MIT5312: Systems Analysis and Design

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Slide 1
MIT5312 Systems Analysis and Design
Outsourcing and Offshoring
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Slide 2
MIT5312 Professor Kirs
Outsourcing
Outsourcing is .

• A free market thing
• A Special form of international trade (CES IFO
  Institute ,Germany)
• A matter of polarized public debate (European
  Foundation for ILWC,2004)
• About your core
• A question of trust
• Unevenly dispersed on the globe (yet growing)
• Generating fear (fear of change?- Cochrane,2004)
• A relationship and arrangement
• Partner quality

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Slide 3
MIT5312 Professor Kirs
Outsourcing
Basic Terminology

• Outsourcing

• Delegation of non-core operations from internal
  production to an external entity. Sharing
  organizational control.

• Best Sourcing

• Associating with the best of the best (Tom
  Peters)

• Offshoring

• Transferring Activities to another country by
  hiring local subcontractors or by building a
  facility in an area where labor is cheap (er).

• Nearsourcing

• Similar to offshore (yet close distance)

• Insourcing

• The opposite of outsourcing

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Slide 4
MIT5312 Professor Kirs
Outsourcing
Why Outsource?

• Cost Concerns

• It has been reported that more than 80 of
  European companies engaging in Offshoring are
  satisfied with the results, and that the cost
  savings realized have generally ranged between
  20 and 40 UNCTAD, 2004.

• The average salary of an Indian programmer stands
  at 6,000 to 12,000. But, it's much lower in
  China at 5700 to 9000

• The pay range for agents at call centers in
  Mumbai is INR 8,000 to INR 15,000 per month, or
  183.50 to 344 at current exchange rates

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Slide 5
MIT5312 Professor Kirs
Outsourcing
Why Outsource?

• Access to Specialized Skills Expertise

• India has over 2,100,000 English-speaking
  graduates are added annually and 460,000 of them
  are IT grads.

• China has over 200,000 IT professionals and
  50,000 new graduates are added to the pool every
  year.

• China produces 52 of all Science and Engineering
  graduates

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Slide 6
MIT5312 Professor Kirs
Outsourcing
Why Outsource?

• Access to Specialized Skills Expertise

• The United States has falling education standards

• The number of scientists, engineers, computer
  scientist and other technical professionals has
  been falling in the United States

• Bill Gates recently said there's an insufficient
  amount of skilled people in the U.S. labor pool.
  As he put it, "Anybody who's got good computer
  science training, they are not out there
  unemployed. We're just not seeing an available
  labor pool."

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Slide 7
MIT5312 Professor Kirs
Outsourcing
Why Outsource?

• Access to Specialized Skills Expertise

In China today, Bill Gates is Britney Spears.
In America today, Britney Spears is Britney
Spears and that is our problem. Thomas
Friedman
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Slide 8
MIT5312 Professor Kirs
Outsourcing
Why Outsource?

• Lagging IT Performance

• The performance gap is widening between
  organizations that have achieved world-class
  performance levels in their back office
  operations versus typical companies, with top
  performers generating significant savings while
  delivering improved effectiveness and reduced
  risk, according to new research released by
  strategic advisory firm The Hackett Group.

• IT might improve business processes, but
  capitalizing on this improvement is out of
  control of the IT function.

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Slide 9
MIT5312 Professor Kirs
Outsourcing
Why Outsource?

• Focus on Core competencies

• Core competencies are the key skills,
  characteristics and assets that your company
  brings to the marketplace. These competencies, on
  an organizational level, are a synergistic
  blending of the core competencies that your
  people individually bring to work every day.

• Core competencies are "focus points" that funnel
  peoples skills and efforts to make a greater
  effect

• Aligning IT with the business is crucial to
  success, yet IT is too often seen as a "support"
  service and is not included in high-level
  decision-making.

• The core competency of the outsourcee is IT

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Slide 10
MIT5312 Professor Kirs
Outsourcing
Why Outsource?

• And other reasons

• Economies of scale

• Bulk Purchasing

• Better use of capacity

• World-class standards applied

• Improved control/standardization

• Flattening of Hierarchical Structure

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Slide 11
MIT5312 Professor Kirs
Outsourcing
Why Outsource?

• It is something you cant (nor want to) avoid-
• Even if we stop, our competitors wont.
• CSIS Report
• It is irreversible.
• It is a product of free tradeit adds value to
  shareholders.
• Requires a society that can imagine and invent
  the future demand.
• Means we must go to high touch/high concept jobs
• and away from high tech jobs
• Daniel Pink

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Slide 12
MIT5312 Professor Kirs
Outsourcing
Why Outsource?

