Global Sourcing – A Strategic Business

Activity

Group 1
Presenters

 Virendra Lamba – Roll no 52 (Introduction)

 Bedanta Choudhury – Roll no 10 (General Trends)
 Preetika Anand – Roll no 28 (Offshoring )
 Satish Menon – Roll no 43 (Backsourcing)
 IP Bharti – Roll no 16 (Cost Factors)
 M C Bhardwaj – Roll no 20 (Cost Factors)
 R K Datta – Roll no 37 (Value Proposition
 Sunil Kini – Roll no 47 (Sourcing Issues)
 Vandana Ray – Roll no 49 (Conclusion)
Introduction

 Global sourcing occurs when buyers purchase goods

and/or services from sellers located anywhere in the
world.
 Global Sourcing is best defined as the process of
identifying, evaluating, negotiating and configuring
supply across multiple geographies in order to reduce
costs, maximize performance and mitigate risks.
Introduction

 Global Sourcing is a key ingredient for corporate survival.

• Low cost labour,
• Cheap international logistics
• Less Regulated Operating Environments
 Global sourcing helps companies reduce their costs by 10%
to 35%.
• An engineer in the US costs $87 per hour, while the same skill set in India
costs just $25.1. A successful transition results in an instantaneous cost
savings of 70%.
 Sourcing decisions require companies to balance the
tradeoffs
• Cost, Performance and Risk
Introduction

 “Outsourcing” is not synonymous with “offshore”

• The need is to explore a broader approach to achieving its
development, production, and support goals

 Discussions no longer center on cost.

• The need is to address more strategic challenges of
productivity, quality, and sustainability.
Introduction

 Four-phased development process

• Phase 1: ‘Domestic purchasing only’,
• Phase 2 : ‘Foreign buying based on need’
• Phase 3:‘Foreign buying as part of the procurement strategy’
• Phase 4: ‘True’ global sourcing effort.
Introduction

The Fifth “P”

Strategic procurement concept with an

international focus to reap economic
advantage.
Introduction

 This shift in perspective raises a host of new questions:

• Which markets offer the best short- and long-term potential ?
• What about the geopolitical risks in emerging markets ?
• Which partners provide the most stable coverage ?
• Can we “future-proof” our sourcing model ?
• What about communications between partners and internal
staff ?
• How will the global offices react to the new team ?
Global Sourcing – Trends in Global
Sourcing

Bedanta Choudhury
Roll no.10
Changing Role of Procurement

 The ‘buyer’ is becoming a strategic procurement officer.

 The pain of non-strategic procurement removed by
automating many buying processes, through
• Portals, buying hubs & smart cards which link directly into a
company’s back-office processes.
• Efficiency in this area is added through tighter controls and
measurement.
• Long-term collaborative relationship with supplier
Trends in Services Sourcing (1/2)

 The real secret of sourcing success is in "right-sourcing"

• Choosing and then successfully implementing the right strategy for each
organization at a particular point in time.
 A trend that shows maturity in the IT Outsourcing market and
continued above-average growth in BPO
 Companies finding new areas – beyond those traditionally
considered as right for outsourcing
• HR outsourcing (HRO)
• Procurement Outsourcing (PO)
• Finance & Accounting Outsourcing (F&AO)
Trends in Services Sourcing (2/2)

 Increased prevalence of the various offshore delivery

models will keep up pressure on pricing amongst the
vendor community.
 Key Indian vendors are intelligently reinventing
themselves in order to retain market leadership by
strongly moving towards onshoring activities from the
current offshoring activities.
Manufacturing Sourcing
 An appropriate manufacturing strategy could provide a competitive
advantage in terms of cost, delivery, quality, innovation, and flexibility
 The location of manufacturing has a strong implication on these,
primarily on cost, delivery and flexibility
 The economic impact of such practices is under great dispute,
• Advocates claim that off-shoring has a positive impact on national
productivity due to the access to cheaper services and products,
• Opponents refer to the adversarial impacts of the resulting unemployment
• Disputing the theorem that workers in the industrialized
countries will be able to transfer to higher, more value-added
activities once the basic manufacturing operations have been
relocated.
Multi Sourcing

