Assignment

On

OUTSOURCING & OFFSHORING

Submitted To Submitted By
Mr. B.C.Sinha Pushpendra
Kumar Atri
Faculty PGDM-(G)
Sec-B
Roll No- M2009066
OUTSOURCING
Outsourcing refers to hiring another company to perform a task that is currently
performed internally. Outsourcing is subcontracting a service, to a third-party company.
Outsourcing involves the transfer of the management and/or day-to-day execution of an
entire business function to an external service provider.The client organization and the
supplier enter into a contractual agreement that defines the transferred services.

A precise definition of outsourcing has yet to be agreed upon. Thus, the term is used
inconsistently. However, outsourcing is often viewed as involving the contracting out of
a business function - commonly one previously performed in-house-to an external
provider. In this sense, two organizations may enter into a contractual agreement
involving an exchange of services and payments. Of recent concern is the ability of
businesses to outsource to suppliers outside the nation, sometimes referred to
as offshoring or offshore outsourcing (which are odd terms because doing business with
another country does not mean you have to go offshore) In addition, several related
terms have emerged to grasp various aspects of the complex relationship between
economic organizationsor networks, such as nearshoring, multisourcing and strategic
outsourcing

BENEFITS OF OUTSOURCING
 Access to expertise

 Focus on Core Business.

 Lower cost

 Higher quality

 Expensive capital goods requiring scale

 Enhance capacity for innovation

 Capacity management.

 Access to talent.
RISK OF OUTSOURCING
 Contract risk

 Outsource firm risk ( insolvency, strikes)

 Future pricing risk

 Compromise in competitive advantage

 Information privacy risk

 Firm specific task

REASONS OF OUTSOURCING
Organizations that outsource are seeking to realize benefits or address the following
issues:

 Cost savings — The lowering of the overall cost of the service to the business.
This will involve reducing the scope, defining quality levels, re-pricing, re-negotiation,
and cost re-structuring. Access to lower cost economies through offshoring called
"labor arbitrage" generated by the wage gap between industrialized and developing
nations.
 Focus on Core Business — Resources (for example investment, people,
infrastructure) are focused on developing the core business. For example often
organizations outsource their IT support to specialised IT services companies.
 Cost restructuring — Operating leverage is a measure that compares fixed costs
to variable costs. Outsourcing changes the balance of this ratio by offering a move
from fixed to variable cost and also by making variable costs more predictable.
 Improve quality — Achieve a steep change in quality through contracting out the
service with a new service level agreement.
 Knowledge — Access to intellectual property and wider experience and
knowledge.
 Contract — Services will be provided to a legally binding contract with financial
penalties and legal redress. This is not the case with internal services.
 Operational expertise — Access to operational best practice that would be too
difficult or time consuming to develop in-house.
  Access to talent — Access to a larger talent pool and a sustainable source of
skills, in particular in science and engineering.
 Capacity management — An improved method of capacity management of
services and technology where the risk in providing the excess capacity is borne by
the supplier.
 Catalyst for change — An organization can use an outsourcing agreement as a
catalyst for major step change that can not be achieved alone. The outsourcer
becomes a Change agent in the process.
 Enhance capacity for innovation — Companies increasingly use external
knowledge service providers to supplement limited in-house capacity for product
innovation.
 Reduce time to market — The acceleration of the development or production of a
product through the additional capability brought by the supplier.]
 Commodification — The trend of standardizing business processes, IT Services,
and application services which enable to buy at the right price, allows businesses
access to services which were only available to large corporations.
 Risk management — An approach to risk management for some types of risks is
to partner with an outsourcer who is better able to provide the mitigation.
 Venture Capital — Some countries match government funds venture capital with
private venture capital for start-ups that start businesses in their country.
 Tax Benefit — Countries offer tax incentives to move manufacturing operations
to counter high corporate taxes within another country.
 Scalability — The outsourced company will usually be prepared to manage a
temporary or permanent increase or decrease in production.

Creating leisure time — Individuals may wish to outsource their work in order to
optimise their work-leisure balance.