• Every Morning in Africa, a gazelle wakes up.
• It knows it must run faster than the fastest lion
  
• or it will be killed.
• Every morning a lion wakes up.
• It knows it must outrun the slowest gazelle
• or it will starve to death.
• It doesnt matter whether you are a lion or a
  gazelle
• When the sun comes up,
• YOU BETTER START RUNNING!
• African Proverb

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Slide 13
MIT5312 Professor Kirs
Outsourcing
Why Outsource?
We arent going any further until the class comes
up with at least three other reasons why
outsourcing is a good idea.
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Slide 14
MIT5312 Professor Kirs
Outsourcing
Some arguments for NOT outsourcing

• Loss of jobs

• A University of California Study that estimates
  14 million U.S. white collar jobs - one in nine -
  are at risk.

• A 2004 report by Forrester Research suggests that
  a total of 3.4 million U.S. white collar jobs
  will move overseas by 2015, with 830,000 jobs
  leaving by the end of 2005.

• A Progressive Policy Institute report claims 12
  million jobs are vulnerable, with most paying
  more than the U.S. median wage.

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Slide 15
MIT5312 Professor Kirs
Outsourcing
Some arguments for NOT outsourcing

• Loss of control

• "I've had people approach me and offer to save us
  money by consolidating our technical support,"
  said Monad.net President George Scott. "But I
  think technical support is a major competitive
  advantage. I therefore want control of that -- I
  don't want to give it away."

• "Everyone knows that differentiation is the key
  in the ISP business, and this also goes for
  dealing with the pressures of handling technical
  support," said the operations manager of a
  Massachusetts ISP. "No ISP is happy with the fact
  that they have to handle so many calls from
  customers who are not adept with their PCs, but
  we understand that handing them over to a third
  party is the wrong business move."

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Slide 16
MIT5312 Professor Kirs
Outsourcing
Some arguments for NOT outsourcing

• Concerns about quality

• "You have to take a total business view of
  outsourcing technical support," said the customer
  service manager of a New York ISP who chose to
  remain anonymous. "And first of all, you have to
  look at the overall importance of offering
  quality technical support. When you're talking
  about capacity and how much you can sell, you
  have to look not only at technical capacity, but
  also your customer service capacity. If you're
  selling within your technical capacity but over
  your technical support capacity, you're in for
  ruin. Outsourcing technical support is certainly
  an option, but it's not something we would do."

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Slide 17
MIT5312 Professor Kirs
Outsourcing
Some arguments for NOT outsourcing

• Social Impacts

• "In the three years ending in 2003, more than 5.3
  million U.S. workers who had held their jobs for
  at least three years were displaced," Outsourcing
  America states. "In January 2004, only 65 percent
  of them had found full or part-time work, and a
  third of the employed suffered a pay cut of at
  least 20 percent."

• A July 2004 survey in the San Francisco Bay area
  found 27 percent of those polled are worried
  about losing their jobs. "Economists could
  attempt to estimate the lost wages and benefits
  from unemployment and reemployment at lower
  salaries, but there is no way that they can
  calculate the costs extracted from individuals,
  their families and their social networks."

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Slide 18
MIT5312 Professor Kirs
Outsourcing
Some arguments for NOT outsourcing

• Hidden Costs

• The Cost of Selecting a Vendor

• With any outsourced service, the expense of
  selecting a service provider can cost from .2
  percent to 2 percent in addition to the annual
  cost of the deal. In other words, if you're
  sending 10 million worth of work to India,
  selecting a vendor could cost you anywhere from
  20,000 to 200,000 each year.

• Some companies hire an outsourcing adviser for
  about the same cost as doing it themselves. To
  top it off, the entire process can take from six
  months to a year, depending on the nature of the
  relationship.

• Bottom line Expect to spend an additional 1
  percent to 10 percent on vendor selection and
  initial travel costs.

• Source The Hidden Costs of Offshore Outsourcing.
  Sep. 1, 2003 Issue of CIO Magazine

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Slide 19
MIT5312 Professor Kirs
Outsourcing
Some arguments for NOT outsourcing

• Hidden Costs

• The Cost of Transition

• The transition period is perhaps the most
  expensive stage of an offshore endeavor. It takes
  from three months to a full year to completely
  hand the work over to an offshore partner. If
  company executives aren't aware that there will
  be no savingsbut rather significant
  expensesduring this period, they are in for a
  nasty surprise..

• It took an awful lot of time to bridge the
  Pacific and getting that to work correctly,"
  remembers Textron Financial's Raspallo, who spent
  six months and 100,000 to set up a transoceanic
  data line with Infosys in 1998, It also cost an
  extra 10,000 a month to keep that network
  functional..

