Outsourcing

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					     Outsourcing
        A world of work
The Economist, November 2004.
www.economist.com/outsourcing
                  Definitions
   Outsourcing: Hiring another company to
    perform a business process.
    • May or may not be in another country
   Offshoring: Moving a business process to
    another country.
    • May or may not be outsourced
   Insourcing: Hiring another company to
    come in and perform a business process
    (e.g. logistics).
   We will talk about all three as outsourcing.
              A world of work
   Is outsourcing new?
    • No, been doing it for decades (almost a
      century).
   Why all the fuss now?
    • New type of outsourcing - white collar jobs
   What two forces have led to outsourcing?
    • Telecommunication bandwidth
    • Shipping costs
   How much further can outsourcing go?
    • Currently outsourced 8%
    • Estimated up to 50%
            Men and Machines
   According to this article, what is the
    reason for outsourcing?
    •   Growing complexity of organizational work
   Three forces of complexity (introduced
    by computer)
    1) Saving costs but adding options
    2) Regulation and information requirements
    3) IT systems themselves.
   Solution to complexity?
    •   Hire an “expert” to do it.
             Men and Machines
   Business Process Outsourcing (BPO)?
    • Outsourcing = primary value chain functions
    • BPO = secondary value chain functions
   Examples of BPO
    •   Credit card processing
    •   Payroll
    •   HR/ benefits
    •   Expense receipts (extreme specialization).
    •   IT Support
      The Value Chain (M. Porter)

•Infrastructure: general mgmt, planning, finance, IS
•HRM: recruiting, hiring, training, and development
•Tech. Development: R&D
•Procurement
Inbound         Operations    Outbound       Marketing   Service
logistics                     logistics      & Sales



               Supply
               Chain
        A desperate embrace
   What’s the story here?
    • KPN, Dutch telecom, agrees to
      outsource €300m/ year of IT for 6
      years.
    • KPN forced to downsize by 1/3, still
      stuck with contract.
    • Have tried to work out an agreement,
      but difficult for both.
   Lesson: Outsourcing isn’t always
    easy. Contracts are VERY important.
              The place to be
   How much of outsourcing business does
    India have?
    •   80%
   How did India become the outsourcing
    king (the history behind it).
    1) Y2K overwhelming US software engineers,
       hire Indian workers to come to US (or to US
       companies) to fix code.
    2) Dot-com bust follows, IT budgets slashed.
       Indian workers return to India, retain
       relationship with US companies.
    3) These engineers begin to hire local help
       conduct work…and the rest is history.
               The place to be
   Growth of outsourcing in India
    • Infosys “grown eight-fold in five years.”
    • Moving from routine to skilled work
    • Lowering cost and improving quality
   Why does US like to work with India?
    • English language
    • Cultural similarities (both former British
      colonies).
    • Strong educational system
    • Lots (~1B) of low-cost workers.
             The place to be
   What will India’s continued
    outsourcing success depend on?
    • Supply of high quality graduates
         Quality currently mixed
    • Improved infrastructure
    • Employee retention (call-center jobs
      stink).
         50% turnover vs. 70-80% in US/Britian
                  Faster, Cheaper, Better
                     “The Layer Cake” – 3 tiers of IT services




                                                                                    How aggressive?
                             Tailored technology services
                                 (e.g. Accenture, IBM)
How fast?




                        “The Middle” (e.g. ERP implementation)




                                    Pure commodity services
            (e.g., data entry, call centers, software support, hardware assembly)
          Into the unknown…
   “Mechanical devices are already
    ousting skilled clerical workers and
    replacing them with operators…
   Opportunity in the white-collar
    services is being steadily
    undermined.”
   What’s important about this quote?
    • It was made in 1929
            Into the unknown…
   People ALWAYS worry about being
    phased out of jobs.
   What percentage of jobs in 1900 still
    exist in some form or fashion today?
    • 30%
   Can forget that loss of old jobs
    creates new ones.
   Schumpeter’s “Creative Destruction”
            Into the unknown
   “We travel in vehicles that were not yet
    invented that are powered by fuels not yet
    produced,
   Communicate through devices not yet
    manufactured,
   Enjoy cool air on the hottest days
   Are entertained by electronic wizardry that
    was not dreamed of, and
   Receive medical treatments that were
    unheard of.”
                 Into the unknown
   Predicting jobs is hard.
    • BLS predicted increase of travel agents and
      gas station attendants.
          Now these jobs are almost non-existent
    • Extra 179,000 software engineers and 185,000
      analysts.
          This one is actually proving true
    • Estimate 11% of US (14m people) work force
      is at risk for outsourcing.
          Not just low-end jobs
          Radiology, accounting, legal work.
              Sink or Schwinn
   What happened to Schwinn?
    • Lesson: have to outsource or die.
   Cycle develops
    • Cheaper goods = higher demand
    • Higher demand = more profits
    • More profits = more investment
   IT as an example
    • Outsourcing production = 10-30% cheaper
    • Created $230B of additional US GDP
              Sink or Schwinn
   McKinsey estimates that for every $1
    spent on outsourcing to India…
   The American economy receives $1.14 in
    return.
   How?
    1. Savings for customers
    2. Direct benefits (e.g. imports/ trade)
    3. Indirect benefits (re-employed labor)
   Heavily depends on ability to re-employ
    workers.
    • US creates and destroys 30m jobs/ year.
               Sink or Schwinn
   Europe struggling with outsourcing
    • Europe higher unemployment, stronger unions
      makes more difficult to reemploy workers.
    • Cultural links with India not strong as US
   80% of top 500 European firms “will not
    even consider outsourcing.”
   Cycle might work in opposite direction:
    •   Protectionist policies
    •   Limit outsourcing
    •   Raise cost of goods
    •   Increase unemployment
       A World of Opportunity
   People who support outsourcing/
    offshoring often unpopular.
   “Has anyone seen Greg Mankiw?”
   US and Britian close to full
    employment… what’s that?
   Most of the outsourced jobs “US
    workers won’t do.”
         A World of Opportunity
   Other developing problems
    • Baby boomers retiring
    • Health care costs rising
   Is outsourcing a good or a bad thing for
    US?
    • Depends on rate of change
    • If workforce can realign, it’s good
    • If not, it can be bad.
   Is it a good or bad thing for India?
    • Sweatshops vs. opportunity for global playing
      field.
              Discussion
   What do you think about
    outsourcing?
   Is it good, bad, otherwise?
   For whom?
   What jobs are most at risk for
    outsourcing?
   Who benefits most (and least) from
    outsourcing?

				
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