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IT Offshore Outsourcing
Offshore outsourcing is not generating the expected cost savings promised nor
is it pursued for cost savings.
Changing World• Collapse of the Berlin wall • Leadership change in China • The European Union
Technology Bubble
• Year 2000• Telecommunication
– Voice
– Data
CEO /CFO View of Supplier$1,000,000 Cost savings
468,000 Number of shares
$2.137 Cost savings stated in earnings per share (EPS)
$1,000,000 Cost savings
20% Operating Profit %
$5,000,000 Additional sales needed to generate the same operating income as the cost savings
$1,000,000 Cost savings
468,000 Number of shares
$2.137 Cost savings stated in earnings per share (EPS)
Source: SDS network software M.L. Emilliani
Impact of Cost reduction on Share price
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5
2003 2004 2005 2006
Share price Share price
India: Attractive IT Outsource Location
High
High
LowWorkers Capability
Loc
atio
n at
trac
tio
n
English, Education, Qualification, Cost
InfrastructureGeopolitical RiskIncentives
Criteria: South East Asia Attraction
GeopoliticalRisk
English Proficiency
Average Programme
r Salary
Pro’s & Con’s
India Moderate Good $4-12K IT Outsourcing heaven
China Low Poor $4-12K Strong government support. Weak IP protection., Bureaucratic
Thailand Low Poor $4-12K Weak education
Malaysia Low Fair $4-12K Shortage of skilled IT
Singapore Low Good >$12K Excellent infrastructure, stable
Philippines Low Good $4-12K Mfg outsourcing heaven
Vietnam Moderate Poor $4-12K Small Mfg outsourcing
New Zealand Low Good >$12K Very stable political & Economic
Foreign direct investment in:
Commercial-servicesexports from:
United States: $82.0 BIndia: $ 4.7 BChina: $53.5 B
United States: $282.5 billionIndia: $ 24.9 billionChina: $ 44.5 billion
Sources: • Organization for International Investment, • The Economist, • U.S. Federal Reserve, • World Trade Organization
United States India ChinaTotal population 0.29 billion 1.07 billion 1.30 billion
Civilian labor force 147 million 470 million 744 million
Percent of population under age 25 35% 53% 41%
Number of college graduates / year 1.3 million 3.1 million 2.8 million
Number of computer-science graduates / year 53,000 75,000 50,000
As percentage of population 0.02% 0.007% 0.0004%
Cost of a cup of coffee (gourmet) $1.68 $0.50 $1
Percent of country with electricity 100% 60% 98%
Percent of population living below the "poverty line"*
12% 25% 10%
Illiteracy rate 5% 35% 15%*
Definition of "poverty line" varies substantially by country.Sources: U.S. Census Bureau, U.S. Bureau of Labor Statistics, U.S. DoE, The Economist, Economic Times of India, Software Outsourcing Research, CNBC, the National Center for Education Statistics, the International Energy Agency, and CFO research
Hourly WagesU.S. India
Telephone operator $13 Less than $1
Medical transcriptions $13 $2
Payroll clerk $15 $2
Legal assistant/paralegal $18 $7
Data-entry clerk $20 $2
Accountant $23 $11
Financial researcher/analyst $34 $11
Software developer $60 $6
Engineer $120 $18Note: Numbers are rounded. Where ranges were given, the average is given aboveSources: University of California, Berkeley; and McKinsey Global Institute
India moving up the value-chain in IT services
• India started by providing Cobol programmers in early 1990s
• Moved to porting from Fortran and Cobol onto C and Pascal
• Moved to converting legacy systems into simple client-server based systems
• Solution provider to Y2K glitch• Moved up the technology chain to Java and XML
programming • Attempting to break into R&D in software & services.
IT Services
– Steel– Chemicals– Ship building
– Utilities– Car manufacturers
– Banking & financial institutions
– Insurance
– Energy equipment– Electronics
– Airlines– Pharmaceuticals– Retailing– Packaged goods– Computer
manufacturers
– Telecom
– Aerospace
– Entertainment– Real estate brokerage– Hotels
– E-commerce– SW-producer
•High•Medium
•Low
•Medium
•High
•Low
•G
lob
al cost
base in
du
str
y
•Relative share of remote serviceable processes
Multinational IT companies with R&D center in India
• Motorola India Electronics Ltd. • Novell India Software Dev. Center • Oracle India Development Center • Philips Research Center • Samsung India Software R&D Center • SAP Labs India • Sasken Technologies • STMicroelectronics • Sun Microsystems, India Engineering Center • Texas Instruments • Zilog R&D Center • Many others in Biotech and Pharmaceutical
Industries
Prior to Outsourcing Evaluate
• Fit between product and where they are mfg.?
• How Supply Chain will work overseas?
• Do lower labor costs really offset shipping fees?
• Who do you want to manage your vendor relationships?
Compete not on PRICE,
but on SPEED & FLEXIBILITY