• Bottom Line Expect to spend an additional 2
  percent to 3 percent on transition costs.

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Slide 20
MIT5312 Professor Kirs
Outsourcing
Some arguments for NOT outsourcing

• Hidden Costs

• The Cost of Layoffs

• To begin with, you have to pay workers severance
  and retention bonuses. You need to keep employees
  there long enough to share their knowledge with
  their Indian replacements. People think if they
  give generous retention bonuses it will destroy
  the business proposition. They cut corners
  because they want quick payback. But then they
  lose the people that can help with the transition
  and incur the even bigger cost of not doing the
  transition right."..

• Bottom line Expect to pay an extra 3 percent to
  5 percent on layoffs and related costs.

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Slide 21
MIT5312 Professor Kirs
Outsourcing
Some arguments for NOT outsourcing

• Hidden Costs

• The Cultural Cost

• You simply cannot take a person sitting here in
  America and replace them with one offshore
  worker," GE Real Estate's Zupnick says. "Whether
  they're in India or Ireland or Israel

• a project that's common sense for a U.S.
  workerlike creating an automation system for
  consumer credit cardsmay be a foreign concept
  offshore.

• Bottom line Expect to spend an extra 3 percent
  to 27 percent on productivity lags.

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Slide 22
MIT5312 Professor Kirs
Outsourcing
Some arguments for NOT outsourcing

• Hidden Costs

• The Cost of Ramping Up

• "If you're an organization that develops and
  maintains by the seat of your pants, or it's a
  case where Mary Jo and Fred have been here for 30
  years and they know how to do everything, you are
  in trouble"

• If a company doesn't create solid in-house
  processes, the vendor will have to put more
  people onsite to compensate for your
  inadequacies, and they'll spend all of your
  savings," says Meta Group's Davison.

• When you have to package specs to go outside the
  company, that has to be done exceptionally well
  and that is time-consuming and costly

• Bottom line Expect to spend an extra 1 percent
  to 10 percent on improving software development
  processes.

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Slide 23
MIT5312 Professor Kirs
Outsourcing
Some arguments for NOT outsourcing

• Hidden Costs

• The Cost of Managing an Offshore Contract

• "There's a significant amount of work in
  invoicing, in auditing, in ensuring cost centers
  are charged correctly, in making sure time is
  properly recorded," explains DHL's Kifer. "We
  have as many as 100 projects a year, all with an
  offshore component, so you can imagine the number
  of invoices and time sheets that have to be
  audited on any given day."

• We knew there would be invoicing and auditing,"
  he says. "But we didn't fully appreciate the due
  diligence and time it would require."

• Bottom line Expect to pay an additional 6
  percent to 10 percent on managing your offshore
  contract

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Slide 24
MIT5312 Professor Kirs
Outsourcing
Some arguments for NOT outsourcing
We arent going any further until the class comes
up with at least three other reasons why
outsourcing is a BAD idea.
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Slide 25
MIT5312 Professor Kirs
Outsourcing
Organization-specific considerations in
Outsourcing

• Development Portfolios

• Organizational Learning

• IT Currency

• IT Organization

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Slide 26
MIT5312 Professor Kirs
Outsourcing
Structuring the Outsourcing Alliance

• Contract Flexibility

• 8-10 Years

• Frequent Renegotiation necessary due to

• Technology changes

• Changing business/economic conditions

• Emerging competitive services

• Performance Standards for System response time,
  availability of service, responsiveness

• Controls

• Safeguards against disruption of operations
  support

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Slide 27
MIT5312 Professor Kirs
Outsourcing
Structuring the Outsourcing Alliance (Cont.)

• Partial Outsourcing

• Can the outsourced area be readily separated from
  the rest of the firm?

• Does the outsourced area require expertise not
  possessed by the firm?

• Realistic determination of Cost Savings

• IT departments will view outsourcing as a threat

• Outsourcing Consultants tend to skew outcomes

• Senior Management Involvement necessary

• Post implementation audits a must

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Slide 28
MIT5312 Professor Kirs
Outsourcing
Structuring the Outsourcing Alliance (Cont.)

