OVERVIEW OF THE GLOBAL SOURCING MARKETPLACE IS SOURCING UNIT 1

DEFINITIONS Sourcing – the act through which work is contracted or delegated to an external or internal entity that could be physically located anywhere. Sourcing encompasses various in-sourcing and outsourcing arrangements such as offshore outsourcing, captive offshoring, nearshoring and onshoring. Outsourcing – contracting with a third service provider for the mgmt and completion of a certain amount of work, for a specified amount of time, cost, and level of service. Backsourcing – bringing previously O/Sed activities back in-house

DEFINITIONS Offshoring – relocation of organizational activities to a wholly owned subsidiary or an independent service provider in another country. Captive – if the center is owned by the org Offshore outsourcing – work done by independent third party Nearshoring – work relocated to a neighboring country

Insource Outsource Onshore Offshore

THE DECISION First decide whether to outsource or insource Decision based on: Characteristics of that activity How that activity relates to other functions in the company Then decide location Decision based on: Market conditions Extra mgmt time needed to manage relationships

WHY COMPANIES OUTSOURCE Intuition Fear Imitation Frustration Avoid regulatory constraints Costs (HR is largest in many cases) In poor financial condition Have poor IT functions IT functions with little org status

REASONS TO OUTSOURCE 1. Reduce IT costs 2. Improve technology or technical service 3. Jump on the bandwagon; outsourcing perceived as a viable, irreversible trend within their industry 4. Focus business on core competencies; IT perceived as non-core 5. Restructure IT budgets from capital budgets to fixed operating budgets 6. Play good corporate citizen; IT managers perceive an outsourcing evaluation demonstrates their willingness to subordinate the good of IT department for the good of the overall business. 7. Focus internal IT staff on critical IT activities, such as development, while outsourcing more stable and predictable IT activities, such as data center operations. 8. Prove efficiency; invite bids to receive a free benchmark 9. Eliminate an IT burden; assume a vendor will solve problematic IT function(s) 10. Downsizing—the entire company is pressured to reduce headcount 11. Preemptive move by IT managers to expose exaggerated claims made to senior executives by consultants or vendors 12. Improve cost controls 13. Forced market testing by the UK government 14. Justify new IT resources by bundling capital budget requests with "proof" that vendors cannot do it cheaper 15. Facilitate mergers and acquisitions—vendors are perceived as experts in merging data centers quickly (Lacity and Willcocks, 1998)

OUTSOURCING - BENEFITS 1.Is a well-proven process 2.Achieves improvements that cannot be attained by internal group 3.Improves business and IT processes 4.Offers cost-mgmt controls not available with internal IT units 5.Increased certainty over costs 6.Improves quality of service 7.Enables a company to keep pace with its competitors 8.Allows a focus on core competencies and revenue generation 9.Valid ways of achieving required cultural change 10.Introduces qualities not found in internal IT depts 11.Offers flexibility in staff quantity 12.Provides access to specialist skills and knowledge (Aalders, 2001)

OUTSOURCING - DISADVANTAGES 1.Lack of control (timing, quality) 2.Uncertainty 3.Loss of critical skills, ability to learn 4.Overdependence 5.Security / lack of data confidentiality 6.Loss of knowledge to vendor 1.Hurt competitiveness 7.Fear and employee resistance due to potential loss of job, etc 8.Table 1.3- OKW book

OUTSOURCING STATISTICS country/ country/

DECIDING WHAT TO OUTSOURCE Value creation Organizations create value and increase shareholder value based on a product or service that is core to the business. IP, knowledge, skills, etc Systems in place to provide support (Tadelis, 2007)

ACTIVITY COMPONENTS Activities should be viewed by considering the function that it performs or by considering what inputs are used to create it and how these inputs need to be managed. The make or buy decision What can be purchased vs. managing and optimizing

Adapted from Tadelis, 2007

WHAT TO OUTSOURCE Not core R&D? App development? Mfg? Sales? ????

REASONS TO OFFSHORE Foreign labor costs Other low costs Ex: Ireland has 43% standard tax rate; 10% for BPOs Ex: Jamaica: 34%, 0% Global strategy Regulatory constraints (to get around local laws) Other reasons, similar to O/S

OFFSHORING PROBLEMS Geographical distance Language and cultural distance Difficult to quantify cultural distance Regulatory and policy distance Can be beneficial (incentives from foreign govts) Legal distance China - IP

IN-HOUSE SOURCING For complicated activities that cannot be carefully specified advance –or- Need for flexibility that cannot be anticipated or described in a contract

WHY IN-HOUSE? A core-related activity Peripheral activity that may require the transfer of company-specific knowledge

PROS AND CONS OF IN-HOUSE Pros: No need for externally enforced contracts Flexible process: “own” the process itself Keep broad set of expertise and IP Cons Can’t use the market mechanism Internal production lacks cost incentives Have more clutter and less focus

FOUR ARCHETYPES OF INSOURCING 1.Senior execs enable internal IT managers to cut costs 2.IT managers terminate failing outsourcing contracts 3.IT managers defend insourcing 4.Senior execs confirm the value of IT (Hirschheim/Lacity, 2000)

TIPS FOR SUCCESS Outsource for good reasons Don’t outsource problems Timing Perform due diligence Well-defined contract Accountability Every contractible action has an accountability entity Life cycle Long-term contract for high up-front costs L-T contracts require changes, etc Good vendor selection

THE FUTURE OF O/S & OFFSHORING Spending continue to rise Developing countries beyond India become more important Large companies look more at ASP BPO will overshadow IT O/S HR, procurement, call centers, legal, etc New value propositions Ex: Network consol similar to data center consols Selective sourcing continues to be a trend Clients control driving and designing deals >80% of contracts written today by clients Willcocks and Lacity, 2006

THE FUTURE OF O/S & OFFSHORING Clients will invest more in contract mgmt * O/S will help in-sourcing Ex: concepts of SLAs in use in-house O/S failures continue 30% of selective, 50% large Clients will move from “hype and fear” to maturity Stages: hype  costs  quality  strategy