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8/8/2019 INTNTL SOURCING1
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What is Outsourcing
Outsourcing means finding better ways of doing business.
It helps companies to look to the value chain for high leverageareas and helps them to better utilise their resources toexploit these areas.
Outsourcing is a means to achieve competitive advantage byfocusing on core competencies.
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International servicessourcing: Opportunities
and challenges
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International Sourcing – Terminology• The international sourcing of IT and ICT-enabled
services (often referred to as ‘offshoring’) is
part of the globalisation of the ICT sector, and
of other services sectors
• ‘Offshoring’ includes:
– Insourcing: to foreign affiliates
– Outsourcing: activities are contracted out to
independent parties abroad
• Media focus is on offshoring (of jobs), but in-
and outsourcing can also take place
domestically
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IllustrationOnshoring, Offshoring, insourcing and outsourcing IT and
business process services
Approximate value of worldwide activity in 2008, USD
Control
Location
National International
I n s o
u r c e
d
O u
t s o
u r
c e
d Onshore
Outsourcing(External Domestic Supply)
(USD 227 billion)
Offshore
Outsourcing(External cross-border supply)
(USD 10 billion)
Internal
Domestic
Supply
Internal
Offshoring
(Internal cross-border supply)
(USD 22 billion)
: ,Source 2004 OECD Information Technology Outlook Chapter 2
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International (services) sourcing
• The phenomenon is not new: has existed
in manufacturing for many years• What is new: it is increasingly taking place
in the services sector (enabled by ICTs)and affects white collar jobs previouslyconsidered ‘untouchable’
• Occurs in response to: – Increased competition, resulting from trade
liberalisation and reinforced pressures to cutcosts, combined with rapid technologicalchange, making services increasinglytradable
– Skills shortages ensuring a skills base is inplace increasingly becomes a locationaldeterminant of economic activity
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Measurement issue
• If outsourcing is concerned with activitiesthat were previously carried out withinthe firm, “When does outsourcing stop
being outsourcing?”• This means it will be very difficult to
collect data measuring the extent of thephenomenon
•
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No official statistics measuring theextent of (services) sourcing
Loo t n r ti di ec
m sur s e k• Exports of services (Information
Technology Outlook, Chapter 2)
Ø if service activities are sourced internationally,
the country receiving the international in-
and/or outsourcing must export services back
to the country of origin
• Employment data: (InformationTechnology Outlook Chapter 6 and
ongoing work on ICT skills and employment )Øoccupations that use ICTs intensively could be
more exposed or vulnerable to offshoringtrends:
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Export data show
• Some of the countries often mentioned in
the outsourcing debate have experienced
strong export growth (e.g. India, Romania,
Estonia, Ireland).
• But, the exports of most of these countries
are growing from a low base (only Indiaand Ireland are among the 10 countries
with the strongest growth rates and the
largest shares):
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Share of reported total exports of other businessservices and computer and information services,
2002, 2008 (IMF BoP data)
: ,Source 2008 OECD Information Technology Outlook Chapter 2
0
2
4
6
8
10
12
14
16
18
UnitedStates
UnitedKingdom
German
y
France
Netherlands
India
Japan
Ital
y
Ireland
Austria
Spain
Singapore
Canada
China
Sweden
Korea
Braz
il
Thailand
Australia
Finland
2002 2008
15 largest reported value shares in 2002 selected
other
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Growth of exports of other business servicesand computer and information services
: ,Source 2009 OECD Information Technology Outlook
-20 -15 -10 -5 0 5 10 15 20 25 30 35 40
GreeceTurkeyMexicoJapan
FinlandCzech Rep.