• Supplier Stability and Quality

• Need to examine suppliers financial structure

• Note

Insourcing is a more difficult than outsourcing

• Management Fit

• Similarity in Corporate Cultures

• Conversion Problems

• Expertise/Information gained by Outsourcer

• Resolution of Internal Staff hiring/Lay-offs

• Career paths/job security

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Slide 29
MIT5312 Professor Kirs
Outsourcing
Managing the Outsourcing Alliance

• A Strong CIO should be retained

• CIO responsibilities

• Partnership/Contract management

• Long-term vision of architecture/interconnectivity

• Assimilation of emerging technologies/
  discontinuation of obsolete applications/technolog
  ies

• Establishment of continuous internal learning/
  training programs

• Establishment of realistic performance Measures

• Must include intangible measures

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Slide 30
MIT5312 Professor Kirs
Outsourcing
Managing the Outsourcing Alliance (Cont.)

• Mix and Coordination of In-house/ Outsourced Tasks

• Customer/outsourcer Interfaces

• Outsourcing may imply delegation of final
  authority to the outsourcer

• Internal Coordination necessary

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Slide 31
MIT5312 Professor Kirs
Outsourcing
A General Strategy

• Strategic Alignment

• Instead of the traditional hierarchical
  organization, world-class organizations
  understand that "flatter" management structures
  are more effective. For example, an IT leader who
  interacts with other business leaders as an equal
  is more likely to be tuned into their needs and
  to the overall business strategy. Hackett's
  research shows that world-class CIOs are twice as
  likely to report directly to the CEO or chairman
  as CIOs at typical companies.

• Aligning IT with the business is crucial to
  success, yet IT is too often seen as a "support"
  service and is not included in high-level
  decision-making. Having a "seat at the table" is
  essential to improved performance. At 77 percent
  of world-class organizations, the senior IT
  executive is a member of the company's primary
  management committee, compared to just 52 percent
  of typical companies.

• Source Performance Gap Seen Widening in the Back
  Offices of Large Global Corporations
  http//www.sdcexec.com/online/article.jsp?id8962
  siteSection13

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Slide 32
MIT5312 Professor Kirs
Outsourcing
A General Strategy

• Complexity Reduction

• While words like "streamlining" and
  "standardization" have become overused terms,
  world-class organizations achieve tangible
  benefits by abolishing unnecessary complexity in
  business processes. For example, world-class
  procurement organizations reduce complexity
  through strategic sourcing, consolidating their
  purchases among 78 percent fewer suppliers than
  typical companies. They also centralize
  processes Hackett found that a typical company
  with 1 billion in annual spend can save 8
  million in process costs alone by increasing the
  percentage of contracts negotiated centrally from
  20 percent to 80 percent.

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Slide 33
MIT5312 Professor Kirs
Outsourcing
A General Strategy

• Technology Enablement

• Companies with world-class IT organizations now
  spend significantly more on IT 7 percent more
  per end user than their peers, making IT the
  only area studied by Hackett where world-class
  companies spend more than typical ones. While
  world-class organizations spend more on IT, their
  use of technology results in improved performance
  across other SGA areas. Hackett's research found
  that of the companies that achieved world-class
  status in multiple functions, IT was one of those
  functions 86 percent of the time suggesting
  that cross-functional excellence relies on
  world-class IT performance.

• Examples of the value of IT abound in Hackett's
  research. In part by using technology to
  streamline and automate operations, world-class
  organizations spend 45 percent less than typical
  companies on finance operations, while at the
  same time generating tens of millions of dollars
  in savings by getting clients to pay their bills
  28 percent

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Slide 34
MIT5312 Professor Kirs
Outsourcing
A General Strategy

• Business Process Sourcing

• Understanding how to effectively leverage
  business process sourcing options such as
  outsourcing, shared services and offshoring is a
  hallmark of a world-class company. They do this
  at the process level and do not hesitate to
  change sourcing solutions if they fail to produce
  the desired result. Most executives miss the
  potential impact of service globalization due to
  "under-scoping" of initiatives, not realizing
  that offshore resources have matured
  significantly in the last few years.

• A good example of this is in IT. World-class IT
  organizations spend 17 percent more on
  outsourcing technology infrastructure than
  typical organizations, but this enables them to
  spend 20 percent less in IT labor, resulting in 8
  percent lower overall technology infrastructure
  process costs.

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Slide 35
MIT5312 Professor Kirs
Outsourcing
A General Strategy

• Cross-Functional Partnering

• World-class organizations seek synergies across
  business functions through cross-functional
  cooperation to achieve common goals. For
  instance, procurement staff work alongside their
  functional peers to understand business needs,
  plan spending and supplier selection (at the best
  price), taking into account both current and
  future needs. World-class procurement
  organizations are more than three times as likely
  as typical companies to rely on cross-functional
  teaming for supplier development. World-class HR
  managers are up to four times as likely as their
  peers to partner with management in key areas
  such as developing business strategies.

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Slide 36
MIT5312 Professor Kirs
Outsourcing