5/21/2008

WELCOME Global Outsourcing Strategy June 13-15th, 2008

Ajay Bhalla

Ajay Bhalla

Agenda-June 13th, 2008

Session 1: Course Overview including coursework modalities Outsourcing: Literature Streams Lunch Session 2: Seven Key Qs for building dynamic sourcing capabilities NOTE: Slides for both sessions are in draft format
Ajay Bhalla

5/21/2008

Course Overview
Session Modalities Course guide Assessment- P12 onwards Global Outsourcing Award sponsored by TCS

Ajay Bhalla

Coursework- 1
COURSEWORK 1- TWO STEP PROCESS

Step1: Teams have been pre-allocated one the cases (See Page 13). They have to write a case report based on the questions on page 11. The format needs to be similar to the cases you have for pre-reading. In addition you must seek additional sources to explore the chosen subject. Word Limit: 2000. Delivery Date for Step 1 is: June 23rd, 2008, 16.00 hrs. Percentage of CW mark: 40%

5/21/2008

Coursework - 1
COURSEWORK 1- TWO STEP PROCESS

Step 2: Following submission of the first case report, the team will then need to interact with the second team (See page 11) which has been allocated the same firm as part of their coursework. The pairs conduct a peer review for each other, and then agree on a joint position, and produce a final joint case report based on same questions on page 12. A joint mark for all members will be allocated. This is quite similar to a common position in firms where small teams carry out work at local level and then collaborate with other teams at global level to make a joint case. Word Limit: 2000. Delivery Date for Step 2 is: June 30th, 2008 16.00hrs. Percentage of CW mark: 40%

Coursework - 2
COURSEWORK 2 (in teams)- 20% OF THE TOTAL GRADE FOR TEAMS SEE PAGE 17 Critically appraise the 2 compulsory readings (Page 16) allocated to you (See Page 17). This needs to be an in-depth appraisal of the allocated reading. The criteria are outlined as below: 1. Abstract 2. Contributions to Academic and Managerial Practice 3. Your view on the article, which includes the logic, validity and reliability of the article 4. On the scale of 1-7, how useful is the article to your fellow students. Why? Deliverable: The summary appraisal should be maximum 750 words. The due date for the Course work 2 would be June 23rd, 2008, 16.00 hrs.

5/21/2008

Sessions
Session 1 Introduction-Transforming Services Landscape through Global Outsourcing Seven key questions firms need to address to build dynamic sourcing capabilities? Reverse Outsourcing-Bharti Airtel Case Outsourcing Contract Design and Service Level Agreements in Public-Private Partnerships- Inland Revenue/EDS Case BEST PRACTICES IN VENDOR MANAGEMENT Concluding Session: What next?

Session 2 Session 3 Session 4

Session 5 Session 6

Ajay Bhalla

Global Outsourcing and Offshoring-Overview

Ajay Bhalla

Delivered to MBA Program, 2006

5/21/2008

Outsourcing-Multiple Definitions exist

(1) Significant contribution by external vendors in the physical/human resources associated with the entire or specific components of the IT infrastructure in the user firms (Loh and Venktraman, 1992) (2)Reliance on external sources for manufacturing components and other value-adding activities (Lei & Hitt, 1995)

A highly strategic decision that has the potential to cause ripple effects through out the entire firm
Ajay Bhalla

Intro>Definitions

Divergent Approaches to Outsource: Tesco vs. Nike

Ajay Bhalla

Intro>Definitions

5/21/2008

Choice to Internalise is key to OS definition

SUBSTITUION ABSENTATION

Firms having no choice but to acquire goods/services from an external source are NOT outsourcing
Ajay Bhalla

Intro>Definitions

These firms aim for mastering project than manufacturing competencies

Ajay Bhalla

5/21/2008

Firms follow different trajectories to Outsourcing

Domestic Corporate Boundary Decision Location Decision Overseas

In-source

Domestic Divisions/Affiliates

Establishing Foreign Affiliates (FDI and trade)

