Offshoring and Outsourcing

Chapter 8
 “Is Your Job Next?”
Business Week, Feb 3, 2003, pp. 50-60

3,400,000 white collar jobs with

$151B in annual wages will leave
U.S. for low wage countries by 2015
(Forrester Research)

Chapter 8 – Offshoring and Successful Service Operations Manag 2

Outsourcing ement, 2006, Thomson
 International
De-coupling / Offshoring
• The hype:
– V.C. firm partner: “In a couple of years, 90% of all
start-ups will have some connection to India or
China.”
– Gartner Group: Off-shore BPO will have 80%
CAGR through 2009
– Forrester Research: 3,400,000 white collar jobs
worth $151B/year will be off-shored from the U.S.
by 2015

Chapter 8 – Offshoring and Successful Service Operations Manag 3

Outsourcing ement, 2006, Thomson
 Offshoring History
Timeline/growth Telecom Technology
• 1994 • 1966: 138 simultaneous x-
– Caribbean 1-10K wkrs Atlantic conversations
– Ireland 2-3K wkrs possible
– Asia 10-20K wkrs • 1988 Trans-oceanic
Materials sent by air, turn time in
weeks
Fiberoptic cable
• 1996 – 1st GE call center • Early 90’s: world-wide
satellite
in India
• Late 90’s: multi-plexing;
• 1998/9 Y2K crisis
optical switching

Chapter 8 – Offshoring and Successful Service Operations Manag 4

Outsourcing ement, 2006, Thomson
 Offshoring vs. Outsourcing

Offshoring Outsourcing
• Moving work to a • Moving work done
different country within a firm to a
• The entity in the different firm
different country can be • The different firm can be
owned by the same firm on- or off-shore
or outsourced

Chapter 8 – Offshoring and Successful Service Operations Manag 5

Outsourcing ement, 2006, Thomson
 Activity Characteristics to
Consider for Outsourcing

Chapter 8 – Offshoring and Successful Service Operations Manag 6

Outsourcing ement, 2006, Thomson
 Outsourcing: Benefits

• Lower cost

• Higher quality

• Access to latest ideas

• Access to technology

Chapter 8 – Offshoring and Successful Service Operations Manag 7

Outsourcing ement, 2006, Thomson
 Outsourcing: Risks
• Contract appropriateness

• Outsource firm (solvency, strikes)

• Future pricing

• Information privacy

• Competitive advantage
Chapter 8 – Offshoring and Successful Service Operations Manag 8
Outsourcing ement, 2006, Thomson
 Outsourcing: Risks

• Firm specific risks

– Loss of firm knowledge
– Loss of career paths

• Organizational identification
– Loss of customer empathy
– Loss of employee-firm identification

Chapter 8 – Offshoring and Successful Service Operations Manag 9

Outsourcing ement, 2006, Thomson
 International
De-coupling / Offshoring
Examples:

Chapter 8 – Offshoring and Successful Service Operations Manag 10

Outsourcing ement, 2006, Thomson
 Size of Off-shoring: Jobs
US Jobs Lost Philippines Call Centers
• 400,000 Forrester Res. • Warburg-Pincus
• 200,000 Info. Tech. Assn. 5-6,000 jobs
• WSJ: 30,000

Indian Call Centers Total Jobs

• Tech. Mkting. Corp. 250,000 • NASSCOM:
jobs (India/Phil.)
171,500 in India
• AJC: 160,000
• Warburg-Pincus 3/2004: • Fortune (11/2003) 350,000
50,000 in India

Chapter 8 – Offshoring and Successful Service Operations Manag 11

Outsourcing ement, 2006, Thomson
 Size of Offshoring: Dollars
• McKinsey (2002) $30-35B • NASSCOM: 185 of
– Ireland $8.3 Fortune 500 offshore to
– India $7.7 India
• India alone (Infosys) • GIGA Info. Group
– $10.2B (2002)
India BPO $1.5 (2001)
6.5B call centers
• Gartner Group (2002)
1.5B finance/acctg
1.3B transcription – BPO market: $110B
– GE India 18,000 FTE – Off-shore now: $1.3B
– Infosys 13,000 FTE

Chapter 8 – Offshoring and Successful Service Operations Manag 12

Outsourcing ement, 2006, Thomson
 Activities Often Offshored

Chapter 8 – Offshoring and Successful Service Operations Manag 13

Outsourcing ement, 2006, Thomson
 Call Center in Delhi, India

Chapter 8 – Offshoring and Successful Service Operations Manag 14

Outsourcing ement, 2006, Thomson
 Ad in Bangalore, India

Chapter 8 – Offshoring and Successful Service Operations Manag 15

Outsourcing ement, 2006, Thomson
 Good/bad for U.S.?

