intntl sourcing1

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What is Outsourcing

Outsourcing means finding better ways of doing business.

It helps companies to look to the value chain for high leverageareas and helps them to better utilise their resources toexploit these areas.

Outsourcing is a means to achieve competitive advantage byfocusing on core competencies.



International servicessourcing: Opportunities

and challenges



International Sourcing – Terminology• The international sourcing of IT and ICT-enabled

services (often referred to as ‘offshoring’) is

part of the globalisation of the ICT sector, and

of other services sectors

• ‘Offshoring’ includes:

– Insourcing: to foreign affiliates

– Outsourcing: activities are contracted out to

independent parties abroad

• Media focus is on offshoring (of jobs), but in-

and outsourcing can also take place

domestically



IllustrationOnshoring, Offshoring, insourcing and outsourcing IT and

business process services

Approximate value of worldwide activity in 2008, USD

Control

Location

National International

I n s o

u r c e

d

O u

t s o

u r

c e

d Onshore

Outsourcing(External Domestic Supply)

(USD 227 billion)

Offshore

Outsourcing(External cross-border supply)

(USD 10 billion)

Internal

Domestic

Supply

Internal

Offshoring

(Internal cross-border supply)

(USD 22 billion)

: ,Source 2004 OECD Information Technology Outlook Chapter 2



International (services) sourcing

• The phenomenon is not new: has existed

in manufacturing for many years• What is new: it is increasingly taking place

in the services sector (enabled by ICTs)and affects white collar jobs previouslyconsidered ‘untouchable’

• Occurs in response to: – Increased competition, resulting from trade

liberalisation and reinforced pressures to cutcosts, combined with rapid technologicalchange, making services increasinglytradable

– Skills shortages ensuring a skills base is inplace increasingly becomes a locationaldeterminant of economic activity



Measurement issue

• If outsourcing is concerned with activitiesthat were previously carried out withinthe firm, “When does outsourcing stop

being outsourcing?”• This means it will be very difficult to

collect data measuring the extent of thephenomenon

•



No official statistics measuring theextent of (services) sourcing

Loo t n r ti di ec

m sur s e k• Exports of services (Information

Technology Outlook, Chapter 2)

Ø if service activities are sourced internationally,

the country receiving the international in-

and/or outsourcing must export services back

to the country of origin

• Employment data: (InformationTechnology Outlook Chapter 6 and

ongoing work on ICT skills and employment )Øoccupations that use ICTs intensively could be

more exposed or vulnerable to offshoringtrends:



Export data show

• Some of the countries often mentioned in

the outsourcing debate have experienced

strong export growth (e.g. India, Romania,

Estonia, Ireland).

• But, the exports of most of these countries

are growing from a low base (only Indiaand Ireland are among the 10 countries

with the strongest growth rates and the

largest shares):



Share of reported total exports of other businessservices and computer and information services,

2002, 2008 (IMF BoP data)


0

2

4

6

8

10

12

14

16

18

UnitedStates

UnitedKingdom

German

y

France

Netherlands

India

Japan

Ital

y

Ireland

Austria

Spain

Singapore

Canada

China

Sweden

Korea

Braz

il

Thailand

Australia

Finland

2002 2008

15 largest reported value shares in 2002 selected

other



Growth of exports of other business servicesand computer and information services

: ,Source 2009 OECD Information Technology Outlook

-20 -15 -10 -5 0 5 10 15 20 25 30 35 40

GreeceTurkeyMexicoJapan

FinlandCzech Rep.

New ZealandFranceKorea

ThailandPolandRussiaAustria

MauritiusGermany

ItalyDenmarkPortugal

GhanaSwitzerland

HungaryCanada

NetherlandsMoroccoAustralia

IcelandUnited States

UnitedNorway

SpainIsraelChina

SwedenBrazil

IrelandEstonia

NicaraguaArgentina

PeruRomaniaIndia

CAGR 2002-2008



Aggregate illustration: the share of narrow andbroad ICT-skilled employment in total

employment, EU15 and USA, 1995-2002

: . % - . %Narrow 2 5 4 5

: . % - . %Broa 19 5 22 5


2. 0

2. 5

3. 0

3. 5

4. 0

4. 5

1995 1996 1997 1998 1999 2000 2001 2002

US narrow EU15 narro

19.5

20.0

20.5

21.0

21.5

22.0

22.5

1995 1996 1997 1998 1999 2000 2001 2002

US broad EU15 broa



Sectoral illustration - for Europe - of the intensity of ICT-skilled employment across all sectors in 2002

