Good Hopes For Global Outsourcing Case Analysis

Global Sourcing Global sourcing is the procurement of products or services from foreign suppliers Global sourcing has become a major international business activity. A firm can outsourc from independent suppliers, company-owned subsidiaries and affilates, or a combination of both.

Drivers of Global Sourcing Technological advances, particularly Internet connectivity and broadband availability Decrease in transportation and communication costs Increased access to information and a rise in connectivity between suppliers and their customers Entrepreneurship and rapid economic changes in emerging markets.

Characteristics of Global Sourcing Services are more difficult to outsource than manufacturing Difficult to judge quality of services Need to develop a trusting relationship Location decision Eastern Europe, India, China & Latin America Main motive of outsourcing is to cut costs, however it often is more costly than planned International laws do not fully protect confidentiality of customer information

The Firm: Good Hope Hospitals Chain of nine hospitals in California Needs to significantly cut operational costs. To avoid laying-off workers, management wants to outsource certain business processes. Outsourcing goals: Reduce labor costs Allow Good Hope to focus on activities that are most critical to their value offerings. Increase organizational efficiency, revenues and the quality of service offerings.

Background Good Hope Wants to outsource data processing for accounts receivable and accounts payable, some customer service applications, transcription of medical records, and some data processing Researched the risks of global outsourcing Consulted with an outsourcing broker Recommended BangSource, a supplier in India Claimed that Good Hope would save $1.4 million annually 25% annual employee turnover rate

Problem #1 Financial costs of outsourcing were higher than expected Processing of accounting and other data more complicated than expected. BangSource is less efficient in answering customer inquiries, which resulted in more telephone time and phone calls to address customer needs Fluctuations in the rupee and dollar exchange rate inflated the cost of BangSource

Problem #2 Outsourcing has decreased customer satisfaction, putting Good Hope’s reputation on the line. Customer complaints about hard-to-understand accents Poor infrastructure, partly due to new contracts Late in performing promised services due to shortage of workers.

Alternative #1: Captive Operation in Mexico Good Hope would own its offshore facility in Mexico Criteria for choosing Mexico: Financial structure of Mexico Availability and skills of people Nature of the business environment Proximity to California Costs High initial costs Bureaucracy and regulation increases with FDI Higher energy and transportation costs Quality of infrastructure is low, which will increase costs.

Alternative #1: Captive Operation in Mexico Benefits Complete control of outsourced activity Control over reputation, brand equity and customer service Control of key technologies and processes Protection of intellectual property Enhanced customer service for Spanish-speaking customers Enhanced communication between Head office in California and outsource facility because Mexico is close to the US, and it is in the same time zone Labor costs are low Access to qualified personnel abroad Enhanced employee morale and commitment among employees in Mexico. Faster corporate growth because outsourcing allows Good Hope to focus on key activities. Increase production efficiency, maximize resource utilization Possibility of access to new markets

Alternative #2: Outsource only Backoffice Activities to BangSource Customer service affects reputation and brand equity, especially in the service industry. If customer service is considered an important key activity it should not be outsourced.

Alternative #2: Outsource only Backoffice Activities to BangSource Costs Savings will not be as substantial BangSource lacks quality workers BangSource has a high turnover rate of skilled employees, Absence of strong protection of intellectual property in India Exchange rate fluctuations between the rupee and the dollar Higher energy and transportation costs Quality of infrastructure is poor Conflicts and misunderstandings between Good Hope and BangSource due to cultural differences Process of accounting and other data is still complex Bureaucracy, legalities and regulation is still complex

Alternative #2: Outsource only Backoffice Activities to BangSource Benefits Control of most customer service activities, which preserves reputation Faster corporate growth because allows Good Hope to focus on key activities, such as customer service. Sheds unnecessary overhead. Increases production efficiency

Alternative # 3: Maintaining Status Quo with an Enhanced Relationship Outsourcing fails because focal firm and the supplier do not spend enough time in the beginning establishing a relationship and setting boundries Good Hope needs to collaborate closely with BangSource in co-development and co-design activities.

Alternative # 3: Maintaining Status Quo with an Enhanced Relationship Costs Lack of quality workers with adequate knowledge. Regulation and bureaucracy is complex, however by maintaing a close relationship with BangSource, Good Hope will have an easier time. Exchange rate fluctuations between rupee and dollar Higher energy and transportation costs Quality of infrastructure is poor, resulting in electricity blackouts

Alternative # 3: Maintaining Status Quo with an Enhanced Relationship Benefits Less conflicts/misunderstandings Enhanced employee morale and commitment among employees Good Hope will gain negociating power and better control of the value chain Faster corporate growth because outsourcing allows Good Hope to focus on key activities Productivity and service improvement Production efficiency due to giving BangService specialized tasks Faster responsiveness to evolving customer needs Shedding unnecessary overhead

Alternative #4: Terminate All Outsourcing Activities Costs Lay off workers, which may lead to eroding employee morale Reduction in competitiveness Cost effieciency reduction Not focused on key activities Spending unneccessary overhead Benefits Control over value chain Maintain reputation, brand equity, and customer service Protection of intellectual property Good infrastructure

Recommendations Alternative #1, Captive Operations in Mexico, preserves reputation and increasing customer service quality However, increase costs – lay-off some employees. Alternative # 3, Maintaining Status Quo with an Enhanced Relationship, Risky: May or may not work. Good Hope and BangSource have different priorities Alternative #4, Terminate All Outsourcing Activities Better customer service However costs would increase once again – lay-off employees Alternative #2, Outsource only Backoffice Activities to BangSource Best option. Reduce costs and preserves customer service Lay-off some employees This option would preserve customer service quality and Good Hope’s reputation.