Good Hopes For Global Outsourcing

1
Good Hopes For Global Outsourcing

• Case Analysis

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Global Sourcing

• Global sourcing is the procurement of products or
  services from foreign suppliers
• Global sourcing has become a major international
  business activity.
• A firm can outsourc from independent suppliers,
  company-owned subsidiaries and affilates, or a
  combination of both.

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Drivers of Global Sourcing

• Technological advances, particularly Internet
  connectivity and broadband availability
• Decrease in transportation and communication
  costs
• Increased access to information and a rise in
  connectivity between suppliers and their
  customers
• Entrepreneurship and rapid economic changes in
  emerging markets.

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Characteristics of Global Sourcing

• Services are more difficult to outsource than
  manufacturing
• Difficult to judge quality of services
• Need to develop a trusting relationship
• Location decision
• Eastern Europe, India, China Latin America
• Main motive of outsourcing is to cut costs,
  however it often is more costly than planned
• International laws do not fully protect
  confidentiality of customer information

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The Firm Good Hope Hospitals

• Chain of nine hospitals in California
• Needs to significantly cut operational costs. To
  avoid laying-off workers, management wants to
  outsource certain business processes.
• Outsourcing goals
• Reduce labor costs
• Allow Good Hope to focus on activities that are
  most critical to their value offerings.
• Increase organizational efficiency, revenues and
  the quality of service offerings.

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Background

• Good Hope
• Wants to outsource data processing for accounts
  receivable and accounts payable, some customer
  service applications, transcription of medical
  records, and some data processing
• Researched the risks of global outsourcing
• Consulted with an outsourcing broker
• Recommended BangSource, a supplier in India
• Claimed that Good Hope would save 1.4 million
  annually
• 25 annual employee turnover rate

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Problem 1

• Financial costs of outsourcing were higher than
  expected
• Processing of accounting and other data more
  complicated than expected.
• BangSource is less efficient in answering
  customer inquiries, which resulted in more
  telephone time and phone calls to address
  customer needs
• Fluctuations in the rupee and dollar exchange
  rate inflated the cost of BangSource

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Problem 2

• Outsourcing has decreased customer satisfaction,
  putting Good Hopes reputation on the line.
• Customer complaints about hard-to-understand
  accents
• Poor infrastructure, partly due to new contracts
• Late in performing promised services due to
  shortage of workers.

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Alternative 1 Captive Operation in Mexico

• Good Hope would own its offshore facility in
  Mexico
• Criteria for choosing Mexico
• Financial structure of Mexico
• Availability and skills of people
• Nature of the business environment
• Proximity to California
• Costs
• High initial costs
• Bureaucracy and regulation increases with FDI
• Higher energy and transportation costs
• Quality of infrastructure is low, which will
  increase costs.

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Alternative 1 Captive Operation in Mexico

• Benefits
• Complete control of outsourced activity
• Control over reputation, brand equity and
  customer service
• Control of key technologies and processes
• Protection of intellectual property
• Enhanced customer service for Spanish-speaking
  customers
• Enhanced communication between Head office in
  California and outsource facility because Mexico
  is close to the US, and it is in the same time
  zone
• Labor costs are low
• Access to qualified personnel abroad
• Enhanced employee morale and commitment among
  employees in Mexico.
• Faster corporate growth because outsourcing
  allows Good Hope to focus on key activities.
• Increase production efficiency, maximize resource
  utilization
• Possibility of access to new markets

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Alternative 2 Outsource only Backoffice
Activities to BangSource

• Customer service affects reputation and brand
  equity, especially in the service industry.
• If customer service is considered an important
  key activity it should not be outsourced.

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Alternative 2 Outsource only Backoffice
Activities to BangSource

• Costs
• Savings will not be as substantial
• BangSource lacks quality workers
• BangSource has a high turnover rate of skilled
  employees,
• Absence of strong protection of intellectual
  property in India
• Exchange rate fluctuations between the rupee and
  the dollar
• Higher energy and transportation costs
• Quality of infrastructure is poor
• Conflicts and misunderstandings between Good Hope
  and BangSource due to cultural differences
• Process of accounting and other data is still
  complex
• Bureaucracy, legalities and regulation is still
  complex

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Alternative 2 Outsource only Backoffice
Activities to BangSource

• Benefits
• Control of most customer service activities,
  which preserves reputation
• Faster corporate growth because allows Good Hope
  to focus on key activities, such as customer
  service.
• Sheds unnecessary overhead.
• Increases production efficiency

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Alternative 3 Maintaining Status Quo with an
Enhanced Relationship

• Outsourcing fails because focal firm and the
  supplier do not spend enough time in the
  beginning establishing a relationship and setting
  boundries
• Good Hope needs to collaborate closely with
  BangSource in co-development and co-design
  activities.

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Alternative 3 Maintaining Status Quo with an
Enhanced Relationship

• Costs
• Lack of quality workers with adequate knowledge.
• Regulation and bureaucracy is complex, however by
  maintaing a close relationship with BangSource,
  Good Hope will have an easier time.
• Exchange rate fluctuations between rupee and
  dollar
• Higher energy and transportation costs
• Quality of infrastructure is poor, resulting in
  electricity blackouts

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Alternative 3 Maintaining Status Quo with an
Enhanced Relationship

• Benefits
• Less conflicts/misunderstandings
• Enhanced employee morale and commitment among
  employees
• Good Hope will gain negociating power and better
  control of the value chain
• Faster corporate growth because outsourcing
  allows Good Hope to focus on key activities
• Productivity and service improvement
• Production efficiency due to giving BangService
  specialized tasks
• Faster responsiveness to evolving customer needs
• Shedding unnecessary overhead

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Alternative 4 Terminate All Outsourcing
Activities

• Costs
• Lay off workers, which may lead to eroding
  employee morale
• Reduction in competitiveness
• Cost effieciency reduction
• Not focused on key activities
• Spending unneccessary overhead
• Benefits
• Control over value chain
• Maintain reputation, brand equity, and customer
  service
• Protection of intellectual property
• Good infrastructure

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Recommendations

• Alternative 1, Captive Operations in Mexico,
• preserves reputation and increasing customer
  service quality
• However, increase costs lay-off some employees.
• Alternative 3, Maintaining Status Quo with an
  Enhanced Relationship,
• Risky May or may not work.
• Good Hope and BangSource have different
  priorities
• Alternative 4, Terminate All Outsourcing
  Activities
• Better customer service
• However costs would increase once again lay-off
  employees
• Alternative 2, Outsource only Backoffice
  Activities to BangSource
• Best option.
• Reduce costs and preserves customer service
• Lay-off some employees This option would preserve
  customer service quality and Good Hopes
  reputation.