(using the broad definition)

0

10

20

30

40

50

60

70

80

90

1 2 5 1 0 1 1 1 2 13 1 4 1 5 1 6 1 7 18 1 9 2 0 2 1 2 2 2 3 2 4 2 5 2 6 2 7 2 8 2 9 30 3 1 3 2 3 3 3 4 3 5 36 3 7 4 0 41 4 5 5 0 5 1 5 2 55 6 0 6 1 6 2 6 3 6 4 6 5 66 6 7 7 0 71 7 2 7 3 7 4 7 5 8 0 85 9 0 9 1 9 2 9 3 9 5 99

wgt ave E U wgt ave non-E U


Chapter 6



Example: EU15 – high intensity sectors(≥30%)

NACE Industry %

72 Computer and related activities 84.2

66 Insurance and pension funding, except compulsary social security 74.865 Financial intermediation, except insurance and pension funding 69.2

67 Activities auxiliary to financial intermediation 67.9

30 Manufacture of office machinery and computers 57.1

74 Other business activities 50.4

70 Real estate activities 46.1

40 Electricity, gas, steam and hot water supply 45.1

32Manufacture of radio, television and communication equipment and

apparatus 44.8

51Wholesale trade and commission trade, except of motor vehicles and

motorcycles 42.7

11Extraction of crude petroleum and natural gas; service activities incidental to

oil and gas extraction excluding surveying 42.0

73 Research and development 41.3

24 Manufacture of chemicals and chemical products 35.9

31 Manufacture of electrical machinery and apparatus, n.e.c. 35.3

23 Manufacture of coke, refined petroleum products and nuclear fuel 35.264 Post and telecommunications 32.6

71Renting of machinery and equipment without operator and of personal and

household goods 31.4

33Manufacture of medical, precision and optical instruments, watches and

clocks 31.0


Chapter 6



Impact of international sourcing

• Efficiency gains and cost savings

• Possible initial job losses in the country from

which the offshoring originates, and job

creation in the host country

• Greater economic efficiency, induced and

enhanced by greater competitiveness, and

increased productivity growth in both home

and host countries

• Should create new employment and growth

opportunities in the home and host countries



Policy issues

• Avoid a protectionist response and remain

committed to liberalising trade in services

(including through GATS Mode 4: movement

of persons)

• Manage the adjustment process andcompensate for adjustment costs where

necessary

• Adjust education and training programmes totrain and retrain workers and enable them

to take advantage of new employment

opportunities

• Ensure good labour standards and welfare



Conclusions• International sourcing is not new, but now affects

the services sector, and high and low skilled jobs

are concerned

• This is induced by increased trade in services and

competition, facilitated by rapid developments in

ICTs T s lls ombec ek kn r s n l mport nt nc e i g i i

t n w onome e ec k• ICT skills are widespread throughout the economy,

but are relatively more important in services

sectors ensuring their supply is crucial for

future competitiveness

• Geographical dimension: the development and

diffusion of ICTs impacts the spatial distribution



EXECUTIVE GLOBALSOURCING

• Cross functional leaders participateon a global sourcing council.

• Commmittee has the authority to

translate global vision into reality.• Executive leaders work to gain

support for global agreements and

processes from cross functionalgroups and buying locations.

• Executive leaders recruit qualifiedparticipants to join global project

teams.



