Offshoring/Outsourcing

1. Offshoring/Outsourcing

2. Offshoring/Outsourcing DomesticOffshore In-House Outsourced

3. Offshoring and RelatedActivities Imports of services (Offshore Sourcing) U.S. Investment abroad (Offshore Production) C Firms import services from their foreign affiliates E U.S. foreign affiliates produce services for foreign markets D Firms import services from foreign suppliers B Firms import services from foreign affiliates, displacing production and workers A Firms import services from foreign suppliers, displacing production and workers F U.S. foreign affiliates displace U.S. exports of services in foreign markets U.S. Production and employment displaced

4. IBM • Moved global procurement chief from N.Y. to Shenzhen, China in 2006 • Performed its back-office financial work in Rio de Janeiro, Brazil • Provided global support for its web site out of Ireland and Brazil • Moved research efforts into China, India, and Israel • Workforce in India grew from 3,000 in 2002 to 53,000 in 2007 • Union organizers interrupted a recent IBM shareholders’ meeting with chants of “Offshore the CEO”

5. Services Being Offshored • Remote executive assistant – Indian workers create PowerPoint presentations, do basic research and check facts • Morgan Stanley opened a mathematical modeling center in Budapest to support its fixed income trading business in 2005 – have expanded its Budapest operations to provide its N.Y. and London offices with services related to mortgage financing, financial control, and information technology (EDS, ExxonMobil, IBM, General Electric, Cisco and SAP have similar service centers in Hungary)

6. Services Being Offshored • Goldman Sachs launched its Bangalore operation in 2004 – software designers, transaction processing, highly skilled analysts who produce modeling and other data that appear in GS reports • Number of U.S. tax returns prepared in India rose from 25,000 in 2003 to an estimated 400,000 in 2005 (salaries for Indian accountants ~$100 per month) • Teleradiology – images from x-rays, CAT scans, MRIs and ultrasounds are sent electronically to, and read by, doctors abroad. Indian radiologists earned on average $20K per year compared to $315,000 for American radiologists.

7. Services Being Offshoredor Outsourced • McDonald’s franchises in Missouri shifted the processing of drive-through orders to a call center in Colorado Springs. Employees in the call center would take a customer order and then relay it, along with a picture of the customer, to the interior of the specific McDonald’s via high-speed data lines • A clinic at Kavai Hospital in Anand, India, specializes in matching infertile couples from around the world with Indian women who were willing to be surrogate mothers. The clinic offered surrogacy services for a fraction of U.S. rates, and each Indian woman earned as much from one pregnancy as she might otherwise earn in 10 years

8. Firm-level effects • Goal – pursuit of profit; prospect of savings on labor costs • Offshoring did not guarantee higher profits. Success driven by factors such as: • Ability to manage in remote locations • Caliber and skills of local labor force • Political stability • Language skills • Infrastructure • Enforceability of intellectual property rights • Business contracts • Ventoro Institute: 36% of executives reported their offshoring strategies failed; offshoring led to an increase in costs in 28% of the cases and no cost savings in 25% of the cases

9. Country-level effectsU.S. • Macroeconomic impact of offshoring was hotly debated in the U.S. • Proponents: • Created jobs in U.S. export sector • Lowered domestic firms’ costs • Provided services to consumers at lower prices • Expands the process of job specialization and raises living standards • Opponents: • Grave threat to American jobs • Downward pressure on effective wages • Replacement jobs paid less & often didn’t include benefits such as health insurance • Rising income inequality in the U.S. • Negative impact on American intellectual property

10. Offshoring Talent Pool China Russia Phillipines Turkey Thailand Poland Brazil Mexico Indonesia 18 other low-wage countries 72% India 28%

11. Supply and Demand Outlook 31, 296 FTEs (in thousands), 2008 3,245 Supply 2,184 1,799 946 752 722 596 112 Demand 50 Generalist (such as HR, sales, and marketing) Finance and accounting Engineering Secretarial and Clerical Analyst

12. What IT Processes AreCompanies Outsourcing/Offshoring? • Call Centers (e.g., American Express, Dell, Inc., Citigroup, Inc.) • Payment processing (e.g., HP took on payment processing for P&G’s major geographies) • Check clearing (e.g, EDS handled digital payments and transfers for the Western Payment Alliance, which handles 7 million checks per day) • Systems and software development (by 2004 there were 150,000 IT engineers in Bangalore – more than the 120,000 in Silicon Valley) • Desktop support (e.g., Garner concluded Boeing could outsource its desktop support function and save 37% over in-house staff) • Technology design (Apple outsourced much of the design work for its blockbuster iPod to a number of engineering firms in Silicon Valley) • Job Characteristics: • Can the job be “routinized”? • Can you write down the whole job on paper?

13. Thought Questions • How might you think strategically about outsourcing/offshoring? • How would you define the differences among a “cost focus”, “quality focus” and “innovation focus” related to outsourcing (think about the concerns of the client, supplier, relationship focus, and target outcomes)