1. Outsourcing – A New Frontier of Opportunity Stephen Sharpe ECON 428 June 08, 2006

2. Outsourcing A New Frontier of Opportunity Agenda IntroductionIntroduction Why Do Firms OutsourceWhy Do Firms Outsource When Should Firms OutsourceWhen Should Firms Outsource Where Should Firms OutsourceWhere Should Firms Outsource Key Strategies for Successful OutsourcingKey Strategies for Successful Outsourcing Key Capabilities for Outsourcing ManagersKey Capabilities for Outsourcing Managers Recent Arguments Against OutsourcingRecent Arguments Against Outsourcing ConclusionConclusion

3. Outsourcing A New Frontier of Opportunity  Outsourcing – Seeking a Solution Outside the Boundaries of the Firm ServicesServices Research & DevelopmentResearch & Development Intermediate GoodsIntermediate Goods Finished ProductsFinished Products FDI – Subsidiary or Joint VentureFDI – Subsidiary or Joint Venture

4. Outsourcing A New Frontier of Opportunity  Firms are Under Immense Pressure  CEO Chapman “We can compete and create great American jobs, but not without offshoring.”  Leverage Efforts of Key Employees  Two Prospects for Savings: Increased Productivity of Key EmployeesIncreased Productivity of Key Employees Lower Overall Costs with OutsourcingLower Overall Costs with Outsourcing  Function Overhaul / Restructuring

5. Outsourcing A New Frontier of Opportunity Why Do Firms Outsource?  Rapid Technological Change  Increased Risk & Search for Flexibility  Emphasis on Core Competencies  Globalization

6. Outsourcing A New Frontier of Opportunity When Should Firms Outsource?  Two Articles, Two Approaches Management / Organization CostsManagement / Organization Costs Marginal CostsMarginal Costs  Both Approaches Must Be Included

7. Outsourcing A New Frontier of Opportunity When Should Firms Outsource?  Management / Organization Costs VariablesVariables  Management Effort  Probability of Success  Cost for Management Effort  Monitoring Costs

8. Outsourcing A New Frontier of Opportunity When Should Firms Outsource?  Management / Organization Costs

9. Outsourcing A New Frontier of Opportunity When Should Firms Outsource?  Marginal Costs  May Not Always Lead to Lower Prices  Expanded Model to Include Tariffs, Taxes, Transportation

10. Outsourcing A New Frontier of Opportunity Where Should Firms Outsource?  Outsourcing as Partnership, Not Just a Contractual Agreement  Three Key Components: Partners with Expertise / CapabilityPartners with Expertise / Capability Convincing Partner to CustomizeConvincing Partner to Customize Encourage Partner to InvestEncourage Partner to Invest

11. Outsourcing A New Frontier of Opportunity Where Should Firms Outsource?  Model with Two Regions: North – High WagesNorth – High Wages South – Low WagesSouth – Low Wages  Thickness – Number of Supplying Firms in a Specific Area  Marginal Cost Analysis

12. Outsourcing A New Frontier of Opportunity Key Strategies for Outsourcing  Go Offshore for the Right Reasons  Choose Your Model Carefully  Get Your People on Board  Be Prepared to Invest Time & Effort  Treat Your Partners as Equals

13. Outsourcing A New Frontier of Opportunity Key Capabilities for Outsourcing Managers  Strategic Thinking  Deal Making  Partnership Governing  Managing Change

14. Outsourcing A New Frontier of Opportunity Key Capabilities for Outsourcing Managers  60% of Responding Firms Willing to Pay 6% Premium for Each Quality  40% of Responding Firms Willing to Pay 11% Premium for Each Quality

15. Outsourcing A New Frontier of Opportunity Recent Arguments Against Outsourcing  Comparative Advantage vs Absolute Advantage  Where are Replacement Jobs?  Law of One Price

16. Outsourcing A New Frontier of Opportunity Conclusion  Firms Have a Strong Incentive to Outsource OpportunitiesOpportunities HardshipsHardships Government EncouragementGovernment Encouragement  Detractors Have Valid Points  Continued Growth In Outsourcing as a Competitive Strategy

17. Outsourcing A New Frontier of Opportunity Sources:  Chen, Yongmen, Jota Ishikawa, and Ahihao Yu, “Trade Liberalization and Strategic Outsourcing”, Journal of International Economics 63, 2004: 419-436.  Colander, David, “The Long Run Consequences of Trade and Outsourcing”, Challenge, January-February 2005: 94- 103.  Deavers, Kenneth L., “Outsourcing: A Corporate Competitiveness Strategy, Not a Search for Low Wages,” Journal of Labor Research, Volume 18, Number 4, Fall 1997: 503-519.  Engardio, Pete, Michael Arndt, and Dean Foust, “The Future of Outsourcing”, Business Week, January 30, 2006: 50-56.

18. Outsourcing A New Frontier of Opportunity Sources:  Grossman, Gene and Elhanan Helpman, “Managerial Incentives and the International Organization of Production”, Journal of International Economics 63, 2004: 237-262.  Grossman, Gene and Elhanan Helpman, “Outsourcing in a Global Economy”, Review of Economic Studies 72, 2005: 135-159.  Kripalani, Manjeet, Dean Foust, Stanley Holmes, and Pete Engardio, “Five Offshore Practices that Pay Off”, Business Week, January 30, 2006: 60-61.  Roberts, Paul, “The Harsh Truth About Outsourcing”, Business Week, March 22, 2004: 48.  Useem, Michael and Joseph Harder, “Leading Laterally in Company Outsourcing”, Sloan Management Review, Winter 2000: 25-36.

19. Outsourcing – A New Frontier of Opportunity Stephen Sharpe ECON 428 June 08, 2006