Outsourcing and Outsourcing and OffshoringOffshoring

Paul C. LynchPaul C. Lynch

IE 597-I Fall 2005IE 597-I Fall 2005

December 7, 2005December 7, 2005

Presentation OutlinePresentation Outline Define Outsourcing and OffshoringDefine Outsourcing and Offshoring Political & Media DebatePolitical & Media Debate Economist ViewEconomist View Advantages for CompaniesAdvantages for Companies RisksRisks Basic Engr. Economic Tools and OR Tools Basic Engr. Economic Tools and OR Tools

Used for I-O EvaluationUsed for I-O Evaluation Further Research NeededFurther Research Needed Q & A SessionQ & A Session

OutsourcingOutsourcing

““act of moving some of a firm’s act of moving some of a firm’s internal activities and decision internal activities and decision responsibilities to outside providers.” responsibilities to outside providers.”

““procuring of services or products procuring of services or products from an outside supplier or from an outside supplier or manufacturer in order to cut costs.” manufacturer in order to cut costs.”

Client Firm Client Firm Outsource ProviderOutsource Provider

OffshoringOffshoring

““the delegation of administrative, the delegation of administrative, engineering, research, development, or engineering, research, development, or technical support processes to a third-technical support processes to a third-party vendor in a lower-cost location.” party vendor in a lower-cost location.”

OffshoringOffshoring is looked at as a version of is looked at as a version of outsourcing that procures services or outsourcing that procures services or goods from suppliers or manufacturers goods from suppliers or manufacturers outside of the country. outside of the country.

Interchangeability / Buzz Interchangeability / Buzz TermsTerms

Outsource/ OffshoreOutsource/ Offshore Outsource/ SubcontractOutsource/ Subcontract Offshore Outsourcing/ OffshoringOffshore Outsourcing/ Offshoring BPOBPO ODCODC GDCGDC

Outsourcing/ Offshoring: Political Outsourcing/ Offshoring: Political DebateDebate

Kerry: CONKerry: CON ““Export American Export American

Products, Not Jobs”Products, Not Jobs” ““Shut Corporate Tax Shut Corporate Tax

Loopholes and level Loopholes and level playing field.”playing field.”

Bush: PROBush: PRO Economy is “Strong Economy is “Strong

and Getting Stronger”and Getting Stronger” “ “ Train Americans and Train Americans and

Increase Funding for Increase Funding for Community Colleges.”Community Colleges.”

““Exporting America”Exporting America” Companies:Companies:

Anheuser-BuschAnheuser-Busch AOLAOL BoeingBoeing Coca-ColaCoca-Cola Dell ComputerDell Computer Delta AirlinesDelta Airlines Gateway ComputerGateway Computer Home DepotHome Depot Lowe’s Lowe’s

The Greenspan ViewThe Greenspan View

PRO Outsourcing PRO Outsourcing and Offshoringand Offshoring

Job Protection = Job Protection = Path to StagnationPath to Stagnation

Protection Would Protection Would Lead to Job LossesLead to Job Losses

Why Outsource/ Why Outsource/ Offshore?Offshore?

Main Factor:Main Factor: Huge Cost Huge Cost

SavingsSavings 30-60% 30-60%

OverallOverall LaborLabor Technology Technology

InvestmentsInvestments Process Process

EfficienciesEfficiencies

Additional BenefitsAdditional Benefits

Access to Skills and Capabilities Beyond Access to Skills and Capabilities Beyond the Company’s the Company’s

SpeedSpeed ““Wake Up Call” or “Motivational Impact”Wake Up Call” or “Motivational Impact” Improved Operational VisibilityImproved Operational Visibility Access to Instant CapacityAccess to Instant Capacity Financing FlexibilityFinancing Flexibility Improved Service/ Decrease Time To Improved Service/ Decrease Time To

MarketMarket

Cost Savings BreakdownCost Savings Breakdown

WOW! Huge Cost WOW! Huge Cost Reductions!Reductions!

Offshoring is the Way To Go… Offshoring is the Way To Go… RIGHT???????RIGHT???????

Not So Fast My Friend…. Not So Fast My Friend…. There are Some Risks There are Some Risks

Involved With that Involved With that Decision!Decision!

The Major Risks In The Major Risks In OffshoringOffshoring

ContractContract Privacy and SecurityPrivacy and Security Diminishing Technical ReturnsDiminishing Technical Returns Increased/ Hidden CostsIncreased/ Hidden Costs Loss of Expertise (Mainly IT) Loss of Expertise (Mainly IT)

Impact On Your EmployeesImpact On Your Employees Impact on Your Customers Impact on Your Customers Failure of Outsource ProviderFailure of Outsource Provider

Additional Offshoring Additional Offshoring RisksRisks

Economic RisksEconomic Risks Culture RisksCulture Risks Demographic RisksDemographic Risks Political Stability RisksPolitical Stability Risks

What Makes Your Business What Makes Your Business A “HOT” Candidate for A “HOT” Candidate for

Offshoring?Offshoring? Top 3 Candidate ProcessesTop 3 Candidate Processes

Processes are Labor IntensiveProcesses are Labor Intensive Processes are Scale - and Efficency – Processes are Scale - and Efficency –

DrivenDriven RepetitiousRepetitious

Processes Allow Remote ExecutionProcesses Allow Remote Execution

Basic Tools Used To Basic Tools Used To Evaluate I-O AlternativesEvaluate I-O Alternatives