New ZealandFranceKorea
ThailandPolandRussiaAustria
MauritiusGermany
ItalyDenmarkPortugal
GhanaSwitzerland
HungaryCanada
NetherlandsMoroccoAustralia
IcelandUnited States
UnitedNorway
SpainIsraelChina
SwedenBrazil
IrelandEstonia
NicaraguaArgentina
PeruRomaniaIndia
CAGR 2002-2008
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Aggregate illustration: the share of narrow andbroad ICT-skilled employment in total
employment, EU15 and USA, 1995-2002
: . % - . %Narrow 2 5 4 5
: . % - . %Broa 19 5 22 5
: ,Source 2004 OECD Information Technology Outlook Chapter 1
2. 0
2. 5
3. 0
3. 5
4. 0
4. 5
1995 1996 1997 1998 1999 2000 2001 2002
US narrow EU15 narro
19.5
20.0
20.5
21.0
21.5
22.0
22.5
1995 1996 1997 1998 1999 2000 2001 2002
US broad EU15 broa
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Sectoral illustration - for Europe - of the intensity of ICT-skilled employment across all sectors in 2002
(using the broad definition)
0
10
20
30
40
50
60
70
80
90
1 2 5 1 0 1 1 1 2 13 1 4 1 5 1 6 1 7 18 1 9 2 0 2 1 2 2 2 3 2 4 2 5 2 6 2 7 2 8 2 9 30 3 1 3 2 3 3 3 4 3 5 36 3 7 4 0 41 4 5 5 0 5 1 5 2 55 6 0 6 1 6 2 6 3 6 4 6 5 66 6 7 7 0 71 7 2 7 3 7 4 7 5 8 0 85 9 0 9 1 9 2 9 3 9 5 99
wgt ave E U wgt ave non-E U
: ,Source 2004 OECD Information Technology Outlook
Chapter 6
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Example: EU15 – high intensity sectors(≥30%)
NACE Industry %
72 Computer and related activities 84.2
66 Insurance and pension funding, except compulsary social security 74.865 Financial intermediation, except insurance and pension funding 69.2
67 Activities auxiliary to financial intermediation 67.9
30 Manufacture of office machinery and computers 57.1
74 Other business activities 50.4
70 Real estate activities 46.1
40 Electricity, gas, steam and hot water supply 45.1
32Manufacture of radio, television and communication equipment and
apparatus 44.8
51Wholesale trade and commission trade, except of motor vehicles and
motorcycles 42.7
11Extraction of crude petroleum and natural gas; service activities incidental to
oil and gas extraction excluding surveying 42.0
73 Research and development 41.3
24 Manufacture of chemicals and chemical products 35.9
31 Manufacture of electrical machinery and apparatus, n.e.c. 35.3
23 Manufacture of coke, refined petroleum products and nuclear fuel 35.264 Post and telecommunications 32.6
71Renting of machinery and equipment without operator and of personal and
household goods 31.4
33Manufacture of medical, precision and optical instruments, watches and
clocks 31.0
: ,Source 2004 OECD Information Technology Outlook
Chapter 6
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Impact of international sourcing
• Efficiency gains and cost savings
• Possible initial job losses in the country from
which the offshoring originates, and job
creation in the host country
• Greater economic efficiency, induced and
enhanced by greater competitiveness, and
increased productivity growth in both home
and host countries
• Should create new employment and growth
opportunities in the home and host countries
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Policy issues
• Avoid a protectionist response and remain
committed to liberalising trade in services
(including through GATS Mode 4: movement
of persons)
• Manage the adjustment process andcompensate for adjustment costs where
necessary
• Adjust education and training programmes totrain and retrain workers and enable them
to take advantage of new employment
opportunities
• Ensure good labour standards and welfare
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Conclusions• International sourcing is not new, but now affects
the services sector, and high and low skilled jobs
are concerned
• This is induced by increased trade in services and
competition, facilitated by rapid developments in
ICTs T s lls ombec ek kn r s n l mport nt nc e i g i i
t n w onome e ec k• ICT skills are widespread throughout the economy,
but are relatively more important in services
sectors ensuring their supply is crucial for
future competitiveness
• Geographical dimension: the development and
diffusion of ICTs impacts the spatial distribution
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EXECUTIVE GLOBALSOURCING
• Cross functional leaders participateon a global sourcing council.
• Commmittee has the authority to
translate global vision into reality.• Executive leaders work to gain
support for global agreements and
processes from cross functionalgroups and buying locations.
• Executive leaders recruit qualifiedparticipants to join global project
teams.