1 3

Outsource

Source from 2 Domestic Suppliers

Source from Foreign Suppliers (International Trade)

Offshoring
Ajay Bhalla

Outsourcing
Intro>Definitions

Source: Aim Report (2004)

FINANCIAL ASPIRATIONS DOMINATE THE OS DECISION

COST Improvements UK headcount reduced by 34% in 2004 2. Generated by Reduction in 75:25 Onshore Offshore Ratio Headcount, or Transfer of Staff to Vendor. Average cost of servicing p/person down by 9% 3. Enhanced Bottom
1. Immediate Cost Line>>Positive impact on market cap. 4. Helps Swiftly Reinforce the OS decision
Ajay Bhalla

PRODUCTIVITY Improvements by 55%

Intro>Definitions>Drivers

5/21/2008

although increasingly firms are deploying offshoring for re-focusing on their competencies
Free up internal resources System development is a Stated Objective: non-core activity for the A Global Services Arm building organization competitive advantage for Tesco. Take advantage of SSC provides IT and Business economies of scale services to make the Tesco Reduce time to market experience better, simpler and faster Increase process for over 300K emp. and 15 mn efficiencies customers Enhance knowledge capability
Intro>Definitions>Drivers

Ajay Bhalla

Energizing Competencies could also be driven by a customer re-focusing exercise

Consider, Prudential objective to simplify processes One easy to remember freefone number 0800 00 Calls answered by real people, not machines 80% of queries answered by first person contacted Immediate feedback from customers Single postal address
Ajay Bhalla

5/21/2008

Offshoring and Outsourcing also carry risks

Consider, 3 examples

Ajay Bhalla

When OS, managers also need to be aware of following disadvantages

1. 2. 3. 4. 5. . . . . .

Ajay Bhalla

Intro>Definitions>Drivers>Disadv

5/21/2008

When OS, managers also need to be aware of following disadvantages

Declining innovation by Outsourcer Loss of long-run R&D competitiveness Potential to loose touch with new tech breakthroughs that offer opp. for product and process innovations. Suppliers gaining knowledge of the product that may be used for own advantage

Ajay Bhalla

Intro>Definitions>Drivers>Disadv

Governance mode, location and support functions have an impact on a companys specific configuration of an offshoring activity.
3 offshoring dimensions

5/21/2008

In terms of providing functions, different implementation options have to be considered

Implementation options

Offshoring enables firms to alter governance modes.

Consider a German engineering firm

5/21/2008

When offshoring, many factors could influence choice of governance mode

Global Service Centre Global Technical Support Global Delivery Centre India Development Centre Microsoft Research

Ajay Bhalla

5/21/2008

Ajay Bhalla

Ajay Bhalla

5/21/2008

What factors could influence choice of various offshoring models?

Ajay Bhalla

Break- 10 minutes
What are the advantages of in-sourcing vs. outsourcing Discuss in your Groups and write down 3 key points for each.

Ajay Bhalla

5/21/2008

Theoretical influences on Outsourcing

Ajay Bhalla

Delivered to MBA Program, 2006

Boundary Choice Decisions are of primary strategic relevance to todays senior managers 1. Which business activities should be brought within the boundary of the firm? 2. Which business activities should be outsourced?
This is because Firms that bring the wrong business activities within their boundaries risk loosing strategic focus. HPs decision to be a hardware leader. Firms that fails to bring the right business activities with their boundaries risk losing their competitive advantage and becoming hollow corporations. Consider Sonys response to Apple
Ajay Bhalla

5/21/2008

Two different views of firm aid our understanding of Sourcing Decisions

Transaction Cost Basic nature Behavioural assumptions Objective Allocation of resources through authority relations Opportunism and bounded rationality Economising on transaction costs through choosing an appropriate governance structure Coordinating production within the firm Asset specificity,uncertainty, infrequency Due to top down control loss and managerial opportunism RBV A collection of productive resources Bounded rationality Maximising long run profits through exploiting and developing firm resources Identifying and taking advantages of productive possibilities Firm specificity of resources

Entrepreneurial function Constraints on strategic options Limit of organisation

Due to managerial diseconomies

Source: Adapted from Tsang (2000) Ajay Bhalla

TCE specifies under which conditions firms should manage a particular exchange within their organizational boundary as well as the conditions under which it should be outsourced.

