations,
    thereby affecting an organizations power.
  • Although RDT was originally formulated to discuss
    relationships between organizations, the theory
    is applicable to relationships among units within
    organizations. RDT is consistent with ecological
    and institutional theories of organizations where
    organizations are seen as persistent structures
    of order under constant reinterpretation and
    negotiati
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