 A greater desire for improved operational efficiency and

accelerated growth of clients’ businesses is driving the
sourcing strategy
• Therefore organizations are looking increasingly at more
integrated, less discrete sourcing options.
 Customers are increasingly splitting up deals that would
previously have been put with a single vendor with a aim to
receive more flexible, best-of-breed services.
 A key issue with multi-sourcing is that: making it work requires
strong but flexible governance, and more effort, resource and
skills
Business Process Sourcing
 The core of BPO has traditionally been the outsourcing of front and
middle-offices and which still represents over 70% of the BPO market.
 HR outsourcing, in fact underpinned the continued growth of the BPO
market and is likely to fuel further growth in future.
 Procurement outsourcing has been slow to achieve traction but
customers are coming to realize that it offers the opportunity to secure a
potential double benefit
• Savings on operational costs at the time of outsourcing
• Savings on goods and services procured through better re-negotiation with
suppliers.
 Typically, if a large organization's indirect spend accounts for 20% of
revenue, and if an outsourcer can deliver savings on that around the
10% mark, PO is an attractive proposition.
Global Sourcing – Offshoring

Preetika Anand
Roll no. 28
Offshoring
Offshoring – An overview
 Offshoring’ – the process of relocating business processes to
lower-cost overseas destinations – is a growing activity.
 11 percent of the 1.46 billion jobs worldwide have the
potential to be performed remotely.
 By 2008, total offshore employment will grow to approximately
4.1 million.
 Experts predict that growth in the offshore marketplace will
continue at the rate of over 30% per annum.
 India continues to lead the global sourcing picture.
 However, many new countries such as Canada, China, Czech
Republic, Hungary, Ireland,Philippines and South Africa are
entering the market
Favorite offshore country is India
Comparison
$B % (CAGR)
30 Total Market Size ($ B) 28.24 90%

25
2002 17.6 75%
2005 29.9
20 2008 51.8 60%

15 45%
12.2
27% 29%
10 25% 25% 30%

14%
13% 5.13
5 3.27 15%
1.85
0.32 0.79 11%
0 0%
Mexico Philippines China Eastern Others Canada India
Europe
2002 2005 2008 CAGR
Services being offshored

Architecture, IT strategy, process, quality,

Consulting strategic sourcing

Application
Testing, App Dev, maintenance, production
services support

Infrastructure Monitoring, server mgmt., DBA, DT mgmt

services

Business Contact centers, collection services, KPO

process (research/analytics), mortgage processing,
outsourcing legal services, tax preparation, claims
processing
 IT and BPO service

$ Billion

800 70
Total Offshore IT Services Revenue
700 60 Total Offshore BPO Services
Revenue
600
50
500
40
400 India Offshore IT Services Revenue
30
300 India Offshore BPO Revenue

20
200

100 10

0 0
2004 2005 2006 2007 2008 2009

Global BPO Revenue Global IT Services Revenue

Source: neoIT
Geographic Trends

 United States
• It is estimated that 70% of offshoring comes from the US.
• Outsourcing market is expected to grow by average of over 9% over 2005-
10.
• A key driver will be increased adoption of BPO as companies prioritize the
outsourcing of key business processes.
 Europe
• UK is the second largest ‘client’ country for offshoring services
• UK remains the biggest market for BPO deals and, generally across
Europe, demand for outsourcing is growing.
Geographic Trends

 Asia
• Sourcing market is supply-side driven.
• Japan, remains the enigma of the sourcing market. According
to a recent survey it is estimated that, 14.8% of Japanese
corporations have used IT outsourcing for more than 3 years;
19.8% have considered IT outsourcing but decided against it;
but a startling 50.9% of Japanese corporations are not
currently considering the use of IT outsourcing.
Global Sourcing – Backsourcing

Satish Menon
Roll no.43
 BACKSOURCING

Everyone knows about outsourcing and the benefits it

can bring if handled properly. But what happens when
there is a clear shift in your business that signals you
should be doing an outsourced function yourself?
 BACKSOURCING

Backsourcing is bringing functions that were outsourced

back into an organization.

Like outsourcing, backsourcing is expensive and should

only be done when a full investigation of the
alternatives has been undertaken and the decision to
backsource is clearly the right one.
 BACKSOURCING

Here are the Seven Practices of Backsourcing that should

be considered.

