+ Offshoring David Adams Heather Stockeland

+ What is Offshoring? Form of outsourcing that involves moving work overseas Different Forms 3 rd Party vendor Subsidiary company Relevance Political Globalization Cost/Benefit of moving work

+ Arguments For Offshoring Profitability and Market Share Production Efficiency Alignment of Information Systems Advanced Processes Risks to consider Mitigating Risks

+ Profitability and Market Share Profitability 2009 study by Dunn et al. Profitability is delayed due to costs incurred at beginning After approximately 2 years, company will experience significant gain Market Share 2009 study showed market share increased more when offshoring 2005 study by LogicaCMG showed 1.7% increase in stock price in month after announcement of offshoring

+ Production Efficiency Output per labor-hour from (Houseman, 2006) Increased by 45% in manufacturing Increased by 426% in computer and electronics manufacturing 11-13% of growth in manufacturing due to offshoring (Houseman, 2006) Positive side effects on other companies that do not utilize offshoring

+ Alignment of Information System Offshoring allows a company to align IS and strategic goals Utilize third-party knowledge of different information systems Information System Primary way of gathering and analyzing company data Benefits More reliable information Information that more effectively achieves company goals

+ Offshoring Advanced Processes Trend to offshore more advanced processes will greatly increase over the next decade (Jensen & Pedersen, 2011) Increased confidence by businesses already offshoring Basic Processes Payroll Manufacturing Call Center Administration Knowledge-intensive businesses benefit most: Research & Development Unique knowledge bases

+ Risks that must be considered Long-term effects Examples: Loss of trade secrets Non-alignment with strategic goals Uncertain ROI Immediate effects Examples: Decreased quality Decreased speed of business functions Employee turnover Inadequate methods of measuring performance Strategic RiskOperational Risk

+ Mitigating Risks Perform a risk assessment Identify necessary security measures Evaluate all costs incurred, both financial and non- financial Maintain strict control over offshored processes Develop and maintain objective methods by which performance can be measured Create standard operating procedures to maintain quality Implement rigid measures to gauge product quality Mitigating Strategic RiskMitigating Operational Risk

+ Arguments Against Offshoring Stakeholder Focus Employee concerns Ethical considerations Data and Information Security Hidden financial costs Cultural costs

+ Stakeholder Focus “…attention to stakeholder concerns may help a firm avoid decisions that might prompt stakeholders to undercut or thwart its objectives” (Robertson, Lamin, & Livanis, 2010) Investors Main concerns: profitability and firm competitiveness Will offshoring negatively impact the bottom line? Will offshoring impact market share? How will the market react to the company announcing transition of work overseas? Consumers Main concerns: product quality, safety, and information security Will sales decrease or will existing customers leave as a result of the company offshoring? Is my information secure from overseas hackers? Will the quality of the products I purchase decrease because they cost less to produce?

+ Employee Considerations “Surviving employee” syndrome Concern over potential job loss Decreased morale Decreased productivity Training provided to offshore replacements Poor practices Inefficient training Offshore employee Resent being paid less for doing the same job

+ Ethical Considerations Working conditions of offshoring vendor Worker protection laws Domestic job loss Product safety Protecting consumer information Environmental laws

+ Information and Data Security Survey of CFOs found that one of the top two reasons for not outsourcing is the perceived risk of losing confidential information (Aronson, 2008) Need for additional network bandwidth and security technologies Intellectual property right laws

+ Hidden Costs Vendor selection costs Selection of an appropriate vendor can take up to a year Travel expenses and expert fees Transition period costs (6-12 months) Travel costs of offshore employees Double salaries for reduced productivity Employee layoff costs Severance packages Retention bonuses Ramping costs Decreased productivity during initial ramp phase of new workers Technology costs Cost of quality: rework, returns, lost sales Contract management costs Increasing labor costs of offshore markets

+ Cultural Costs IT organizations that choose offshoring experience a twenty percent decline in efficiency during the first two years as a result of cultural differences (Overby, 2003) High turnover National holidays increase downtime Communication barriers

+ Conclusion Impact of Offshoring on all areas of the business mustbe carefully considered Key: perform thorough risk assessment Offshoring clearly has incredible benefits but can haveimmense consequences Areas of future research Track long-term stock price and earnings changes ofcompanies that Offshore Investigate whether companies continue to Offshoreadvanced processes Examine long-term challenges since this is a new trend

+ Open Discussion Does anyone have experience with their employer offshoring activities? Is it worth the risk to offshore? What are some additional arguments for and against offshoring?