Pros and Cons of Outsourcing - PowerPoint by pub14358

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									IT Outsourcing

    Kyle Wilson Andy Vu Ian McCulley
Topics Covered
   Definitions and types of outsourcing.
   Pros & Cons.
   Which countries are the major players?
   How big is this outsourcing and why?
   Is it growing?
   Which jobs are being outsourced?
   Companies & process involved and why?
   Trends and future outlook.
        Outsourcing: an arrangement in which one company provides services for
         another company that could also be or usually have been provided in-house.

        Onshore: (also called domestic outsourcing) is the obtaining of services from
         outside a company but within the same country

        Nearshore: is the practice of getting work done or services performed in
         neighboring countries.

        Offshore: the exporting of IT-related work from the home country to other
         countries. Offshore simply means "any country other than your own.

        BPO: Business Process Outsourcing, the long-term contracting out of non-
         core business processes to an outside provider to help achieve increased
         shareholder value.

    Onshore Outsourcing
             Pros                           Cons
   Travel and                     Not as large of talent
    communications are              pool
    easy and less expensive        Not as many options
   Same country and               Price may be much
    culture                         higher because of same
   Speak the same                  currency and standard of
    language                        living
   Small differences in time
   Less risk of security
    Nearshore Outsourcing
             Pros                       Cons
   Travel and                 Possibility of higher
    communications are          prices
    easier and not very        Security risks
    expensive                  Loss of domestic jobs
   Likely to be at least       (for the country
    some commonalities          outsourcing)
    between the cultures
   More likely to speak
    the same language
   Similar time zones
    Offshore Outsourcing
             Pros                          Cons
   Lower labor costs or tax      Home-grown IT talent
    savings                        might dry up
   Companies able to be          Language
    more price competitive         barriers/cultural
   A wide variety of              differences
    outsourcing companies         Security problems
    to choose from                Different time zones
                                  Loss of domestic jobs
                                   (for the country
Minimizing Risk
ISO 9000

       The International Organization for Standards (ISO 9000 series).
       International set of documents on quality assurance. Written by members of a
        worldwide delegation.


       SEI (Software Engineering Institute) established in 1984.
       The CMM (Capability Maturity Model) of SEI is a framework that describes the
        key elements of an effective software development process.
       CMM - composed of 5 maturity levels.
       Each level facilitates a layer in the foundation for continuous process
       Achieving each level of the model institutionalizes a different component in
        the software process, resulting in an overall increase in the process capability
        of the organization.

    Three out of every four SEI-CMM companies that have reached level
    5 worldwide are located in India.
    Major Players: India
Labor Pool: India has many prestigious technical universities, but the Indian Institute of
Technology stands apart as one of the world's best. India produces 75,000 IT graduates
and 2 million English-speaking graduates annually.

Costs: Labor costs have crept upward over the years but have been offset by falling
telecom rates. Typical salaries range from $5,000 to $12,000 for technical staff, while
back-office salaries range from $3,500 to $7,500.

Government: Outsourcing is so ingrained in the fabric here that the Indian government
has a national minister specifically for IT. The government favors IT foreign ownership and
imposes no export taxes.

Infrastructure: With redundant telecom and utility infrastructure, there is very good
reliability within India's special IT parks. Reliability can be spotty outside the parks or in
more remote areas.

Expertise: Application development, maintenance, call centers, financial processing.
Experts see India becoming a hotbed for more critical analytical jobs.

Major U.S. Customers: Citigroup, GE Capital and American Express have a very large
presence and have set up their own centers here.
      Major Players: Philippines
   Labor Pool: The Philippines turns out 380,000 graduates annually, but only
    15,000 of them are focused on technology. The country has cultural affinities
    with the U.S., is well-versed in U.S. accounting and customer service standards
    and has low employee turnover.

   Costs: Lower labor costs than India; technical salaries range from $5,000 to
    $10,000 annually and back office from $3,000 to $8,000.

   Government: Government exempts companies from export taxes, fees, dues
    and licenses if they open in one of the country's IT parks. Government's task
    force charged with development of IT and business process outsourcing (BPO)

   Infrastructure: IT parks that have sprung up over the past 13 years fuel the
    export industry. Abandoned U.S. military bases left behind dependable telecom

   Expertise: Accounting, finance, call centers, animation, human resources.

