1. Martin V. Smith School of Business & Economics California State University Channel Island BUS 550 The Contemporary Firm Spring 2011 Instructor: Dr. Minder Chen, Associate Professor of MIS Student: Natalia Gorbunova A US Client’s learning from outsourcing IT work offshore

2. OUTSOURCING Today, more than 75 percent of companies outsource some IT functions to outside service providers. Today, more than 75 percent of companies outsource some IT functions to outside service providers.

3. Strategic Advantages: Offshore Outsourcing Cost Generally, outsourced services cost you a fraction of US (30-50%) costs with equal quality. Focus The most valuable resource within your management resources is Time. Once a process is successfully outsourced, the management gets more and effective control over time. Rapid Migration to New Technology Exploit the Time Zone Advantage and reap the benefits of 24-hour development cycle

4. Summary Case present analyses of IT offshore outsourcing of the abstract Biotech company Case present analyses of IT offshore outsourcing of the abstract Biotech company The company employs 15 000 people, has 400 locations in 40 countries The company employs 15 000 people, has 400 locations in 40 countries Biotech is a Fortune 500 company and a leading provider of biotechnology products Biotech is a Fortune 500 company and a leading provider of biotechnology products In 2001 it experienced flat revenues, and was need to cut the budget In 2001 it experienced flat revenues, and was need to cut the budget For 2002 the IT budget were reduced by 5%. For 2002 the IT budget were reduced by 5%. “Doing more with less”: became the CIO’s major challenge for 2002. “Doing more with less”: became the CIO’s major challenge for 2002.

5. Summary The CIO and IT Leads replaced domestic contractors with cheaper offshore IT workers ($65 per hour compare with $25 per hour in India) The CIO and IT Leads replaced domestic contractors with cheaper offshore IT workers ($65 per hour compare with $25 per hour in India) Biotech launched 21 projects offshore in 2003 to 2005 Biotech launched 21 projects offshore in 2003 to 2005 Program Management Office (PMO) always reported that offshore outsourcing is successful in meeting Biotech’s cost saving targets Program Management Office (PMO) always reported that offshore outsourcing is successful in meeting Biotech’s cost saving targets IT Leads and CIO did not agree with PMO IT Leads and CIO did not agree with PMO The case is analyzing data of the company offshore outsourcing The case is analyzing data of the company offshore outsourcing

6. Summary Analytics interviewed 45 participants and explored 2 000 significant documentation Analytics interviewed 45 participants and explored 2 000 significant documentation They asked participants to give grades for the projects They asked participants to give grades for the projects Considering the degree to which projects objectives were met, budgets and schedules and the quality of delivering product. Considering the degree to which projects objectives were met, budgets and schedules and the quality of delivering product.

7. Project Number of participants who assign a grade Letter grades assigned by participants Average project rating using A=4, A-/B+=3.5, B=3, B- /C+=2.5, C=2, C-/D+=1.5, D=1, D-/F+=0.5, F=0 Standard deviation of average project rating A3C+,D,F1.171.26 B1C-1.5N/A C3D+,D,A-21.32 D5F,F,F,F,F00 E3F,C,B1.671.53 F4C,B,B,D2.250.96 G5A,A,A,B,B3.60.55 H4F,F,F,D0.250.5 I1D1N/A J2B,C-2.251.06 K2F,D0.50.71 L3A,A,C3.331.15 M4C,D,C-,B1.880.85 N4C,F,F,F0.51 O3B+,B+,B+3.50 P3B,C+,D+2.330.76 Q9D,C,D,D,B,B,F,B,B1.891.17 R2C+,D1.751.06 S1C-1.5N/A T1D1N/A U3C-,B,B2.50.87 Overall1.73(mean)1.75(median)1.02

8. Issues Organizational Issues: Strong social networks between Biotech IT employees and domestic contractors were not replicated with offshore suppliers. Strong social networks between Biotech IT employees and domestic contractors were not replicated with offshore suppliers. (they worked in same cubicles, attended same meetings) (they worked in same cubicles, attended same meetings) Biotech’s “sneaker-net” culture were not possible to duplicated. Biotech’s “sneaker-net” culture were not possible to duplicated. Researches could not transfer information outside (before everybody just had notebooks for the reason to avoid the licking of information) (before everybody just had notebooks for the reason to avoid the licking of information) Cultural differences Cultural differences IT Leads summed: ‘ The place could be on fire, but Indian IT workers would say, ‘ Oh it’s great, a little warm, but it’s great!”