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18
Outsourcing
• Increasingly common option – Relocating some or all of a business’s activities or
processes outside of the company
• Focus on core competencies
• Leverage skills of other companies• Reduce costs
• Improve flexibility and speed of response
• Enhance quality – Can outsource in same country or another country
• Offshoring: a foreign location – Choices increased by
• Global access to vendors
• Falling costs of interactions
• Improved information technology andcommunication
–
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21
Global Sourcing
• The Lure of Global Sourcing – Suppliers with improved competitiveness
• Cost
• Quality• Timeliness
– Suppliers in less developed countries withlow-cost labor
• Attractive for labor-intensive productswith low skill requirements
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22
Global SourcingArrangements
• Arrangement that provide a firm withforeign products
– Wholly owned subsidiary
– Overseas joint venture
– In-bond plant contractor
– Overseas independent contractor
– Independent overseas manufacturer
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23
Global Sourcing
• Problems
– Unanticipated added costs
• Currency fluctuations• Transportation cost increases
•
– E-procurement exposes businesssystems to wide range of potentialsecurity issues
–
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24
Added Costs
• International freight, insurance andpacking
• Import duties
• Customhouse broker’s fees• Transit or pipeline inventory
• Cost of letter of credit
• International travel and communicationcosts
• Company import specialists
• Reworking of products out of specification
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Standards for GlobalOperations
• Standards
– Documented agreements on technicalspecifications or other precise
criteria used consistently asguidelines, rules, or definitions of the characteristics of a product,process, or service
• ISO 9000 (International Organization forStandards) most used in Europe, forquality
• ISO 9001 most comprehensive standard
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POSITIVE ASPECTS
• COSTS + EFFICIENCY
• – Lower overall cost
• – Lower labour cost
• – Lower land and facility costs
• – Lower taxes
• – Greater standardisation
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POSITIVE ASPECTS
• STRATEGIC
• – Penetration of growth markets
• – Introduce competition between
• suppliers
• – Improve environmental
• compliance
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POSITIVE ASPECTS
• VALUE
• – Improved quality
• – Improved delivery reliability
• – Improved new product
• introduction
• – Improved sharing of information• – Uniqueness
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NEGATIVES
• STRATEGIC
• – Loss of Knowledge
• – Piracy / Abuse of IPR
• – Unknown long term impact on
• demand / supply
• – Language, cultural and time
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NEGATIVES
• VALUE• – Quality problems• – Lower responsiveness
• • ENVIRONMENT AND CSR• – Longer distances (effects on• pollution and congestion)• – Abuse of the environment• – Abuse of employees• – Loss of jobs
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RISKS
• SUPPLY RISK
• – Supply disruptions
• – Longer lead-times
• – Lower responsiveness
• – Quality problems
• • PROCESS RISK
• – Communication problems
• – Quality problems postmanufacture
• • DEMAND RISK • – Indirect effects on corporate
• social responsibly can affect demand
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RISKS
• ENVIROMENTAL RISK
• – Natural disasters
• – Terrorism
• – Global pandemic
• – Strikes and demonstrations
• – Currency fluctuations
• – Travel longer distances (effects
• on pollution and congestion)
• • CONTROL RISK • – Loss of knowledge
• – Piracy / abuse of IPR
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The future shape of business is
being redefined through outsourcing
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What to Outsource
• CRM (Customer Relationship Management)
• SCM (Supply Chain Management)
• Back Office
– Payroll – Billing
– Accounting
– Investor Relationship Management – Share
Transfer & Fixed Deposit Accounting
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Why Outsource
• Use the specialised services andskills of the Outsourcing partner
• Better utilise internal resources
• Increased responsiveness tocustomer needs
• Decrease financial risks by reducing
capital investments
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Motivators for Outsourcing
The followings are the major reasonsgiven for taking outsourcing decisions
• Difficulty of hiring skilled professionals(28.8 percent),
• Lack of in-house skills to deliver thedesired levels of quality (20.3 percent),
• Budgetary considerations (13.6 percent),
• Mandate from the management (11.9percent).
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Risks in Outsourcing
• Information Security
• Loss of control
• Compromising confidentiality
• Monitoring costs
•
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Benefits
Service
• Industry knowledge and expertise of thevendor
• Quick response time
• Function Difficult to Manage or Out of Control
• They are great in a pinch – ability toincrease resources whenever required
•
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Benefits
Costs
• Pay only for what you need
• The infrastructure is of the vendor
• Economies of scale with the vendor
• Reduce or Control Operating Costs
• Outsourcing is a cost-effective way to
increase your resources.
•
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