1. Ask, Why Did We Outsource?

The first best practice of backsourcing is to understand why the
functions were outsourced in the first place so that the decision
to backsource can be appropriately evaluated.
 BACKSOURCING

Good reasons to outsource include:

 The function was non-core and it was outsourced to allow
adequate time to be spent on core functions.
 To reduce costs.
 To access the provider’s state-of-the-art technology.
 To improve customer satisfaction.
 To obtain a competitive advantage.
 To avoid capital expenditure.
 To increase capacity.
 BACKSOURCING
2. Consider All Legal Issues
A key consideration when making the backsource decision is what the
contract says about removing the outsourced business from the
provider. Term of the relationship, notification period is required to
remove the outsourced business, regulatory requirements?

3. Gain Clear Commitment

The decision to backsource should be made with the understanding
that your organization has made a commitment to reinvest in this
portion of your business. If this commitment is not clear, the
backsourcing decision needs to be reevaluated.
 BACKSOURCING

4. Figure Out What Has Changed

Chances are very good that the systems, functions and
processes you outsourced are considerably different than the
functions and processes you backsource.

Therefore, one of the most challenging hurdles to clear

involves fully investigating and understanding if the knowledge
base you had of the outsourced function is still the knowledge
base needed to backsource the function today.
 BACKSOURCING

5. Plan, Plan, Plan!

 Define your backsourcing team.
 Define the backsourcing requirements.
 Develop the backsourcing business plan and backsourcing schedule.
 Assess skills and readiness to successfully backsource.
 Establish a cooperative relationship with the current provider and define
communication protocols.
 Clarify roles and responsibilities and the legal relationship with the
outsource provider.
 Maintain a relationship with the outsourced provider of teamwork, open
communications, cooperation, and collaboration.
 BACKSOURCING

6. Communicate, Then Communicate More

Notify the outsource provider of your decision to
backsource as early as possible and communicate in
a way that begets a culture of cooperation.

7. Focus Contingency Planning on Customer

Never forget about the impact backsourcing can have
on the customer. Develop a contingency plan to cover
as broad a set of business continuity issues as is
realistic.
Global Sourcing – Cost Factors

I P Bharti – Roll no 16
M C Bhardwaj – Roll no 20
 Global Sourcing – Cost Factors

COST – THE PRIMARY REASON FOR OUTSOURCING…….

 Global Sourcing – Cost Factors

 Other Cost Factors

- Multiple Vendors
- Source directly from OEMs
- Bulk Purchase ( Economy of Scale, Savings on ordering
costs)
However care need to be taken as
a) It adds to inventory cost
b) Storage facility limitations
c) Risk of theft and damage
d) Risk of obsolescence
 Global Sourcing – Cost Factors

 Other Cost Factors (Contd…)

 Hidden Cost
• High running / maintenance charges
• No / Poor after sales service
• Costly spares
• Proprietary Technology
• Attrition Cost
• Management cost
 Recurring Cost
 Exchange Rate
 Correct use INCOTERMS
While cost advantage was the initial attraction…
 Significantly favorable total
transaction cost economics
 Gross savings on factor
cost up to 78%
 Net realized savings
ranging between 25-60%

Source: McKinsey Global Institute

COST ELEMENT US INDIA SAVING PROCESS ACHIEVED SAVING

USD / FTE / Year Value Share Value Share On US Cost Transaction Processing 25%-40%
base
Accounting / Contact Center 30%-40%
Personnel Costs 42,927 73.3% 6,348 48.4% 85% Services
IT/ Telecom 2,400 3,770 IT Services 25%-50%
Costs 4.1% 28.7% -57%
Finance / Insurance 40%-60%
Office Facility 3,700 1,991
Costs 6.3% 15.2% 46% Digital Content 30%-50%
Source: GECIS, FT Outsourcing to India Conference – November 2004
Source: NASSCOM, Evalueserve Analysis
Otherrate
Blended G&A 9,571 operations
for voice and non-voice 1012.5 Software/ ERP / Analytics 40%-60%
Expenses 16.3% 7.7% 89%
The above figures are indicative and the actual costs – savings could vary by process; further the cost advantage may be partially offset by travel, transitioning and
non-process
Total Costcommunication costs
58,598 100% 13,121 100% 78%
Global Sourcing Cost Factors

Global sourcing cost factors can be segmented into six categories:

 Material Cost

- Price, setup, tooling, transaction and other costs related to

the actual product or service delivered.

