Out sourcing decision a strategic frame work

AMITY

Out sourcing decision a strategic frame work

The nature of out sourcing is divers from:
Core production activities. In-bound out bound logistics. Secondary value chain activities. IT, accounting, distribution, HR R&D. Goal: Maximizing the net benefits versus in-house provision of value chain activities. Risk: Placing part of its destiny in the hands of others.

Frame work for assessing benefits of outsourcing

Cost from the firms perspective: Specific governance costs associated with outsourcing: Three major determents of outsourcing:
1. Costs. 2. Product/activity complexity. 3. Contestability and assets specificity.

Set Standards for each potential outsourcing situations:

The benefits from outsourcing:

Objective: Create value for share holders.
Lower the purchase price of some inputs taking advantage of external suppliers lower cost. Improve the quality of some inputs by purchasing superior capabilities from an external supplier.

Cost reducing rationales from outsourcing

Compare cost with internal production of activities. Too low, inefficient, large fixed capital costs into variable costs, New product generations happens quickly at low cost and greater capacity utilization.

Cost reducing rationales from outsourcing

Organizational cost factors: Large multi units organizations-internal units are often price in-efficient. Govt. laws and regulations. Agreements with unions.

Cost reducing rationales from outsourcing

Firms capabilities that are difficult to imitate are the key to sustainable competitive advantage.

Cost reducing rationales from outsourcing

Direct purchase cost savings or superior resources may be off-set in increase in governance costs.(Any cost other than production & purchase costs).

Two distinctive type of governance costs:

Bargaining costs. Contract negotiation costs, Post contract negotiation costs, Contract monitoring costs, Disputes costs.

Two distinctive type of governance costs:

Opportunism costs: Change the agreed terms of a transaction, (one party acts self-interestingly but in bad faith)

PRODUCT/ACTIVITY COMPLEXITY:
Complex goods involved uncertainty about the nature and cost of production process itself.

ASSETS SPECIFICITY:
Specific asset is one that has much lower value in any alternative use. Physical assets , Location, Human assets specificity, Dedicated assets.

OUTSOURCING SITUATONS
Outsourcing situations and some possible strategies: Action: Address bargaining and opportunism (during or post contracting) costs at contracting stage.

OUTSOURCING SITUATIONS
Various combinations of product complexity: Low product/activity complexity and low asset specificity:
This combination provides clearest case of outsourcing. It encompasses many standard products, services and activities required by the firm. The outsourcing firm has or easily acquire sufficient knowledge and information to specify contract terms precisely (as there is low uncertainty about price performance characteristics) with low asset specificity(and resulting high contestability) inefficient and opportunistic external suppliers can be quickly replaced.

OUTSOURCING CITUATIONS
Low product/activity complexity and high asset specificity: Given low complexity ,problems associated with high assets specificity almost certainly involves high temporal or location specificity. There are likely to be few efficiency cost arising from high physical assets specifically when the outsourcing firm makes the specific investments itself, as given this ownership it is not costly to replace the external suppler (given high contestability) One way of avoiding these problem is for the outsourcing firm to Own the specific asset and to rent it or lease it to the external firm.

OUTSOURCING SITUATIONS
High product/activity complexity and low asset specificity: This configuration perhaps best characterizes the supply of wide range of services or activities that are potentially outsourcable to professionals.

OUTSOUCING SITUATIONS
High product/activity complexity and high asset specificity:
The important different between this situation and the second case discussed above is that Reliance on arbitration or third party contract enforcement procedure is more problematic, because it is more difficult for a judging third party to identify whether contract breach has occurred. Solution: Outsourcing firm provides external suppliers with higher than normal profit that they can expect to earn indefinitely in the absence of a verified contract breach

Overall frame work emphasize the following steps:

Formulate consistent expectations about the uncertainties surrounding the potential transactions at all stages of contract formulation and implementation. Identify the potential opportunism at different stages of contract formulation. Identify contract provisions to attenuate opportunism and assess the consequences of the preferred strategies for the overall efficiency of outsourcing versus internal production. Implement the relevant strategies prior to initiation of outsourcing.

Ranking of cities
The annual survey conducted by the Datamonitor Group: Asked 3,100 corporate development leaders, including more than 400 outsourcing customers, to indicate their company's inclination to consider specific offshore locations for outsourcing (including IT outsourcing and BPO).