   Major U.S. Customers: Procter & Gamble, American International Group,
      Major Players: Russia
   Labor Pool: The good news: Russia can claim the third largest population of
    engineers and scientists per capita. The bad news: Not many of them speak

   Costs: IT salaries range from $6,000 to $10,000. The country hasn't yet
    developed back-office competence. Telecom infrastructure costs are higher than

   Government: Government is erratic and, for now, sticking by old tax laws and
    structures that don't benefit business. But a treaty with the U.S. could change
    things down the road.

   Infrastructure: Infrastructure quality and quantity decrease when outside of
    Russia's few IT parks.

   Expertise: Web design, complex software development, aerospace engineering.

   Major U.S. Customer: Boeing.
      Major Players: China
   Labor Pool: China's technical schools turn out 50,000 graduates annually,
    many of whom migrate west. Those who stay generally don't speak English.

   Costs: IT salaries range from $3,000 to $8,000 annually. No real BPO

   Government: China's government has hampered growth due to trade policies
    and overregulation; intellectual property concerns linger. The hope is that these
    issues will evaporate as China blends into the World Trade Organization.

   Infrastructure: Infrastructure can be spotty outside major cities, but China is
    building networks, particularly telecommunications, almost as fast as the U.S.

   Expertise: Transaction processing, low-end software development and

   Major U.S. Customers: HSBC, Microsoft.
      Major Players: Canada
   Labor Pool: <del>U.S. neighbor to the north</del> Has solid
    educational system, with a qualified labor force of more than 16 million.

   Costs: Being a nearshore alternative to the U.S. means IT salaries are
    much higher than most offshore countries, ranging from $25,000 to

   Government: Low or no political risk. Government gives tax breaks on
    IT exports. NAFTA provides free trade market for IT services.

   Infrastructure: Solid telecomm infrastructure.

   Expertise: Software development and maintenance, call center, tech

   Major U.S. Customers: Allmerica, Agilent.
       Major Players: Mexico
   Labor Pool: Mexico provides U.S. companies with millions of Spanish-
    speaking people to staff call centers.

   Costs: Low labor costs; companies can save up to 50% by outsourcing
    call centers to Mexico. Costs could be offset by unreliable infrastructure.

   Government: NAFTA has opened up free trade markets, but Mexican
    government does not offer high level of incentives.

   Infrastructure: Solid inside the technology parks.

   Expertise: Spanish-language call centers, software development, data
    center outsourcing.

   Major U.S. Customers: AOL Time Warner, General Motors, IBM.
      Major Players: Ireland
   Labor Pool: Relatively small; 34,000 graduates annually, 5,000 of them

   Costs: Tech salaries range from $25,000 to $35,000, making Ireland
    unattractive if primary objective is cost savings.

   Government: Favorable tax laws and $330 million technology-
    education fund provide incentives. Low or no political risk.

   Infrastructure: Solid.

   Expertise: European shared-services centers, software development,
    call centers.

   Major U.S. Customers: Intel, Dell, Microsoft.
     Leader of the Pack
   India is the leading recipient of IT outsourcing functions
          •   Software development/maintenance
          •   Business process outsourcing
   The latter includes back office functions
          •   Accounting, human resources, call centers, and data analysis
   Similar to manufacturing, outsourcing will fall into a tiered
    structured and base-level work will go to rock-bottom-wage
    countries such as Vietnam and Uruguay
          •   Payroll & data entry
   Leaving countries such as India to advance and take on
    more complex development services
          •   Software
          •   Product
Growing Popularity of Outsourcing

   Pioneered by Citigroup and GE in the late 80’s.
   In 2004 there are roughly 130 million employed people in the
    United States >>> In India there are roughly 650,000 –
    700,000 jobs consisting of software and business process jobs
   By 2015 an estimated $151 billion in wages will be outsourced
    and 3,000,000+ white collar jobs will be overseas.
   Engineers in India working on several innovative products
       •   Microprocessor chips for high-speed wireless technology
       •   Aircraft engines
       •   Transport Systems
       •   Plastics
       •   Medicine
   Very large amount of intellectual property is being
    created for US companies all over India.
   Texas Instruments, GE, Intel & Cisco Systems >
    1000 patent applications with US patent office by
   Bangalore, India is quickly becoming the Silicone
    Valley of the US.
   Samples:
          •   Molded toothbrush with flexible bristles
          •   Safety device for motorized two-wheel vehicles with shock
          •   HIV fighting medicine
   India is becoming so successful, Fortune
    500 companies are seeking consultation
    and advice regarding patents, technology
    and innovation.
   One firm in India who specializes in the
    outsourcing of large corporations and
    companies is armed with over 1400 working
    engineers and over 200 R&D labs.
   India is the busiest hub for innovation and
    intellectual property in 2004 – “Year of the
       Why So Big?                                                       2003      2008
                                                Natural Resources &
                                                      Mining             1,046     1,182

