Outsourcing and Offshoring

1. Outsourcing and Offshoring Paul C. Lynch IE 597-I Fall 2005 December 7, 2005

2. Presentation Outline • Define Outsourcing and Offshoring • Political & Media Debate • Economist View • Advantages for Companies • Risks • Basic Engr. Economic Tools and OR Tools Used for I-O Evaluation • Further Research Needed • Q & A Session

3. Outsourcing • “act of moving some of a firm’s internal activities and decision responsibilities to outside providers.” • “procuring of services or products from an outside supplier or manufacturer in order to cut costs.” • Client Firm • Outsource Provider

4. Offshoring • “the delegation of administrative, engineering, research, development, or technical support processes to a third-party vendor in a lower-cost location.” • Offshoring is looked at as a version of outsourcing that procures services or goods from suppliers or manufacturers outside of the country.

5. Interchangeability / Buzz Terms • Outsource/ Offshore • Outsource/ Subcontract • Offshore Outsourcing/ Offshoring • BPO • ODC • GDC

6. Outsourcing/ Offshoring: Political Debate • Kerry: CON • “Export American Products, Not Jobs” • “Shut Corporate Tax Loopholes and level playing field.” • Bush: PRO • Economy is “Strong and Getting Stronger” • “ Train Americans and Increase Funding for Community Colleges.”

7. “Exporting America” • Companies: • Anheuser-Busch • AOL • Boeing • Coca-Cola • Dell Computer • Delta Airlines • Gateway Computer • Home Depot • Lowe’s

8. The Greenspan View • PRO Outsourcing and Offshoring • Job Protection = Path to Stagnation • Protection Would Lead to Job Losses

9. Why Outsource/ Offshore? • Main Factor: • Huge Cost Savings • 30-60% Overall • Labor • Technology Investments • Process Efficiencies

10. Additional Benefits • Access to Skills and Capabilities Beyond the Company’s • Speed • “Wake Up Call” or “Motivational Impact” • Improved Operational Visibility • Access to Instant Capacity • Financing Flexibility • Improved Service/ Decrease Time To Market

11. Cost Savings Breakdown

12. WOW! Huge Cost Reductions! Offshoring is the Way To Go… RIGHT???????

13. Not So Fast My Friend…. There are Some Risks Involved With that Decision!

14. The Major Risks In Offshoring • Contract • Privacy and Security • Diminishing Technical Returns • Increased/ Hidden Costs • Loss of Expertise (Mainly IT) • Impact On Your Employees • Impact on Your Customers • Failure of Outsource Provider

15. Additional Offshoring Risks • Economic Risks • Culture Risks • Demographic Risks • Political Stability Risks

16. What Makes Your Business A “HOT” Candidate for Offshoring? • Top 3 Candidate Processes • Processes are Labor Intensive • Processes are Scale - and Efficency – Driven • Repetitious • Processes Allow Remote Execution

17. Basic Tools Used To Evaluate I-O Alternatives • Basic Engineering Economic Analysis • PV, NPV Calculations - E(NPV) • Break-Even Analysis (Cost/ Benefit Analysis) • Compare Quantifiable Costs with Possible Benefits. • ROI Calculations • IRR- Internal Rate of Return Methods • ARR- Accounting Rate of Return Analysis • Payback Period Evaluation

18. OR Methodologies • Decision Theory (DT) Model • Game Theory (GT) Model • LP For O-I Proportional Allocation Decisions • Allocation of Service Jobs, Production Requirements for Different Outsource Providers. • LP: Min. Total Costs, Max. Total Profits • Integer Programming Call Center, Phone Service Industries

19. OR Methodologies • Centroid Method • Shortest-Route Method • Minimal Spanning-Tree Method • Tranportation Method

20. Further Research Needed • Case Studies • Compile Results from Outsourcing Companies • Apply some Values for Stated Risks. • Country and Region Analysis • Laws and Guidelines • Govts. Working to Minimize Risks? • Current States of Companies currently there • Develop SPECIFIC OR Models. • Strategic Partnerships

21. References • Dobbs, Lou (2005), “Exporting America: The List.”, available at: http://www.cnn.com/ ‘ CNN/Programs/lou.dobbs.tonight (accessed 4 December). • Donahoe, Daniel N., Pecht, Michael (2003), “Are U.S. Jobs Moving to China?”, IEEE Transactions on Components and Packaging Technologies, v 26, n 3, September, 2003, pp. 682-686. • Hines, Matthew (2004), “Greenspan: Offshoring Laws Could Harm U.S.”, CNET News, March, 12, 2004, available at: http://news.com.com/Greenspan+Offshoring+ laws+could+harm+U.S./2100-1022_3-5172975.html. • Linder, Jane C. (2004), “Outsourcing for Radical Change.” pp. 63-69. • Namasivayam, S. (2004), “Profiting from Business Process Outsourcing”, IT Professional, v 6, n 1, January/February, 2004, pp. 12-18. • Robinson, M., Kalakota, R. (2004), “Offshore Outsourcing: Business Models, ROI, and Best Practices.” pp. 1-9. • Rodgers, T.J. (2005), “The truth about outsourcing”, IEEE Design and Test of Computers, v 22, n 1, January/February, 2005, pp. 12-13. • Schneiderjans, Marc J. (2005), “Outsourcing and Insourcing in an International Context.”, pp. 3-5, 15, 24-31, 40, 75-180. • Tafti, Mohammed H.A. (2005), “Risk Factors associated with offshore IT outsourcing”, Industrial Management and Data Systems, v 105, n 5, 2005, p 549-560. • Tas, Jeroen; Sunder, Shyam (2004), “Financial services business process outsourcing”, Communications of the ACM, v 47, n 5, May, 2004, p 50-52.