What is Outsourcing

Outsourcing means finding better ways of doing business.

It helps companies to look to the value chain for high leverage

areas and helps them to better utilise their resources to
exploit these areas.

Outsourcing is a means to achieve competitive advantage by

focusing on core competencies.
 International services
sourcing: 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
 Illustration
Onshoring, Offshoring, insourcing and outsourcing IT and
business process services
Approximate value of worldwide activity in 2008, USD

Outsourced Onshore Offshore

Outsourcing Outsourcing
(External Domestic Supply) (External cross-border supply)

(USD 227 billion) (USD 10 billion)

Control

Internal Internal
Insourced

Domestic Offshoring
Supply (Internal cross-border supply)

(USD 22 billion)

National International

Location
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 previously
considered ‘untouchable’
• Occurs in response to:
– Increased competition, resulting from trade
liberalisation and reinforced pressures to cut
costs, combined with rapid technological
change, making services increasingly
tradable
– Skills shortages  ensuring a skills base is in
place increasingly becomes a locational
determinant of economic activity
 Measurement issue
• If outsourcing is concerned with activities
that were previously carried out within
the firm, “When does outsourcing stop
being outsourcing?”
• This means it will be very difficult to
collect data measuring the extent of the
phenomenon
•
 No official statistics measuring the
extent of (services) sourcing
 Look at indirect
measuresk
• 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: (Information
Technology Outlook Chapter 6 and
ongoing work on ICT skills and
employment)
Ø occupations that use ICTs intensively could be
more exposed or vulnerable to offshoring
trends:
 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 India
and Ireland are among the 10 countries
with the strongest growth rates and the
largest shares):
Share of reported total exports of other business
services and computer and information services,
2002, 2008 (IMF BoP data)
2002 2008

18
16
14 15 largest reported value shares in 2002 selected
12 other
10
8
6
4
2
0

Sweden
Japan

Singapore
Germany

Italy
France

Austria

Spain

Canada

China

Korea

Australia
United States

Ireland

Brazil

Thailand

Finland
United Kingdom

Netherlands

India

Source: 2008 OECD Information Technology Outlook,

Chapter 2
Growth of exports of other business services
and computer and information services
CAGR 2002-2008
India
Romania
Peru
Argentina
Nicaragua
Estonia
Ireland
Brazil
Sweden
China
Israel
Spain
Norway
United
United States
Iceland
Australia
Morocco
Netherlands
Canada
Hungary
Switzerland
Ghana
Portugal
Denmark
Italy
Germany
Mauritius
Austria
Russia
Poland
Thailand
Korea
France
New Zealand
Czech Rep.
Finland
Japan
Mexico
Turkey
Greece

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

Source: 2009 OECD Information Technology Outlook,

Aggregate illustration: the share of narrow and
broad ICT-skilled employment in total
employment, EU15 and USA, 1995-2002
US narrow E U15 narrow US broad E U15 broad
4.5 22.5

4.0 22.0

21.5
3.5

21.0

3.0
20.5

2.5
20.0

2.0 19.5
1995 1996 1997 1998 1999 2000 2001 2002 1995 1996 1997 1998 1999 2000 2001 2002

Source: 2004 OECD Information Technology Outlook,

Chapter 1
Narrow: 2.5% - 4.5%
Broad: 19.5% - 22.5%
 Sectoral illustration - for Europe - of the intensity of
ICT-skilled employment across all sectors in 2002
(using the broad definition)
wgt ave E U wgt ave non-E U

90

80

70

60

50

40

30

20

10

0
1 2 5 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 40 41 45 50 51 52 55 60 61 62 63 64 65 66 67 70 71 72 73 74 75 80 85 90 91 92 93 95 99

Source: 2004 OECD Information Technology Outlook,

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 74.8
65 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
Manufacture of radio, television and communication equipment and
32
apparatus 44.8
Wholesale trade and commission trade, except of motor vehicles and
51
motorcycles 42.7
Extraction of crude petroleum and natural gas; service activities incidental to
11
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 35.2
64 Post and telecommunications 32.6
Renting of machinery and equipment without operator and of personal and
71
household goods 31.4
Manufacture of medical, precision and optical instruments, watches and
33
clocks 31.0

Source: 2004 OECD Information Technology Outlook,

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 and
compensate for adjustment costs where
necessary
• Adjust education and training programmes to
train 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  kkT skills become
increasinglk important in
the new economk
• 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 GLOBAL
SOURCING
• Cross functional leaders participate
on 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 functional
groups and buying locations.
• Executive leaders recruit qualified
participants to join global project
teams.
 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 and
communication
– 18
 Global Sourcing
• The Lure of Global Sourcing
– Suppliers with improved competitiveness
• Cost
• Quality
• Timeliness
– Suppliers in less developed countries with
low-cost labor
• Attractive for labor-intensive products
with low skill requirements

21
 Global Sourcing
Arrangements
• Arrangement that provide a firm with
foreign products
– Wholly owned subsidiary
– Overseas joint venture
– In-bond plant contractor
– Overseas independent contractor
– Independent overseas manufacturer

22
 Global Sourcing
• Problems


– Unanticipated added costs

• Currency fluctuations
• Transportation cost increases
•
– E-procurement exposes business
systems to wide range of potential
security issues
–

23
 Added Costs
• International freight, insurance and
packing
• Import duties
• Customhouse broker’s fees
• Transit or pipeline inventory
• Cost of letter of credit
• International travel and communication
costs
• Company import specialists
• Reworking of products out of specification
24
 Standards for Global
Operations
• Standards
– Documented agreements on technical
specifications or other precise
criteria used consistently as
guidelines, rules, or definitions of
the characteristics of a product,
process, or service
• ISO 9000 (International Organization for
Standards) most used in Europe, for
quality
• ISO 9001 most comprehensive standard 25
 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 and
skills of the Outsourcing partner
• Better utilise internal resources
• Increased responsiveness to
customer needs
• Decrease financial risks by reducing
capital investments

 Motivators for Outsourcing
 The followings are the major reasons
given for taking outsourcing decisions


• Difficulty of hiring skilled professionals

(28.8 percent),
• Lack of in-house skills to deliver the
desired levels of quality (20.3 percent),
• Budgetary considerations (13.6 percent),
• Mandate from the management (11.9
percent).

 Risks in Outsourcing
• Information Security
• Loss of control
• Compromising confidentiality
• Monitoring costs
•
 Benefits
 Service


• Industry knowledge and expertise of the

vendor
• Quick response time
• Function Difficult to Manage or Out of
Control
• They are great in a pinch – ability to
increase 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.