Ajay Bhalla

5/21/2008

It further posits that transaction properties determine the governance structure

Low High

Degree of Asset Specificity and Uncertainty Market Governance 1. 2. Discrete short-term contracts. Bargaining relationships between highly autonomous buyers and suppliers designed to facilitate economically efficient transfer Intermediate Governance 1. Use of Complex contracts* and bilateral relations to form hybrid forms such as JVs to manage the exchange. Degree of collaborative arrangements guards opportunism by recognising the benefits of working together for mutual benefit. Hierarchical Governance 1. High Asset Specificity and uncertainty lead to transaction difficulties and firms opting for carrying the transaction in-house.

2.

* Complexity of contract is related to the difficulty in measuring performance

Ajay Bhalla

Transaction cost theory-Key points 1 Markets as imperfect exchange mechanism Market inefficiencies occur as a result of 3 conditions: Bounded Rationality of managers Asymmetric distribution of relevant information Inability to completely specify behaviour in presence of multiple contingencies

All contracts are therefore subject to renegotiation and the possibility of opportunistic behaviour.

5/21/2008

And under these assumptions.. TCT posits that economic actors, i.e. managers are boundedly rationale and potentially opportunistic, and explains how unfavorable exchange conditions can increase the costs of writing enforceable contracts and create

In case of hold-up concerns, firms prefer Vertical Integration because: (a)Hierarchical gov. aligns the interests of exchange parties (b) Provides for reconciliation of differences via extensive administrative rules and procedures.

ex post maladaptation and hold-up

problems (Williamson, 1985)
Ajay Bhalla

However, TCE it places overemphasis on market and hierarchical forms of governance Focus on single transactions Emergence of collaborative arrangements leads to repeated transactions between the same parties Discounts role of trust

Ajay Bhalla

5/21/2008

RBV has emerged a preferred theoretical platform in OS literature

Theses: Firms should retain Core activities and outsource the non-core activities to specialist vendors.
To qualify core competencies must meet the following 7 point criteria: 1. 2. 3. 4. 5. 6. 7. Skills or knowledge sets, not products or functions Flexible, long-term platforms that are adaptable Limited in number Unique sources of leverage in the value chain Areas where the organisation can dominate Elements important to customers in long run Embedded in the systems of the organisation. 2. Activities which meet the following 2 conditions qualify as non-core: 1. External suppliers become more competent at performing the activity than the firm. A competitor of the customer organisation becomes more competent in performing the activity.

Ajay Bhalla

Firm specific effects on governance choices must be factored in when considering outsourcing
Firms are hetrogenous in terms of their resources and capabilities (Wernerfelt, 1984) Some of the resources and capabilities are limited in supply or costly to imitate (Barney, 1991) Firms governance choices are directed by their attempts to leverage and protect idiosyncratic capabilities (Barney, 1999) 3. 2. 1. Firm specific governance choices may be influenced by: Prior commitments and extant governance form Governance inseparability, i.e. interdependencies may exist between gov. decisions as a result of formal and informal commitments embedded in the existing portfolio of contractual relationships. Firm specific capability differences

5/21/2008

Today, managers often use core vs. peripheral framework to determine what to outsource
-Occurs when firms acquire activities that are considered highly important to long-run success.
Example: ABN Amros strategic decision to OS all IT related activities to Five vendors in August (Deal size: $2.2bn per annum)

-Occurs when firms acquire less strategically relevant, peripheral activities from external Suppliers.
Example: IT Support or IT infrastructure OS

Ajay Bhalla

What is Core vs. Peripheral is debatable..