9. Project Level Analysis Offshore Supplier Size 1. For Biotech, bigger was better Table 1. Project rating vs. size and number of offshore suppliers Offshore supplier size Number of more Successful projects Number of less Successful projects Percentage of more Successful projects Large supplier (greater than 1 billion in revenue ) 4180% Multi-sourced2167% One small supplier (<50 million in revenue) 5742% Captive center 010%

10. Project Level Analysis Supplier Engagement Model 2. Projects with some offshore supplier employees onsite were more successful, But cost saving was lost! Table2. Project rating vs. supplier engagement model Offshore supplier Engagement model Number of more Successful projects Number of less Successful projects Percentage of more Successful projects Some supplier managers and developers onsite 4180% Some supplier developers onsite but no managers onsite 3175% No supplier managers and developers onsite 4833%

11. Project Level Analysis Contract Value Projects with greater value rated higher than projects with lesser value Table 3. Project rating vs. contract value using mean and median Contract value Number of more Successful projects Number of less Successful projects Percentage of more Successful projects Greater- value (greater than $93K mean spent) 5271% Lesser- value (lesser than $93K mean spent) 6843% Greater- value (greater than $64K median spent) 7370% Lesser- value (less than $64K median spent) 3730%

12. Project Level Analysis Project Duration With the larger projects allow to build relationships and understanding between suppliers and Biotech. Table 4. Project rating vs. project duration using mean and median Contract duration Number of more Successful projects Number of less Successful projects Percentage of more Successful projects Longer (more than 1-year mean) 5363% Shorter (less than 1-year mean ) 6746% Longer (longer than 272 days median) 7370% Shorter (less than 272 days median) 3730%

13. Project Level Analysis Organizational Units Projects within the R&D area required the supplier to have very specific scientific knowledge, whereas the Web and ERP units required more common knowledge Table 5. Project rating vs. organizational unit Organizational unit within Biotech Number of more Successful projects Number of less Successful projects Percentage of more Successful projects Web30100% ERP20100% Marketing3260% R&D3730% Enterprise architecture 010%

14. Project Level Analysis Project Type It did not matter the types of works. Participants rated both development and maintenance nearly equally. Table 6. Project rating vs. project type Project type Number of more Successful projects Number of less Successful projects Percentage of more Successful projects New software development 8753% Support or maintenance of existing software 3350%

15. Project Level Analysis Project start year Recent contractors have higher frequencies of success than older contractors. Table 7. Project rating vs. project start year Project start year Number of more Successful projects Number of less Successful projects Percentage of more Successful projects During 2003 6843% During 2004 or 2005 5271%

16. Four Insights for Clients and Suppliers 1. An offshore strategy should fit with the client’s norms and practices, or the client have to change norms. (“sneaker-net” culture and social network did not fit offshore outsourcing. Documentation) (“sneaker-net” culture and social network did not fit offshore outsourcing. Documentation) 2. Clients and suppliers should invest in social capital, transfer knowledge. (Understanding user requirements, meet face-to-face, brining developers inside) 3. Clients and suppliers may achieve greater success with bigger commitments. (longer and more expensive projects cause less transaction costs and more supplier attention) 4.Clients should carefully analyze outsourcing programs in term of cost savings) (cost of hours offshore versus what the hours would cost onshore)

17. Question Which Biotech IT offshore outsourcing projects had less success? Which Biotech IT offshore outsourcing projects had less success? a. Projects that had contract value less than 100K b. Web and ERP projects c. Projects which started in 2003 d. All of above