Basic Engineering Economic AnalysisBasic Engineering Economic Analysis PV, NPV Calculations - E(NPV)PV, NPV Calculations - E(NPV) Break-Even Analysis (Cost/ Benefit Break-Even Analysis (Cost/ Benefit

Analysis)Analysis) Compare Quantifiable Costs with Possible Compare Quantifiable Costs with Possible

Benefits.Benefits. ROI CalculationsROI Calculations IRR- Internal Rate of Return MethodsIRR- Internal Rate of Return Methods ARR- Accounting Rate of Return AnalysisARR- Accounting Rate of Return Analysis Payback Period EvaluationPayback Period Evaluation

OR MethodologiesOR Methodologies

Decision Theory (DT) ModelDecision Theory (DT) Model Game Theory (GT) ModelGame Theory (GT) Model LP For O-I Proportional Allocation LP For O-I Proportional Allocation

DecisionsDecisions Allocation of Service Jobs, Production Allocation of Service Jobs, Production

Requirements for Different Outsource Requirements for Different Outsource Providers.Providers.

LP: Min. Total Costs, Max. Total ProfitsLP: Min. Total Costs, Max. Total Profits Integer ProgrammingInteger Programming

Call Center, Phone Service IndustriesCall Center, Phone Service Industries

OR MethodologiesOR Methodologies

Centroid MethodCentroid Method Shortest-Route MethodShortest-Route Method Minimal Spanning-Tree MethodMinimal Spanning-Tree Method Tranportation MethodTranportation Method

Further Research Further Research NeededNeeded

Case StudiesCase Studies Compile Results from Outsourcing CompaniesCompile Results from Outsourcing Companies Apply some Values for Stated Risks.Apply some Values for Stated Risks.

Country and Region AnalysisCountry and Region Analysis Laws and GuidelinesLaws and Guidelines Govts. Working to Minimize Risks?Govts. Working to Minimize Risks? Current States of Companies currently thereCurrent States of Companies currently there

Develop SPECIFIC OR Models.Develop SPECIFIC OR Models.

Strategic PartnershipsStrategic Partnerships

ReferencesReferences Dobbs, Lou (2005), “Exporting America: The List.”, available at: Dobbs, Lou (2005), “Exporting America: The List.”, available at: http://http://wwwwww.cnn.com/ ‘.cnn.com/ ‘

CNN/Programs/lou.dobbs.tonight (accessed 4 December).CNN/Programs/lou.dobbs.tonight (accessed 4 December).

DonahoeDonahoe, Daniel N., Daniel N., , PechtPecht, Michael, Michael (2003), “Are U.S. Jobs Moving to China?”, (2003), “Are U.S. Jobs Moving to China?”, IEEE IEEE Transactions on Components and Packaging TechnologiesTransactions on Components and Packaging Technologies, v 26, n 3, September, 2003, pp. 682-686., v 26, n 3, September, 2003, pp. 682-686.

Hines, Matthew (2004), “Greenspan: Offshoring Laws Could Harm U.S.”, CNET News, Hines, Matthew (2004), “Greenspan: Offshoring Laws Could Harm U.S.”, CNET News, March, 12, 2004, available at: March, 12, 2004, available at: http://http://news.com.com/Greenspan+Offshoringnews.com.com/Greenspan+Offshoring+ laws+could+ laws+could+harm+U.S./2100-+harm+U.S./2100-

1022_3-5172975.html.1022_3-5172975.html.

Linder, Jane C. (2004), “Outsourcing for Radical Change.” pp. 63-69.Linder, Jane C. (2004), “Outsourcing for Radical Change.” pp. 63-69.

Namasivayam, S. (2004), “Profiting from Business Process Outsourcing”, Namasivayam, S. (2004), “Profiting from Business Process Outsourcing”, IT IT ProfessionalProfessional, v 6, n 1, January/February, 2004, pp. 12-18., v 6, n 1, January/February, 2004, pp. 12-18.

Robinson, M., Kalakota, R. (2004), “Offshore Outsourcing: Business Models, ROI, and Robinson, M., Kalakota, R. (2004), “Offshore Outsourcing: Business Models, ROI, and Best Practices.” pp. 1-9.Best Practices.” pp. 1-9.

Rodgers, T.J. (2005), “The truth about outsourcing”, Rodgers, T.J. (2005), “The truth about outsourcing”, IEEE Design and Test of IEEE Design and Test of ComputersComputers, v 22, n 1, January/February, 2005, pp. 12-13., v 22, n 1, January/February, 2005, pp. 12-13.

Schneiderjans, Marc J. (2005), “Outsourcing and Insourcing in an International Schneiderjans, Marc J. (2005), “Outsourcing and Insourcing in an International Context.”, pp. 3-5, 15, 24-31, 40, 75-180.Context.”, pp. 3-5, 15, 24-31, 40, 75-180.

Tafti, Mohammed H.A. (2005), “Risk Factors associated with offshore IT outsourcing”, Tafti, Mohammed H.A. (2005), “Risk Factors associated with offshore IT outsourcing”, Industrial Management and Data SystemsIndustrial Management and Data Systems, v 105, n 5, 2005, p 549-560., v 105, n 5, 2005, p 549-560.

Tas, Jeroen; Sunder, Shyam (2004), “Financial services business process outsourcing”, Tas, Jeroen; Sunder, Shyam (2004), “Financial services business process outsourcing”, Communications of the ACMCommunications of the ACM, v 47, n 5, May, 2004, p 50-52., v 47, n 5, May, 2004, p 50-52.