   US companies                                Construction             19,815    75,757
                                                Manufacturing            3,078     25,010
    sending work abroad                         Wholesale Trade          20,456    43,359
    yielded higher                              Retail Trade             12,552    30,931
    productivity that                           Transportation &
    actually boosted                                  Utilities          18,895    63,513
    employment by                               Publishing, Software &
    90,000 across the                                                    –24,860   –50,043
    economy                                     Financial Services       5,604     32,066

   Foreign Workers >                           Professional &
    Lower Costs > Higher                               Services          14,667    31,623
    Productivity >                              Education & Health
    Increased Income >                                Services           18,015    47,260
                                                Leisure, Hospitality &
    Expand in the US and                              Other Services
                                                                         4,389     12,506
    Abroad                                      Government               –3,393    4,203
   Source of table: Global Insight and North
    American Industry Classification System     Total Employment         90,264    317,367
    Which Jobs Can Be Outsourced?
    Wide variety of jobs – anywhere from low skilled to
        •   Computer programming, insurance claims, processing,
            radiology, and legal work.
    Any task that can be sent down a wire can be
     outsourced even some jobs where the finished
     product can be shipped.
    How large is this going to be? Imagine the jobs
     today that actually require face-to-face interaction
     with the customer and you will begin to understand
     the impact this will have.
    CEOs are not safe either!!!
Why Companies Outsource:

        Focus in-house resources on core functions
        Personnel cost savings
        Improved quality of information systems services
        Increased flexibility
        Increased access to new technology
        Provide alternatives to in-house costs
        Stabilize information systems costs
        Technology cost savings
        Re-engineer process
        Reduce technological obsolescence risk.
 Which Sectors are Being Outsourced?

       Information Technology
       Programming
       Logistics
       Human Resources
       Purchasing
Trends in Outsourcing
   Companies are now outsourcing more functions
    than just IT.
   Even the government is starting to outsource “white
    collar” jobs.
   Most major companies are turning to outsourcing to
    stay competitive in the global economy.
   Companies rely on their “core competencies” while
    trying provide better customer service and lowering
   Companies now outsourcing for long-term, strategic
    reasons yield better results than doing so for short-
    term, tactical reasons.
   Process For Outsourcing
1. Clearly define the scope and schedule of your project.
Make a clear statement of what you wish to accomplish.
2. Evaluate a service provider like you'd hire a full-time
Be subjective and ask questions and for references.
3. Look for specific experience fit.
Ideally, your provider will have experience with your type of
   project, which is crucial for projects like software development.
4. Don't choose a vendor based solely on price.
Look for a good balance of value and quality.
5. Review portfolios and samples.
Make sure their previous work meets your expectations for
   quality and style.
 Process Cont.
 6. Start small.
 First time with a service provider? Make it a small project,
     not a crucial one.
 7. Tie payment to clearly defined project milestones.
 Follow the progress and compensate along the way based
     on completion.
 8. Negotiate ownership of work up front.
 Be clear about who owns the result of the work.
 9. Don't forget about support after the project is
 Specify a warranty or support clause to ensure continuing
 10. Get it in writing.
 Clearly communicate schedules and payments in writing.
What is the Future?

           By 2008, IT services and back-office work in
            India will swell fivefold, to a $57 billion annual
            export industry employing 4 million people and
            accounting for 7% of India's gross domestic
   In the next 15 years, more than
3 million US white-collar jobs,
representing $136 billion in wages,
will depart to places like India, with
the IT industry leading the
   “India: The Big Outsourcing Hub of Patent Ideas” By Nona Walia,
    Times New Network, January 04, 2004
   “Size of Outsorucing Doesn’t Justify Uproar”, PTI, June 13, 2004
   “Best Countries for outsourcing”, By Lisa DiCarlo, August 27, 2003

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