SECURITY
Before outsourcing an organization is responsible for the actions of all their staff and
liable for their actions. When these same people are transferred to an outsourcer they
may not change desk but their legal status has changed. They are no longer directly
employed or responsible to the organization. This causes legal, security and compliance
issues that need to be addressed through the contract between the client and the
suppliers. This is one of the most complex areas of outsourcing and requires a
specialist third party adviser.
Fraud is a specific security issue that is criminal activity whether it is by employees or
the supplier staff. However, it can be disputed that the fraud is more likely when
outsourcers are involved, for example credit card theft when there is scope for fraud by
credit card cloning. In April 2005, a high-profile case involving the theft of $350,000 from
four Citibank customers occurred when call center workers acquired the passwords to
customer accounts and transferred the money to their own accounts opened under
fictitious names. Citibank did not find out about the problem until the American
customers noticed discrepancies with their accounts and notified the bank

Qualification of Outsourcer
The outsourcer may replace staff with less qualified people or with people with different
non-equivalent qualifications.
In the engineering discipline there has been a debate about the number of engineers
being produced by the major economies of the United States, India and China. The
argument centers around the definition of an engineering graduate and also disputed
numbers. The closest comparable numbers of annual graduates of four-year degrees
are United States (137,437) India (112,000) and China (351,537)

United States
'Outsourcing' became a popular political issue in the United States during the 2004 U.S.
presidential election. The political debate centered on outsourcing's consequences for
the domestic U.S. workforce. Democratic U.S. presidential candidate John
Kerry criticized U.S. firms that outsource jobs abroad or that incorporate overseas in tax
havens to avoid paying their "fair share" of U.S. taxesduring his 2004 campaign, calling
such firms "Benedict Arnold corporations"

Criticism of outsourcing, from the perspective of U.S. citizens, generally revolves around
the costs associated with transferring control of the labor process to an external entity in
another country. AZogby International poll conducted in August 2004 found that 71% of
American voters believed that “outsourcing jobs overseas” hurt the economy while
another 62% believed that the U.S. government should impose some legislative action
against companies that transfer domestic jobs overseas, possibly in the form of
increased taxes on companies that outsource. One given rationale is the extremely high
corporate income tax rate in the U.S. relative to other OECD nations, and the practice of
taxing revenues earned outside of U.S. jurisdiction, a very uncommon practice.
However, outsourcing is not solely a U.S. phenomenon as corporations in various
nations with low tax rates outsource as well, which means that high taxation can only
partially, if at all, explain US outsourcing. For example, the amount of corporate
outsourcing in 1950 would be considerably lower than today, yet the tax rate was
actually higher in 1950.

It is argued that lowering the corporate income tax and ending the double-taxation of
foreign-derived revenue (taxed once in the nation where the revenue was raised, and
once from the U.S.) will alleviate corporate outsourcing and make the U.S. more
attractive to foreign companies. However, while the US has a high official tax rate, the
actual taxes paid by US corporations may be considerably lower due to the use of tax
loopholes, tax havens, and attempts to "game the system". Rather than avoiding taxes,
outsourcing may be mostly driven by the desire to lower labor costs (see standpoint of
labor above). Sarbanes-Oxley has also been cited as a factor for corporate flight from
U.S. jurisdiction.
 OFFSHORING
Offshoring describes the relocation by a company of a business process from one
country to another—typically an operational process, such as manufacturing, or
supporting processes, such as accounting. Even state governments employ offshoring.

The term is in use in several distinct but closely related ways. It is sometimes used
broadly to include substitution of a service from any foreign source for a service formerly
produced internally to the firm. In other cases, only imported services from subsidiaries
or other closely related suppliers are included. A further complication is that
intermediate goods, such as partially completed computers, are not consistently
included in the scope of the term. "Re-shoring" (sometimes "Backshoring") is offshoring
that has been brought back onshore.

Offshoring can be seen in the context of either production offshoring or services

offshoring. After its accession to the World Trade Organization (WTO) in 2001,
the People's Republic of China emerged as a prominent destination for production
offshoring. After technical progress in telecommunications improved the possibilities
of trade in services, India became a country leading in this domain though many parts of
the world are now emerging as offshore destinations.

The economic logic is to reduce costs. If some people can use some of their skills more
cheaply than others, those people have the comparative advantage. The idea is that
countries should freely trade the items that cost the least for them to produce.
Offshoring is outsourcing in which the buyer organization belongs to another country.
Offshoring is the transfer of an organizational function to another country, regardless of
whether the work is outsourced or stays within the same corporation/ company.The
country who is offering work is called parent country and the country receiving work is
called host country.The offshore unit can be either captive or outsourced. The task that
is transmitted electronically or can be shipped is fit for offshoring.