Ranking of cities
The ranking of cities on various perceived threats and weaknesses, including : Geopolitical risk, Terrorist threats, Climate concerns, legal maturity, environmental waste and pollution, IT and telecom infrastructure security, Crime rates.

Ranking of cities
The 25 Riskiest Cities for Offshore Outsourcing in 2010 1. Karachi, Pakistan 2. Medellin, Colombia 3. Juarez, Mexico 4. Cali, Columbia 5. Tijuana, Mexico 6. Lahore, Pakistan 7. Jakarta, Indonesia 8. Lagos, Nigeria 9. Dhaka, Bangladesh 10. Chittagong, Bangladesh

Ranking of cities
11. Amman, Jordan 12. Khulna, Bangladesh 13. Faisalabad, Pakistan 14. Rawalpindi, Pakistan 15. Port-au-Prince Haiti 16. Managua, Nicaragua 17. Chihuahua, Mexico 18. Ljubljana, Slovenia 19. Tashkent, Uzbekistan 20. Bandung, Indonesia 21. Kingston, Jamaica 22. Tel Aviv, Israel 23. Colombo, Sri Lanka 24. Johannesburg, South Africa 25. Accra, Ghana

Ranking of cities
The 25 Safest Cities for Offshore Outsourcing in 2010 1. Prague, Czech Republic 2. Warsaw, Poland 3. Brno, Czech Republic 4. Krakow, Poland 5. Toronto, Canada 6. Halifax, Canada 7. Singapore, Singapore 8. Dublin, Ireland 9. Kiev, Ukraine 10. Chennai, India

Ranking of cities
11. Pune, India 12. Wuxi, China 13. Monterrey, Mexico 14. Sao Paolo, Brazil 15. Bangalore, India 16. Beijing, China 17. Santiago, Chile 18. Brasilia, Brazil 19. Mumbai, India 20. Dalian, China 21. Chandigarh, India 22. Rio de Janeiro, Brazil 23. Cebu City, Philippines 24. Kuala Lumpur, Malaysia 25. Kolkata, India

Outsourcing lessons from regulators

The provision of outsourced business services is not, of course, a regulated industry. But many clients of outsourcing service providers are themselves in regulated industries indeed arguably the greatest take up of outsourced (and offshore) business process services has been in regulated industries such as financial services and utilities. Regulators have therefore taken a keen interest in the implications of outsourcing and offshoring for their members, particularly with regard to operational risk and the potential impact on their customers.

Outsourcing lessons from regulators

Other industry sectors can learn a great deal from the way the regulators have addressed this issue their guidelines are pretty close to a good practice summary for any outsourcing arrangement in any organisation.

Outsourcing lessons from regulators

Take the UK Financial Services Authority Handbook which has recently incorporated additional requirements due to the new European-wide Markets in Financial Instruments Directive (MiFid). This sets out standards that any organisation should meet in their outsourcing arrangements. A few pertinent examples are summarised below, with comments in brackets:

Outsourcing lessons from regulators

The need for a written contract setting out the respective rights and obligations of the client and the service provider (one would hope that most organisations have understood this by now.) Robust governance arrangements in place (the g word is now of course the current hot topic in the outsourcing world)

Outsourcing lessons from regulators

No delegation of senior personnels responsibility (i.e. outsourcing is a means of delivering, not an abdication of responsibility)

Outsourcing lessons from regulators

Service provider must have the ability and capacity to perform the services professionally (and therefore the client is responsible for carrying out the due diligence to find out if they have)

Outsourcing lessons from regulators

Client must establish methods for assessing the standard of performance of the service provider (so no more SLAs which never get monitored or even drafted)

Outsourcing lessons from regulators

Client must retain the necessary expertise to supervise the outsourced functions effectively (which means that the work can not just be thrown over the fence)

Outsourcing lessons from regulators

Client must have the right to terminate where necessary (note this is a right, which means it must be addressed in the contract)

Outsourcing lessons from regulators

Contingency plans for disaster recovery must be in place and be periodically tested (no good just having vague assurances in the contract).

Outsourcing lessons from regulators

And so it goes on. Whether or not these standards are generally adhered to in the outsourcing arrangements in place in the financial services industry is a question for those organisations, the FSA and other regulators.

Outsourcing lessons from regulators

But regardless of this, the questions these standards raise apply equally to any significant outsourcing of what the FSA calls critical and important functions (which would certainly include IT, Finance and HR) in any industry.

