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Outsourcing

Page history last edited by Brian D Butler 12 years, 2 months ago

 

 

 

 

 

 

Outsourcing:

 

 

From Wikipedia: "back office outsourcing - which includes internal business functions such as human resources or finance and accounting, and front office outsourcing - which includes customer-related services such as contact center services."

 

Table of Contents:


 

Learning Module from http://globaledge.msu.edu/ 

 

 

Multinational Sourcing
The Multinational Sourcing module contains information pertaining to the following issues: what international sourcing is and why companies chose this option; the international sourcing process, including the steps of progression from domestic to full international sourcing; countertrade, the different types of countertrade, and the issues to consider when conducting countertrade. A case study on multinational purchasing at Paradyne is also provided.

 

 

 

Financial Benefits of Outsourcing

 

Outsourcing lowers inventories by reducing the need to have in-house work in process inventory and raw material inventories. But it lowers the overall profit margin because you now have to share some of that profit with the outsourcing firm.

 

 

Should you outsource? how much? 

 

see also our discussion on make-or-buy decision analysis

 

Vertically integrated companies

 

companies such as Zara (fast fashion) have bucked the outsourcing trend, and have kept a majority of their processes in house.  They design, produce, ship and sell....all controlled in-house.  The benefit?  faster response to changing consumer trends.  Also, the additional control has allowed them to reduce inventory, and streamline operations.   The bottom line?  One of the most successful companies in recent years financially.   They kind of make you second guess the logic of outsourcing...

 

 

Other extreme - outsourcing everything

 

Other companies have proven very successful in focusing just on their core competency, and have outsourced most other functions.   This was a very popular trend recommended by most strategy consultants (they even recommended that Zara should do the same).    For example, financial companies such as Merrill Lynch (which sold its fund management to BlackRock) have outsourced fund management (stock trading) to other companies and now just focus on client management.  (see our discussion on asset management)

 

 

 

 

Focusing on your core competency

 

Deciding whether or not to outsource either production or design process is a strategic decision with long-term implications.  It involves determining your core competency, and deciding what are your Competitive Advantages over your competition that you can sustain for a long period of time.  If you think you need to develop product design as a core competency for your long term success, then dont consider outsourcing as an alternative. 

 

This sounds obvious on the surface, but its amazing how many companies got this wrong.  In the short term desire to cut costs, many companies outsource production to Asia, only to find out that without the production, they loose their advantage in design and in development.  With the hassles of producing, you have the advantage of learning, which is essential to long term competitive advantage (if that is the route you choose).  Companies such as Xerox discovered this when they outsourced production to Fuji.  As did a whole host of industries from TV's to appliances. 

 

 

 start a discussion:  outsourcing pros and cons

 

 

 

Near-Sourcing

 

near sourcing

Out sourcing to Latin America to take advantage of time zones, and local proximity to the US.

 

 

 

Call Centers

 

India

Malta - European call center (island in Med.)

 

 

Financial Outsourcing

 

asset management outsourcing:   They outsource the actual fund managemnt, and focus on clients.  examples include:

  • Merrill Lynch (sold fund management to BlackRock)
  • Citigroup sold to Legg Mason

 

 

 

Other outsourcing in Financial markets:

 

Buy-side firms in general often look to off-load their back-office work (accounting, shareholder services, reporting) to a custodian or fund administrator (generally these are interchangeble terms). Hedge funds are no different, in fact about 90% of hedge funds outsource some or all of their back-office work to fund admins (CITCO, HSBC, Fortis, Bisys are the top providers). Increasingly, prime brokers are looking at this function as well; Goldman Sachs, Morgan Stanley and UBS all have both prime brokerage and fund admin business lines... you typically have to be a prime client to be a fund admin client.

 

Hedge funds generally don't outsource their front office work (analysis, modelling, trading) prior to the execution. That's where they add value and make their money. They do look to their prime and executing brokers for investment ideas (research) and for technology for trading, risk management, reporting, etc..

 

Pricing varies depending on the service. Back and middle office (post-trade, pre-settlement) work is based on basis points on assets under management with an annual minimum (maybe 8-20 basis points depending on the scope of the work). Research is still bundled in with execution costs more often than not, though that's changing. technology is generally either given for free by a service provider, or purchasd from a third-party software firm for an annual subscription, or for a term license with an upfront cost plus an annual recurring maintenance fee (generally about 20% of the license fee).