18

Outsourcing

• Increasingly common option – Relocating some or all of a business’s activities or

processes outside of the company

• Focus on core competencies

• Leverage skills of other companies• Reduce costs

• Improve flexibility and speed of response

• Enhance quality – Can outsource in same country or another country

• Offshoring: a foreign location – Choices increased by

• Global access to vendors

• Falling costs of interactions

• Improved information technology andcommunication

–



21

Global Sourcing

• The Lure of Global Sourcing – Suppliers with improved competitiveness

• Cost

• Quality• Timeliness

– Suppliers in less developed countries withlow-cost labor

• Attractive for labor-intensive productswith low skill requirements



22

Global SourcingArrangements

• Arrangement that provide a firm withforeign products

– Wholly owned subsidiary

– Overseas joint venture

– In-bond plant contractor

– Overseas independent contractor

– Independent overseas manufacturer



23

Global Sourcing

• Problems

– Unanticipated added costs

• Currency fluctuations• Transportation cost increases

•

– E-procurement exposes businesssystems to wide range of potentialsecurity issues

–



24

Added Costs

• International freight, insurance andpacking

• Import duties

• Customhouse broker’s fees• Transit or pipeline inventory

• Cost of letter of credit

• International travel and communicationcosts

• Company import specialists

• Reworking of products out of specification



25

Standards for GlobalOperations

• Standards

– Documented agreements on technicalspecifications or other precise

criteria used consistently asguidelines, rules, or definitions of the characteristics of a product,process, or service

• ISO 9000 (International Organization forStandards) most used in Europe, forquality

• ISO 9001 most comprehensive standard



POSITIVE ASPECTS

• COSTS + EFFICIENCY

• – Lower overall cost

• – Lower labour cost

• – Lower land and facility costs

• – Lower taxes

• – Greater standardisation



POSITIVE ASPECTS

• STRATEGIC

• – Penetration of growth markets

• – Introduce competition between

• suppliers

• – Improve environmental

• compliance



POSITIVE ASPECTS

• VALUE

• – Improved quality

• – Improved delivery reliability

• – Improved new product

• introduction

• – Improved sharing of information• – Uniqueness



NEGATIVES

• STRATEGIC

• – Loss of Knowledge

• – Piracy / Abuse of IPR

• – Unknown long term impact on

• demand / supply

• – Language, cultural and time



NEGATIVES

• VALUE• – Quality problems• – Lower responsiveness

• • ENVIRONMENT AND CSR• – Longer distances (effects on• pollution and congestion)• – Abuse of the environment• – Abuse of employees• – Loss of jobs



RISKS

• SUPPLY RISK

• – Supply disruptions

• – Longer lead-times

• – Lower responsiveness

• – Quality problems

• • PROCESS RISK

• – Communication problems

• – Quality problems postmanufacture

• • DEMAND RISK • – Indirect effects on corporate

• social responsibly can affect demand



RISKS

• ENVIROMENTAL RISK

• – Natural disasters

• – Terrorism

• – Global pandemic

• – Strikes and demonstrations

• – Currency fluctuations

• – Travel longer distances (effects

• on pollution and congestion)

• • CONTROL RISK • – Loss of knowledge

• – Piracy / abuse of IPR



The future shape of business is

being redefined through outsourcing



What to Outsource

• CRM (Customer Relationship Management)

• SCM (Supply Chain Management)

• Back Office

– Payroll – Billing

– Accounting

– Investor Relationship Management – Share

Transfer & Fixed Deposit Accounting



Why Outsource

• Use the specialised services andskills of the Outsourcing partner

• Better utilise internal resources

• Increased responsiveness tocustomer needs

• Decrease financial risks by reducing

capital investments



Motivators for Outsourcing

The followings are the major reasonsgiven for taking outsourcing decisions

• Difficulty of hiring skilled professionals(28.8 percent),

• Lack of in-house skills to deliver thedesired levels of quality (20.3 percent),

• Budgetary considerations (13.6 percent),

• Mandate from the management (11.9percent).



Risks in Outsourcing

• Information Security

• Loss of control

• Compromising confidentiality

• Monitoring costs

•



Benefits

Service

• Industry knowledge and expertise of thevendor

• Quick response time

• Function Difficult to Manage or Out of Control

• They are great in a pinch – ability toincrease resources whenever required

•



Benefits

Costs

• Pay only for what you need

• The infrastructure is of the vendor

• Economies of scale with the vendor

• Reduce or Control Operating Costs

• Outsourcing is a cost-effective way to

increase your resources.

•

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