 Transportation Cost

- Transportation, drayage, fuel surcharges and other fees

included in a freight rate.
Global Sourcing Cost Factors

 Inventory Carrying Cost

- Warehousing, handling, taxes, insurance, depreciation,

shrinkage, obsolescence, and other costs associated with
maintaining inventories, including the cost of money or
opportunity costs.

 Cross-border taxes, tariffs, duties

- Often referred to as landed costs, which include duties,

shipping, insurance and other fees and taxes.
Global Sourcing Cost Factors

 Supply & Operational Performance

- The cost of noncompliance or underperformance, which, if

not managed properly, can offset any price variance gains
attained by shifting to an offshore source.
Global Sourcing Cost Factors
 Recurring Costs

- There are some major recurring costs that need to be monitored.

Some of these costs are intangible and others are not, but all can
have a strong impact on any global sourcing initiative.

• Price Creep
• Efficiency Costs
• Management Costs
• Attrition Cost
• Currency Hedging
Global Sourcing Cost Factors
 Price Creep
- The cost of price creep is a tangible cost but may come as a surprise.

- Several vendors provide the lowest, most basic figures during the bidding
process and systematically add in costs after the contract begins.

- Price creep can throw budgeting, ROI and cost calculations awry.

- To control price creep, define final deliverables and terms before the
bidding process.
Global Sourcing Cost Factors

 Efficiency Costs

- Efficiency cost is an intangible cost that is rarely captured.

- In any business relationship, both partners often work jointly to

improve productivity- that is, to make the processes and work more efficient.

- However, in many cases the benefits of higher productivity are not

passed on.

- This essentially means that you may be paying a higher rate, even when
the cost of production has dropped.
Global Sourcing Cost Factors
 Management Costs
- As processes move offshore, organizations often neglect to capture
management costs associated with effectively running the co- sourced process.

- It is difficult to estimate these costs since the time required depends on the
complexity of problems and is often spread out.

- For example, many companies many not know, how do they calculate the
additional management time for late night or early morning conference calls?
 
- When supervising onsite staff, the time involved is often smaller since all
processes are in one physical location. But with global sourcing, management costs
are higher. Since top management usually devotes a lot of time in the initial stages of
co-sourcing, costs are high.
Global Sourcing Cost Factors

 Attrition Cost
- Attrition costs are hidden costs.

- Loss of talent not only means knowledge loss but also

results in additional costs for training new personnel and
lower productivity. Given the fact that global sourcing is
growing at a rapid pace, human resources jump jobs quickly.
 
Global Sourcing Cost Factors

 Currency Hedging
- Since costs are delivered from globally scattered locations, vendors may
incur costs related to fluctuating local currencies.

- These costs may be passed on to the company by the vendor

through a price increase.

- This cost is tangible but hidden and to keep these costs down it is best
to keep these open and known to both the parties and settled in the best
interest to both to keep the costs down in future.
 
Global Sourcing – Value Proposition

R K Datta
Roll no 37
What is Value Proposition?
 Every Industry is now driving down costs and
developing products and services faster to meet new
challenges.
• The need to provide more value to customers (higher level of
products and service and reduced costs) can be achieved thru
Global Sourcing.
How Global Sourcing creates value

 The emergence of world-class service

providers around the world
 Multi-tier suppliers, multiple country
options - enabling clients to
appropriately balance cost, control,
quality & risk
 Maturing industry structure,
highlighted by vendor consolidation
and greater standardization of
infrastructure elements.
 Highest use of technology domain
How Global Sourcing creates value

 To improve the financial position

through cost savings that contribute
directly to the bottom line.
 Also makes companies more agile
 Organizations are leveraging the latest
model of outsourcing - Multi-sourcing -
benefit from the skills and efficiencies
of multiple vendors.
 Access to huge trained pool of talent
and end to end quality delivery.
Other factors in Value Creation

 Technology makes much of the work of the modern organization

“placeless” , “paperless”.
• It no longer matters where information is processed, where
accounting is done
 Competition – As competition intensifies, organisations must get
more efficient and more effective to survive.
Global Sourcing Drivers
Save Costs Improve Access Skilled Reduce Source
Quality Resources Cycle-time Globally