Offshoring is defined as the movement of a business process done at a company in one

country to the same or another company in another, different country. Almost always
work is moved due to a lower cost of operations in the new location. Offshoring is
sometimes contrasted with outsourcing or offshore outsourcing. Outsourcing is the
movement of internal business processes to an external company. Companies
subcontracting in the same country would be outsourcing, but not offshoring. A
company moving an internal business unit from one country to another would be
offshoring orphysical restructuring, but not outsourcing. A company subcontracting a
business unit to a different company in another country would be both outsourcing and
offshoring

BENEFITS OF OFFSHORING
 Lower cost ( labor rate differentials )

 Quality due to expertise

 Low employees turn over

RISK OF OFFSHORING
 Local knowledge

 Cultural differences

 Cultural bias

 Country risk

 Communication

 Seasonality

 Scale

 Distance issue

 Fixed cost of starting offshore operation

 Fraud

 Crisis

 Activates that are offshored.

Production off-shoring
Production offshoring also known as physical restructuring of established products
involves relocation of physical manufacturing processes to a lower-cost destination.
Examples of production offshoring include the manufacture of electronic components
in Costa Rica, production of apparel, toys, and consumer goods in China, Vietnam etc.
Product design, research and the development process that leads to new products, are
relatively difficult to offshore. This is because research and development to improve
products and create new reference designs requires a skill set that is harder to obtain in
regions with cheap labor. For this reason, in many cases only the manufacturing will be
offshored by a company wishing to reduce costs.

However, there is a relationship between offshoring and patent system strength. This is
because companies under a strong patent system are not afraid to offshore work
because their work will remain their property. Conversely, companies in countries with
weak patent systems have an increased fear of intellectual property theft from foreign
vendors or workers, and, therefore, have less offshoring.

IT Services offshoring
The growth of IT services offshoring is linked to the availability of large amounts of
reliable and affordable communication infrastructure following the telecommunication
and Internet expansion of the late 1990s. This was seen all the way up to the year 2000.
Coupled with the digitization of many services, it was possible to shift the actual
production location of services to low cost countries in a manner theoretically
transparent to end-users.

Innovation offshoring
Once companies are comfortable with services offerings and started realizing the cost
savings, many high-tech product companies started using countries like South Africa,
India, China, Mexico, Russia etc. for innovating products.

Many famed Silicon Valley based companies jumped on this bandwagon not only to cut
costs but to shorten their product lifecycle and access the talent pool available in these
countries. Less developed countries are usually utilized for this practice.
 OFFSHORE OUTSOURCING
Offshore outsourcing is the practice of hiring an external organization to perform
some business functions in a country other than the one where
the products or services are actually developed or manufactured. It can be contrasted
with offshoring, in which the functions are performed in a foreign country by a foreign
subsidiary. Opponents point out that the practice of sending work overseas by countries
with higher wages reduces their own domestic employment and domestic investment.
Many customer service jobs as well as jobs in the information technology sectors (data
processing,computer programming, and technical support) in countries such as
the United States and the United Kingdom - have been or are potentially affected.

Types
There are four basic types of offshore outsourcing:

 ITO — Information Technology Outsourcing

 BPO — Business Process Outsourcing covers things like running call centers,
processing insurance claims.
 Software R&D — offshore software development

KPO - Knowledge Process Outsourcing covers things that require a higher skill set such
as reading X-Rays, performing investment research on stocks and bonds, handling the
accounting functions for a business or executing engineering design projects

CRITERIA
The general criteria for a job to be offshore-able are:

 There is a significant wage difference between the original and offshore

countries;
 The job can be telework;
 The work has a high information content;
 The work can be transmitted over the Internet;
 The work is easy to set up;
  The work is repeatable.

The driving factor behind the development of offshore outsourcing has been the need to
cut costs while the enabling factor has been the global electronic internet network that
allows digital data to be accessed and delivered instantly, from and to almost anywhere
in the world.
One of the main factors influencing the beginnings of the offshore outsourcing
movement were a combination of pressures to reduce labor costs, save on operational
cost such as payroll, administrative cost, utilities and to improve productivity, and an
expanding, economical labor in other countries. When companies outsource the idea is
to save money if they can keep the prices of their product lower than competitors