1. Outsourcing and Offshoring Paul C. Lynch IE 597-I Fall 2005 December 7, 2005

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

3. Outsourcing “act of moving some of a firm’s internal activities and decision responsibilities to outside providers.” “act of moving some of a firm’s internal activities and decision responsibilities to outside providers.” “procuring of services or products from an outside supplier or manufacturer in order to cut costs.” “procuring of services or products from an outside supplier or manufacturer in order to cut costs.” Client Firm Client Firm Outsource Provider Outsource Provider

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

5. Interchangeability / Buzz Terms Outsource/ Offshore Outsource/ Offshore Outsource/ Subcontract Outsource/ Subcontract Offshore Outsourcing/ Offshoring Offshore Outsourcing/ Offshoring BPO BPO ODC ODC GDC GDC

6. 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.”

7. “Exporting America” Companies: Companies: Anheuser-Busch Anheuser-Busch AOL AOL Boeing Boeing Coca-Cola Coca-Cola Dell Computer Dell Computer Delta Airlines Delta Airlines Gateway Computer Gateway Computer Home Depot Home Depot Lowe’s Lowe’s

8. The Greenspan View PRO Outsourcing and Offshoring PRO Outsourcing and Offshoring Job Protection = Path to Stagnation Job Protection = Path to Stagnation Protection Would Lead to Job Losses Protection Would Lead to Job Losses

9. Why Outsource/ Offshore? Main Factor: Huge Cost Savings 30-60% Overall Labor Technology Investments Process Efficiencies

10. Additional Benefits Access to Skills and Capabilities Beyond the Company’s Access to Skills and Capabilities Beyond the Company’s Speed Speed “Wake Up Call” or “Motivational Impact” “Wake Up Call” or “Motivational Impact” Improved Operational Visibility Improved Operational Visibility Access to Instant Capacity Access to Instant Capacity Financing Flexibility Financing Flexibility Improved Service/ Decrease Time To Market Improved Service/ Decrease Time To Market

11. Cost Savings Breakdown

12. WOW! Huge Cost Reductions! Offshoring is the Way To Go… RIGHT???????

13. Not So Fast My Friend…. There are Some Risks Involved With that Decision!

14. The Major Risks In Offshoring Contract Contract Privacy and Security Privacy and Security Diminishing Technical Returns Diminishing Technical Returns Increased/ Hidden Costs Increased/ Hidden Costs Loss of Expertise (Mainly IT) Loss of Expertise (Mainly IT) Impact On Your Employees Impact On Your Employees Impact on Your Customers Impact on Your Customers Failure of Outsource Provider Failure of Outsource Provider

15. Additional Offshoring Risks Economic Risks Economic Risks Culture Risks Culture Risks Demographic Risks Demographic Risks Political Stability Risks Political Stability Risks

16. What Makes Your Business A “HOT” Candidate for Offshoring? Top 3 Candidate Processes Top 3 Candidate Processes Processes are Labor Intensive Processes are Labor Intensive Processes are Scale - and Efficency – Driven Processes are Scale - and Efficency – Driven Repetitious Repetitious Processes Allow Remote Execution Processes Allow Remote Execution

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

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

19. OR Methodologies Centroid Method Centroid Method Shortest-Route Method Shortest-Route Method Minimal Spanning-Tree Method Minimal Spanning-Tree Method Tranportation Method Tranportation Method

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

21. References Dobbs, Lou (2005), “Exporting America: The List.”, available at: http://www.cnn.com/ ‘ Dobbs, Lou (2005), “Exporting America: The List.”, available at: http://www.cnn.com/ ‘http://www CNN/Programs/lou.dobbs.tonight (accessed 4 December). Donahoe, Daniel N., Pecht, Michael (2003), “Are U.S. Jobs Moving to China?”, IEEE Donahoe, Daniel N., Pecht, Michael (2003), “Are U.S. Jobs Moving to China?”, IEEE Donahoe, Daniel N.Pecht, Michael Donahoe, Daniel N.Pecht, Michael 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, Hines, Matthew (2004), “Greenspan: Offshoring Laws Could Harm U.S.”, CNET News, March, 12, 2004, available at: http://news.com.com/Greenspan+Offshoring+ laws+could+harm+U.S./2100-1022_3-5172975.html. http://news.com.com/Greenspan+Offshoring+ laws+couldhttp://news.com.com/Greenspan+Offshoring+ laws+could Linder, Jane C. (2004), “Outsourcing for Radical Change.” pp. 63-69. Linder, Jane C. (2004), “Outsourcing for Radical Change.” pp. 63-69. Namasivayam, S. (2004), “Profiting from Business Process Outsourcing”, IT Namasivayam, S. (2004), “Profiting from Business Process Outsourcing”, IT Namasivayam, S Namasivayam, S Professional, v 6, n 1, January/February, 2004, pp. 12-18. Robinson, M., Kalakota, R. (2004), “Offshore Outsourcing: Business Models, ROI, and 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 Rodgers, T.J. (2005), “The truth about outsourcing”, IEEE Design and Test of Rodgers, T.J. Rodgers, T.J. Computers, v 22, n 1, January/February, 2005, pp. 12-13. Schneiderjans, Marc J. (2005), “Outsourcing and Insourcing in an International Schneiderjans, Marc J. (2005), “Outsourcing and Insourcing in an International Context.”, pp. 3-5, 15, 24-31, 40, 75-180. Tafti, Mohammed H.A. (2005), “Risk Factors associated with offshore IT outsourcing”, Tafti, Mohammed H.A. (2005), “Risk Factors associated with offshore IT outsourcing”, Tafti, Mohammed H.A. Tafti, Mohammed H.A. Industrial Management and Data Systems, v 105, n 5, 2005, p 549-560. Tas, Jeroen; Sunder, Shyam (2004), “Financial services business process outsourcing”, Tas, Jeroen; Sunder, Shyam (2004), “Financial services business process outsourcing”, Tas, JeroenSunder, Shyam Tas, JeroenSunder, Shyam Communications of the ACM, v 47, n 5, May, 2004, p 50-52.