GLOBAL DELIVERY MODEL

GDM is typically associated with companies engaged in IT consulting and services delivery business and using a model of executing a technology project using a team that is distributed globally.

GDM
GDM focus on the technical skills, process rigor, tools, methodologies, overall structure and strategies for seamlessly delivering ITenabled services from global locations."

GDM
This model of delivery to signify one or more of the following value propositions they bring to their customers: A global presence ensures an understanding of the local language and culture wherever they may be present, which is seen to be an advantage when trying to understand customer requirements.

GDM
A global presence implies that the organization has access to resources of varying costs that allows it to deliver services to its customers at an optimal cost, typically a mix of costlier 'on-site' resources combined with cheaper 'offshore' resources.

GDM
A global delivery model implies that potentially, a firm can work round the clock for its customer, handing off work from one location to another at the end of the 'day shift' ('follow the sun' model) - thus providing twice or even three times the capacity they would have if they worked in a single location/ time-zone only.

GDM
Global locations also provide some degree of 'risk-proofing' a customer from natural or man-made disasters such as flooding, earthquake or political unrest - causing disruption in one place.

GDM
In case of such events, a global company could presumably transfer work to another location where the situation is normal, thus ensuring that work did not get delayed for the client.

Infosys
Infosys pioneered the Global Delivery Model (GDM) to ensure the distribution of application and business process lifecycle activities and resources, while ensuring their integration. The key drivers of our Global Delivery Model are:

Infosys
Processes Our robust process-orientation allows us to deliver solutions from multiple locations. Quality We deliver world-class solutions by maintaining quality across processes, interfaces and outputs, in management, core and support processes.

Infosys
Tools We monitor large and complex projects through a combination of indigenous tools. Knowledge Management Our Knowledge Management Services help you assess your needs, evaluate technologies and recommend solutions.

Infosys
Program Management Our project management processes address key aspects across the project life cycle. Risk Mitigation The risk management framework of Infosys covers risk identification, prioritization and mitigation.

CLOUD COMPUTING
Cloud computing is a general term for anything that involves delivering hosted services over the Internet. These services are broadly divided into three categories: I Infrastructure-as-a-Service (IaaS), Platform-as-a-Service (PaaS) Software-as-a-Service (SaaS).

CLOUD COMPUTING
The name cloud computing was inspired by the cloud symbol that's often used to represent the Internet in flowcharts and diagrams.

CLOUD COMPUTING
A cloud service has three distinct characteristics that differentiate it from traditional hosting. It is sold on demand, typically by the minute or the hour; it is elastic -- a user can have as much or as little of a service as they want at any given time; The service is fully managed by the provider (the consumer needs nothing but a personal computer and Internet access). Significant innovations in virtualization and distributed computing, as well as improved access to high-speed Internet and a weak economy, have accelerated interest in cloud computing.

CLOUD COMPUTING
A cloud can be private or public. A public cloud sells services to anyone on the Internet. (Currently, Amazon Web Services is the largest public cloud provider.) A private cloud is a proprietary network or a data center that supplies hosted services to a limited number of people.

CLOUD COMPUTING
When a service provider uses public cloud resources to create their private cloud, the result is called a virtual private cloud. Private or public, the goal of cloud computing is to provide easy, scalable access to computing resources and IT services.

CLOUD COMPUTING
Infrastructure-as-a-Service like Amazon Web Services provides virtual server instances with unique IP addresses and blocks of storage on demand.

CLOUD COMPUTING
Customers use the provider's application program interface (API) to start, stop, access and configure their virtual servers and storage.

CLOUD COMPUTING
In the enterprise, cloud computing allows a company to pay for only as much capacity as is needed, and bring more online as soon as required.

CLOUD COMPUTING
Because this pay-for-what-you-use model resembles the way electricity, fuel and water are consumed, it's sometimes referred to as utility computing.

CLOUD COMPUTING
Platform-as-a-service in the cloud is defined as a set of software and product development tools hosted on the provider's infrastructure. Developers create applications on the provider's platform over the Internet. PaaS providers may use APIs, website portals or gateway software installed on the customer's computer.

CLOUD COMPUTING
In the software-as-a-service cloud model, the vendor supplies the hardware infrastructure, the software product and interacts with the user through a front-end portal.

CLOUD COMPUTING
SaaS is a very broad market. Services can be anything from Web-based email to inventory control and database processing. Because the service provider hosts both the application and the data, the end user is free to use the service from anywhere.