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?