 

 

 

Alternative outsourcing

 

its not what you would expect, but some firms are finding unique niches for outsourcing.  Take, for example, the firm "Tiandi Energy", which helps western oil industry giants to find talent in people with advanced geotech knowledge in China, helping to fill staffing problems in the oil industry (after years of decline in university -skilled employees, and an extraordinary aging industry).  see more here:

 

 

Report: Many U.S. Parents Outsourcing Child Care Overseas

 

 

Practical steps to outsourcing

 

 

To discuss various Outsourcing business models please click here.

Or, visit our Worldwide Outsourcing Directory and add your company to our list.

 

 

 

Cracking The Outsourcing Value Code

IT View and Business View Trends, by Paul Roehrig, Ph.D.

Anyone who has lived through a complex outsourcing engagement knows that the deal you build becomes the foundation for either success or insurmountable challenges. Sophisticated clients and providers know that putting one participant on the ropes — rather than negotiating for mutual success — will end up costing more in the long run. At this year's inaugural Services And Sourcing Forum, Forrester held a panel devoted to outsourcing negotiation and strategy. Representatives from an outsourcing advisory firm, a client firm, and an outsourcing service provider joined Forrester's Paul Roehrig on stage to offer their perspectives on deal negotiation best practices. This document highlights some best practices based on a 360-degree view of the complex deal negotiation process.

 

 

Is your job threatened by outsourcing?

maybe not as much as you think...

 

Despite much concern, the US software sector has so far not relocated to India and has in fact thrived in global competition in recent years. Recovering from the collapse of the Internet bubble, US total software employment at 1.2 million jobs in 2006 surpassed its erstwhile 2001 peak, while the unemployment rate for US software workers returned to the 2–3 percent range in late 2005. It has since remained at this low level, normally associated with full employment.

 

 

Recent anecdotal data suggest that salaries for top Bangalore-based software engineers have risen from 20 to 75 percent of US levels in just two years from 2005 to 2007. Given this rapidly declining wage differential and the fact that thousands of US-based high-skilled software positions are available, the present and future labor market for US software workers in the global economy seems secure.

 

 

Considering that many less-skilled US workers, for instance, in the manufacturing sector, face genuine hardships—the loss of both job and employment security—as a result of rapid technological innovation and increased global competition, it seems improbable that high-skilled US software workers would have any credible claim for scarce congressional attention or support.

 

 

>> Read full op-ed

 

 

 

 

 

Outsourcing vs. Offshoring...what is the difference?

 

Outsourcing will be an approximately $450 billion global industry in 2007, with the largest portions created in three broad areas: 1) logistics, sourcing and distribution services, 2) information technology services, including the creation of software and the management of computer centers, and 3) business process outsourcing (BPO) areas such as call centers, financial transaction processing and human resources management.
 
Offshoring, on the other hand, covers such a wide variety of nations, products and practices that it would be difficult to put a number on it. A significant share of offshoring revenue is created by contract manufacturing of electronics, laptop computers, cellular telephones and consumer electronics such as iPods. Another major sector in offshoring is contract manufacturing of shoes, apparel and accessories.
 
In order to consider the outsourcing and offshoring industry, it is best to define the terms upfront, since the words are often used in conjunction and are sometimes used incorrectly. To begin with, “outsourcing” can be defined as the hiring of an outside company to perform a task that would otherwise be performed internally by a company, organization or government agency—generally with the goal of lowering costs and/or streamlining work flow. Outsourcing contracts are often several years in length. Companies that hire outsourced services providers often do so because they prefer to focus on their core strengths while sending more routine tasks outside for others to perform. For example, typical outsourced services include the operation of human resources departments, telephone call centers, distribution centers, research needs, computer departments or services, and the design and/or engineering of components or end-products.
 
Next, “offshoring” refers to the rapidly growing tendency among U.S., Japanese and Western European firms to send both knowledge-based and manufacturing work to third-party firms in other nations. The intent is to take advantage of lower wages and operating costs in such nations as China, India, Hungary, the Philippines and Russia. The choice of a nation for offshore work may be influenced by such factors as language and education of the local workforce, transportation systems or natural resources. For example, China and India are graduating high numbers of skilled engineers and scientists from their universities—thus enabling these nations to attract massive engineering, research and development contracts. In addition, some nations are noted for large numbers of workers skilled in the English language, such as the Philippines and India. In many cases, offshoring utilizes less-skilled labor working for low wages in plants that manufacture such items as shoes, apparel and generic computer components. In other cases, offshore manufacturing contracts go to firms in nations that have developed very advanced technology and industrial bases with highly-skilled and educated workers. For example, final manufacturing of laptop computers is frequently offshored to very high quality firms in Taiwan and South Korea.
 
