Outsourcing and Offshoring

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Outsourcing and Offshoring

• Paul C. Lynch
• IE 597-I Fall 2005
• December 7, 2005

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Presentation Outline

• Define Outsourcing and Offshoring
• Political Media Debate
• Economist View
• Advantages for Companies
• Risks
• Basic Engr. Economic Tools and OR Tools Used for
  I-O Evaluation
• Further Research Needed
• Q A Session

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Outsourcing

• act of moving some of a firms internal
  activities and decision responsibilities to
  outside providers.
• procuring of services or products from an
  outside supplier or manufacturer in order to cut
  costs.
• Client Firm
• Outsource Provider

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Offshoring

• the delegation of administrative, engineering,
  research, development, or technical support
  processes to a third-party vendor in a lower-cost
  location.
• Offshoring is looked at as a version of
  outsourcing that procures services or goods from
  suppliers or manufacturers outside of the
  country.

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Interchangeability / Buzz Terms

• Outsource/ Offshore
• Outsource/ Subcontract
• Offshore Outsourcing/ Offshoring
• BPO
• ODC
• GDC

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Outsourcing/ Offshoring Political Debate

• Kerry CON
• Export American Products, Not Jobs
• Shut Corporate Tax Loopholes and level playing
  field.
• Bush PRO
• Economy is Strong and Getting Stronger
• Train Americans and Increase Funding for
  Community Colleges.

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Exporting America

• Companies
• Anheuser-Busch
• AOL
• Boeing
• Coca-Cola
• Dell Computer
• Delta Airlines
• Gateway Computer
• Home Depot
• Lowes

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The Greenspan View

• PRO Outsourcing and Offshoring
• Job Protection Path to Stagnation
• Protection Would Lead to Job Losses

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Why Outsource/ Offshore?

• Main Factor
• Huge Cost Savings
• 30-60 Overall
• Labor
• Technology Investments
• Process Efficiencies

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Additional Benefits

• Access to Skills and Capabilities Beyond the
  Companys
• Speed
• Wake Up Call or Motivational Impact
• Improved Operational Visibility
• Access to Instant Capacity
• Financing Flexibility
• Improved Service/ Decrease Time To Market

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Cost Savings Breakdown
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WOW! Huge Cost Reductions!

• Offshoring is the Way To Go RIGHT???????

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Not So Fast My Friend. There are Some Risks
Involved With that Decision!
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The Major Risks In Offshoring

• Contract
• Privacy and Security
• Diminishing Technical Returns
• Increased/ Hidden Costs
• Loss of Expertise (Mainly IT)
• Impact On Your Employees
• Impact on Your Customers
• Failure of Outsource Provider

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Additional Offshoring Risks

• Economic Risks
• Culture Risks
• Demographic Risks
• Political Stability Risks

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What Makes Your Business A HOT Candidate for
Offshoring?

• Top 3 Candidate Processes
• Processes are Labor Intensive
• Processes are Scale - and Efficency Driven
• Repetitious
• Processes Allow Remote Execution

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Basic Tools Used To Evaluate I-O Alternatives

• Basic Engineering Economic Analysis
• PV, NPV Calculations - E(NPV)
• Break-Even Analysis (Cost/ Benefit Analysis)
• Compare Quantifiable Costs with Possible
  Benefits.
• ROI Calculations
• IRR- Internal Rate of Return Methods
• ARR- Accounting Rate of Return Analysis
• Payback Period Evaluation

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OR Methodologies

• Decision Theory (DT) Model
• Game Theory (GT) Model
• LP For O-I Proportional Allocation Decisions
• Allocation of Service Jobs, Production
  Requirements for Different Outsource Providers.
• LP Min. Total Costs, Max. Total Profits
• Integer Programming
• Call Center, Phone Service Industries

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OR Methodologies

• Centroid Method
• Shortest-Route Method
• Minimal Spanning-Tree Method
• Tranportation Method

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Further Research Needed

• Case Studies
• Compile Results from Outsourcing Companies
• Apply some Values for Stated Risks.
• Country and Region Analysis
• Laws and Guidelines
• Govts. Working to Minimize Risks?
• Current States of Companies currently there
• Develop SPECIFIC OR Models.
• Strategic Partnerships

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References

• Dobbs, Lou (2005), Exporting America The
  List., available at http//www.cnn.com/
• CNN/Programs/lou.dobbs.tonight (accessed 4
  December).
• Donahoe, Daniel N., Pecht, Michael (2003), Are
  U.S. Jobs Moving to China?, IEEE
• Transactions on Components and Packaging
  Technologies, v 26, n 3, September, 2003, pp.
  682-686.
• Hines, Matthew (2004), Greenspan Offshoring
  Laws Could Harm U.S., CNET News,
• March, 12, 2004, available at
  http//news.com.com/GreenspanOffshoring
  lawscouldharmU.S./2100-1022_3-5172975.html.
• Linder, Jane C. (2004), Outsourcing for Radical
  Change. pp. 63-69.
• Namasivayam, S. (2004), Profiting from Business
  Process Outsourcing, IT
• Professional, v 6, n 1, January/February, 2004,
  pp. 12-18.
• Robinson, M., Kalakota, R. (2004), Offshore
  Outsourcing Business Models, ROI, and
• Best Practices. pp. 1-9.
• Rodgers, T.J. (2005), The truth about
  outsourcing, IEEE Design and Test of