 In the current economic environment “cost savings” has become an –

important aspect.
 At the same time, quality remains an important consideration for
companies.
 Important avenue for scarce skills.
 Cycle time reduced due to multi-vendors, multi-sourcing activities.
 Globally competitive environments – barriers across geographic regions
reduced.
India Value Proposition
 India’s telecom infrastructure between Chennai, Mumbai and Singapore,
provides the largest bandwidth capacity in the world, with well over 8.5 Terabits
(8.5Tbs) per second.
 With more than 250 universities, 1,500 research institutions and 10,428 higher-
education institutes, India produces 200,000 engineering graduates and
another 300,000 technically trained graduates every year.
 80 of the World’s 117 SEI CMM Level-5 companies are based in India.
 India’s GDP growth has been growing consistently at over 7.5% year on year
and makes it the fastest growing economies.
 Cheaper workforce than their Western counterparts. According to Nasscom,
The wage difference is as high as 70-80 percent when compared to their
Western counterparts.
 Round-the-clock advantage for Western companies due to the huge time
difference.
Global Sourcing – Issues

Sunil Kini
Roll no 47
WTO Compliance
 Important Factors
• Pace and scope of globalization
• Shifting economic and trade policies
• Global sourcing as a means to control costs
 The WTO is the only international organization dealing with
global rules of trade between nations.
 After 2005, all quota limitations have been lifted, changing the
face of global sourcing dramatically.
 Sourcing from any region covered by trade agreements
formulated by WTO comes with potential significant
advantages.
 While one should not expect an immediate improvement in
operating margins, full commitment will be essential to the
global sourcing plan’s success.
Trade Agreements (1/4)

 Broadly the trade agreements under WTO cover the

following areas which directly impact global sourcing:-
Benefits to importers
- To facilitate imports, imports must be allowed in without
further restrictions upon payment of duties.

- Tariff bindings assure importers that their importing costs

will not be increased by higher customs duties.
Trade Agreements (2/4)

 Rights of domestic producers and importers.

Some Agreements require the legislation of member
countries to provide certain rights to domestic
producers and importers under their legal systems.
 Rights of exporters

The rights which the Agreements create in favour of

exporters is the right to give evidence for the levy of anti-
dumping or countervailing duties during investigations in
importing countries.
Trade Agreement (3/4)

 Using WTO dispute settlement procedures

• Knowledge of systems enable business communities to help

their government to take full advantage of the WTO mechanism
to monitor implementation of the Agreements and to settle
differences and disputes
Trade Agreement (4/4)

 Influencing Negotiations

• Negotiations with important implications for trade are often held

during the implementation stage, during periodic reviews to
examine how the Agreements are operating.

• Feedback from the business community also greatly assist

governments in securing appropriate modifications to the
Agreements
Global Sourcing – Road Ahead

Vandana Ray
Roll no 49
Data Privacy and Secrecy
 Around the world, governments are reacting in different ways to
the issues posed by cross-border data transfers and data
security breaches.
 Failures in data security in a sourcing transaction will likely lead
to some combination of fines, loss of customers, and potential
litigation.
 The real cost can be damaged reputation: it is neither adequate
nor acceptable to say: "sorry, it was our outsourcing vendor’s
fault that your account details got released".
 More attention than ever before to strategies to anticipate and
prevent data security breaches.
 Going well beyond merely complying with the various laws on
data privacy and protection of the laws of the outsourced
country.
Road Ahead

 Developing global sourcing strategy will bring enhanced

capabilities, smoother projects & greater control of the
organization's destiny.
 Majority of the companies have clear plans to significantly
enhance their investment in the offshoring initiative.
 Increasing evidence the term “offshoring” may soon be passé
• pursuing a “global sourcing” strategy with the relentless pursuit of “low cost,
high quality” locations around the globe
• resilience and the assurance that they will not be held hostage to skill
shortages/ wage increases in any one location.
Conclusion

 Off-shoring is now deeply rooted and will continue to form part

of many transactions
 In coming years, offshore and onshore will become inextricably
blended.
 Offshore delivery models have forced suppliers to become more
price-competitive; clients are becoming more sophisticated and
learning from their own and others’ deals; and there are more
external advisers to advise on correct approaches.
 The key to success for companies considering sourcing projects
is how to position themselves to maximize the value on offer in
the sourcing market
Thank You