VARIATIONS EXIST AMONG FIRMS WITHIN A INDUSTRY

We would be nuts to outsource- Linda Dillman, CIO

(Walmarts approach towards IT OS: http://www.informationweek.com/story/showArticle.jhtml? articleID=47902662)

Ajay Bhalla

5/21/2008

Task: 2 Minutes

1.
1.1

Can Firms Make More by Doing Less?

What is the impact of Outsourcing on Firms Performance?
(Firm performance interpreted as: financial, Innovation, Stakeholders)

THINK OF ONE EXAMPLE? DISCUSS IN PAIRS?

Ajay Bhalla

Outsourcing and its Effect on Firm Performance

Core vs. Peripheral provides some clarity

Peripheral Outsourcing Intensity (+)

Core Outsourcing Intensity (-)

Strategy

Environmental Dynamism

Firm Performance

Ajay Bhalla

5/21/2008

Outsourcing and its Effect on Firm Performance

Core vs. Peripheral provides some clarity
1.

Peripheral Outsourcing:
Reducing Peripheral activities allows firms to focus Outsourcing Peripheral activities may greatly improve their quality May lead to incremental improvement in a firms overall cost position

Peripheral Outsourcing Intensity (+)

Core Outsourcing Intensity (-)

2.

Core Outsourcing
Intensity with which a firm outsources its near-core, strategically relevant activities May lead to declining innovation Eventual competition from suppliers Resulting in reduced firm performance.

Strategy

Environmental Dynamism

Firm Performance

Ajay Bhalla

Outsourcing and its Effect on Firm Performance

Core vs. Peripheral provides some clarity MODERATING RELATIONSHIPS ARE AT PLAY 1.

Generic Firm Strategy:

Benefits of OS are more likely to be realised by cost leaders than by differentiators, and Any costs are more likely to be borne by differentiators than by cost leaders.
Strategy Peripheral Outsourcing Intensity (+) Core Outsourcing Intensity (+-

Environmental Dynamism

2.

Environmental Dynamism (ED)

Benefits of OS increase with increasing levels of ED, and the costs associated with OS decrease with increasing levels of ED.
E.g. By relying on OS for peripheral and near-core activities in more dynamic env., firms are able to take advantage of emerging tech. without investing large amount of capital. CONSIDER SOFTWARE IND.
Firm Performance

Conversely, in more stable environments, the benefits of OS decline and the costs of OS increase.
Ajay Bhalla

5/21/2008

Outsourcing Intensity is a key measure to understand a firms overall reliance on OS

Breadth of Outsourcing Activities Number of activities outsourced/ Maximum number of activities that could be outsourced.

Depth of Outsourcing Activities

Average percentage of each outsourced activity that is being provided by external suppliers.

Outsourcing Intensity can be defined as: Breadth X Depth

Ajay Bhalla

Final thoughts on OS and Firm Performance

Difficulties of drawing direct relationships between OS and aggregate firm performance. OS has an effect on the individual functional areas in which it occurs.

Ajay Bhalla

5/21/2008

Additional Note: Relational Contracting as 3rd influential literature stream

Primary theses: Formal contracts undermine trust and encourage the opportunistic behaviour they are designed to discourage. Relational exchange arrangements supported by trust act as substitutes for complex contracts.
Ajay Bhalla

Alternative theses: Managers use Formal Contracts and Relational Governance as complements
Previous Business Relations Relational Governance + or Exchange Hazards IT Size Managerial Experience + or Customized Contracts Exchange Performance

Source: Laura and Poppo (2002)

Summary Thoughts
Outsourcing has emerged as a key competence for firms aiming to deliver on various fronts, e.g. costs, service etc. Managers need to develop competencies to differentiate between Myths of Outsourcing and as a organisation fertilizer.

Ajay Bhalla

5/21/2008

Key Session Takeaways

1... 2.. 3.. 4.. 5..

Ajay Bhalla