“Captive offshoring” is used to describe a company-owned offshore operation. For example, Microsoft owns and operates significant captive research and development centers in China and elsewhere. The goals of captive offshoring include greater company control through direct ownership, along with lower operating costs and the ability to utilize highly educated local workforces.
 
There is also such as thing as “offshore outsourcing,” and you will occasionally see this phrase used in the press. In this case, a company outsources operations, such as manufacturing or a call center, to an offshore organization.
 
Finally, there is “insourcing,” which refers to situations where an outsourced services provider moves into, and sets up shop in or near, a client company’s facility. For example, it is common for major companies to sign agreements with IBM Global Services, EDS, Perot Systems and other outsourcing firms whereby these firms take over and operate a client’s internal computer department. Here’s a non-technology insourcing example: ARAMARK Corporation will build and operate snack bars, employee cafeterias and executive dining rooms within a client company’s facilities.
 
China, India and similar offshore work centers will remain low-cost providers of services and manufacturing for the foreseeable future. At the same time, as their economies grow, their business structures and middle classes will grow, and they will offer lucrative markets for exported intellectual property, goods and services created in the U.S., Europe, Japan and elsewhere. Meanwhile, these developing nations face immense challenges, including the need to:  build infrastructure such as dependable electricity networks, roads and highways; extend their education systems; control pollution; and provide greater opportunities to residents in rural and remote areas. In fact, rapid growth in some offshoring centers in China and India has created myriad shortages and problems. Some Chinese cities are experiencing significant problems with pollution and road traffic. The most popular Indian business centers, such as Bangalore, are experiencing daunting shortages of real estate, while competition for workers is driving wages higher and higher. Nonetheless, the offshoring boom does not touch all residents in India or China, despite impressive growth in the middle classes. For example, the Asian Development Bank estimated, in 2006, that 77% of Indians live on $2 U.S. daily or less, a vast number of them earning small livings from low-tech agriculture.  Clearly, there is room for substantial growth in industry, education and income. India began a five-year, $150 billion plan to update its woefully inadequate roads, ports, airports and electric plants in 2005.
 
China, since its business/economic reforms began in 1978, has been a bigger beneficiary of foreign investment than has India. As a result, growth has been generally faster. China’s exports grew ten-fold to nearly $1 trillion annually in the years from 1978 through 2006.  Nonetheless, China has hundreds of millions of low-income residents subsisting on low-tech agriculture, despite the creation of more than 135 million jobs in that 28-year period.
 
The biggest advances in developing nations are yet to come. From 2007 through 2014, an estimated 1 billion people throughout Asia will enter the middle class for the first time, and middle class income levels will rise significantly.
 
Fully developed nations such as America have been shifting to knowledge-based economies for decades, as automation takes over factory floors (displacing factory workers) and much of manufacturing shifts overseas. The challenge for developed nations such as the U.S. and Japan is to maintain their leads in such areas as intellectual property, investment in R&D and higher education. There is fierce competition among nations to foster advanced education, develop well-trained and motivated workforces, boost productivity and create high incentives for entrepreneurship and investment. Nations that succeed in this regard will invent the new technologies, services, consumer goods and business processes that can be sold to businesses and consumers in other nations

 

 

 

Outsourcing popular in tech startup community

 

There is an increasing trend even among the smallest of startup companies to outsource talent to emerging markets such as India, Argentina, Mexico, and Eastern Europe.   See more in our coverage of innovation clusters

 

 

 

Doubtsourcing :

out.jpg

 

 

 

News

 

GlobalLogic raises $29.5M for offshore software development

GlobalLogic, a Vienna, Va. company that specializes in offshore software development, has raised $29.5 million in a third round of funding.

 

The round was led by existing investor Sequoia Capital India, with participation from GlobalLogic’s other investors New Atlantic Ventures (formerly Draper Atlantic) and New Enterprise Associates.

 

The funding news followed the announcement that GlobalLogic has acquired Validio Software, a Bellevue, Wash.-based company with a 320-person design center in Kharkov, Ukraine. GlobalLogic says the acquisition makes it one of the largest technology employers in Ukraine.

 

GlobalLogic has 2,500 engineers in the United States, India, China and Ukraine. The company says that over the past six years, it has helped clients release more than 800 software products.

 

 

 

 

 

 

 

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