McKinsey: For every $1 off-shored…

0.58 cost reduction
0.05 other countries buying U.S. goods
0.04 repatriation of profits
+ 0.47 redeployed U.S. labor
$1.14 in U.S. gains

Chapter 8 – Offshoring and Successful Service Operations Manag 16

Outsourcing ement, 2006, Thomson
 Redeployed labor??

72% of offshored process dollars is labor

69% of those who lose their jobs re-employed
Of those re-employed, make 96% of their former
wage
.72 x .69 x .96 = 48%

Chapter 8 – Offshoring and Successful Service Operations Manag 17

Outsourcing ement, 2006, Thomson
 The Empire Strikes Back
• U.S. Congress Laws Pending/Passed
– Trade Adjustment Assistance Act (1974) extension
to services
– Defending American Jobs Act
– U.S. Workers Protection Act
– USA Jobs Protection Act
– Jobs for America Act
• 36 States considering laws banning offshoring
of governmentt contract work
Chapter 8 – Offshoring and Successful Service Operations Manag 18
Outsourcing ement, 2006, Thomson
 The Empire Strikes Back
• Possible Laws
– End tax structure favoring offshoring
– Require 3 mo lay-off notice if offshoring
– Require informing customer of where work is
processed
– Ban sending private information overseas
– Eliminate tax deduction for expense of offshoring
– Bar fed loans/grants/contracts if firm lays-off more
U.S. than non-U.S. workers

Chapter 8 – Offshoring and Successful Service Operations Manag 19

Outsourcing ement, 2006, Thomson
 International Tax Laws

• Ireland: std rate 43% BPO rate 10% until 2010

• Jamaica: std 34% BPO “free trade zones” 0%
• Barbados: std 2.5%
• Mauritius: std 15% BPO personal “tax holiday”
until 2008

Chapter 8 – Offshoring and Successful Service Operations Manag 20

Outsourcing ement, 2006, Thomson
 Naaasty
• IBM (12/2003)

Internal memo leaked. 3,000 people to be off-

shored. They must train their replacements here for
several weeks. They then have 60 days to find
another job within IBM.

• Indiana – unemployment paperwork

• New Jersey – welfare help line: India

Chapter 8 – Offshoring and Successful Service Operations Manag 21
Outsourcing ement, 2006, Thomson
 Choices for Electronically
Transmitted Services

Chapter 8 – Offshoring and Successful Service Operations Manag 22

Outsourcing ement, 2006, Thomson
 Outsourcing: Managerial Concerns

• Organizational identification
– Loss of service quality
– Loss of service flexibility

Chapter 8 – Offshoring and Successful Service Operations Manag 23

Outsourcing ement, 2006, Thomson
 Outsourcing: Managerial Concerns

• Loss of competitive advantage source

 

– Loss of firm knowledge

– Loss of career paths
• Increased risks:
– Contract risk
– Outsource firm risk
– Future pricing risk
– Information privacy risk

Chapter 8 – Offshoring and Successful Service Operations Manag 24

Outsourcing ement, 2006, Thomson
 In-sourcing: Managerial Concerns

• High labor costs

• Technical expertise
• High demand variance
• Expensive capital goods requiring scale

Chapter 8 – Offshoring and Successful Service Operations Manag 25

Outsourcing ement, 2006, Thomson
 Location of Workers:
Managerial Issues

Domestic: Offshore:
High cost Local knowledge
High turnover Cultural differences
Quality Cultural bias
Missed opportunity Country risk
         International Communication
Domestic Seasonality
Scale
Distance issues

Chapter 8 – Offshoring and Successful Service Operations Manag 26

Outsourcing ement, 2006, Thomson
 Cost Versus Service in
High- and Low-wage Countries

Chapter 8 – Offshoring and Successful Service Operations Manag 27

Outsourcing ement, 2006, Thomson
 Chapter Summary
• The terms “outsourcing” and “offshoring” are
conceptually different with very different risks
ands benefits
• Services outsourcing is used to
– Cut costs
– Keep up with technological advance
• Services offshoring is principally driven by
labor rate differentials
– Yet there are many risks involved
Chapter 8 – Offshoring and Successful Service Operations Manag 28
Outsourcing ement, 2006, Thomson