Outsourcing and the Implications for National Competitiveness

1. Outsourcing and the Implications for National Competitiveness Professor Ronan McIvor University of Ulster 2008

2. Conventional view of outsourcing driven by these headlines…. • ‘… unions fear 450 Prudential and Lloyds jobs will be lost to India…’ • ‘… IT workers under threat as EDS moves jobs offshore…’ • ‘… Aviva moving 1,000 positions offshore to India…’ • ‘… Reuters have established a new centre in Bangalore to source financial news…’ • Etc.

3. Overview • What is services outsourcing; • Drivers of services outsourcing; • How companies make the outsourcing decision; • Offshoring; • Case illustration: India versus Ireland; and • Benefits and risks of offshoring for developed economies.

4. What is business services outsourcing? ….. Services outsourcing involves organisations buying rather than sourcing services in-house …. and involves greater specialisation as services are increasingly sourced from external service providers….

5. Increasing Specialisation in Services Abramovsky et al., 2005

6. UK business services sectors have trade surpluses… Abramovsky et al., 2005

7. Drivers of Services Outsourcing • Globalisation; • The shareholder value business model; • Consumers demanding more for less; • Business process view; and • Developments in information and communication technologies (ICTs).

8. Business Process View

9. The Impact of ICTs on Service Processes • Service processes have physical and information elements; • E.g. Mortgage application – visit branch in person (physical) and bank processes application (information); • ICTs facilitate the separation of physical from information elements; • Processes that are rich in information content can be performed anywhere; and • Many complex and knowledge intensive processes can also be performed anywhere….

10. Who’s Reading Your X-Ray?

11. Who’s Reading Your X-Ray?

12. Traditional HR Services Structure

13. Global HR Shared Services Model

14. Outsourcing Evaluation • Organisation capability; • Importance of activity to competitive advantage; • Supplier capability to provide activity; • Supply market risk; • Workforce reaction; • Organisational change. McIvor, 2005

15. Outsourcing Management • Supplier selection; • Contract negotiation; • Transitioning of assets; • Relationship management. McIvor, 2005

16. How companies outsource business services McIvor, 2005

17. However, must consider the transaction costs…. Supplier opportunism potential increases under conditions of: • Dependency – difficult to switch processes and services; • Knowledge loss – supplier knows more about the transaction than the customer; • Performance measurement – difficulties with assessing and interpreting performance; • High uncertainty – supplier can charge a lot for changes; and • Small number of suppliers – suppliers have too much power; McIvor, 2005

18. Additional Transactions Cost of Offshore Outsourcing • Cultural distance; • Time zone challenges; • Managing remote service provider teams; • Ineffective judicial system in offshore country; • Trade restrictions; and • Political instability in offshore country etc. McIvor, 2006

19. Offshoring “Off-shoring involves the transferring of organisational activities carried out locally to product and service providers in other countries.”

20. The Evolution of Business Process Outsourcing (BPO) 2000 Offshoring B2B Alliances Process Outsourcing 1990s Shared Business Services 1980s Entire IT Operations 1970s Data Processing 1960s Time Sharing Source: www.ebstrategy.com/bpo/basics/evolution.htm

21. Drivers of Offshoring • Globalisation; • Developments in Information and Communication Technologies (ICTs); • Developing telecommunications infrastructures e.g. broadband; • Lower labour costs; • Highly skilled human resource base; and • Proactive nations enhancing their relative attractiveness and competitiveness. McIvor, 2005

22. Approaches to Offshore Supplier Management • Supplementing staff; • Building turnkey projects or providing ongoing support; • Gaining assistance in building centres; • Building, operating and transferring facilities; • Providing specialised assets; and • Entering joint ventures. Kumra and Sinha, 2003

23. Case Illustration: India – World Leader in BPO Services Market • 1st choice for US companies outsourcing IT services; • Large population of well educated and highly motivated people; • Widespread use of English; • Cost structure 20% less than Western nations; • Call centres attracting graduates; • Privatisation of Indian telecoms. sector; and • Power sector reforms. Shalini and Rajshekar, 2004

24. India as an Offshore location for Western Companies Shalini and Rajshekar, 2004

25. Ireland vs. India - Strengths • Frontrunner in BPO & started much earlier than India; • Good brand equity in US; • Conducive regulatory framework; • Excellent quality standards; • Government aggressively pursued outsourcing market; and • Investments in telecoms. infrastructure. Shalini and Rajshekar, 2004

26. Ireland vs. India - Weaknesses • Lack of large human resource base; • High relative labour costs; • Shortage of skilled programmers; and • Companies in Ireland have to outsource work to India! Shalini and Rajshekar, 2004

27. Benefits of Offshoring for Western Economies • Lower resource costs; • Lower end-product and service costs; • Deploy capable international human resources; and • Focus on more innovative and areas that can deliver future success. McIvor, 2005

28. Risks of Offshoring for Western Economies • Social costs; • Service levels e.g. Dell and customer support; • Loss of innovation potential; and • Loss of competitiveness e.g. South Korea and Taiwan world leaders in notebook PCs, wireless telephones, memory chips and digital displays. McIvor, 2005