Offshore Outsourcing free essay sample

Aztec Software has an offshore development enter in Bangor, India, that develops the new integration product, Embarcadero DOT/Studio. The entire product lifestyle -? from development to maintenance takes place in India. Aztec work on the DOT/Studio tool helped Embarcadero to quickly establish a competitive market position for this particular product. There are many definitions of offspring as outlined below, but most accept that it generally refers to the process of an organization replacing services obtained from domestic providers with imported services (Greene 2006; Backchat et al. 004). Offspring refers to the acquisition of intermediate inputs by companies (or governments) from locations outside the consumer country. It is the crossing of international borders that distinguishes it from outsourcing in general (Kirkland, p. 4 2005). Offshore outsourcing can have far-reaching implications beyond those associated with onshore outsourcing.Various authors have made the assumption that the countries that send work offshore are primarily developed nations (Interrogator, 2001; Spray, Maydays Verdi, 2006; Raja 2004, Kodiak Lair, 2007). We will write a custom essay sample on Offshore Outsourcing or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page Most definitions assume that offspring is directed to developing countries in the interest of saving costs; it was possible o shift the actual production location of services to lowest countries in a manner theoretically transparent to end-users (Kirkland, 2005 ; Corroboratory Remington, 2005). 1 The World Trade Organization (WTFO) in its General Agreement on Trade in Services used the following parameters to define offshore outsourcing (Corroboratory Remington, 2005): Despoilers and buyers remain in their respective locations; Dmoving the service recipient to the location of the service provider; [Noncommercial presence of service provider in a foreign country; and C]temporary migration -? seller moves to the location of the service buyer.All definitions are compelling but for the purpose of this thesis, the previously stated definition of offshore outsourcing as the delegation of administration, engineering, vendor in a lower-cost location will be used (Robinson Oklahoma 2004). The WTFO parameters will also be respected as they expand upon that definition. 2. 3 History of IT outsourcing The history of IT outsourcing is part of IT in that the early time-share systems were a form of outsourcing. Sass sass 1 9805 sass 20005 20105 Hardware Software Standardization Total Solution Time Sharing Facilities Management Infrastructure Client Server Application OutsourcingProcess Offspring Rationalization Layering Best of Breed Technical Models Utilized Trends Figure 2. 1: Technical Models and Trends Figure 2. 1 gives an indication of the timeline for technical models and trends by combining charts and information (Hillocks Fenny, 2006; Zoning et al. , 2006% Wagner et al. , 2006; Lee et al. , 2003; AAA, 2007 and AAA, 2007). In the early 1 sass software programming was first moved offshore as software production was easily movable, since it seldom needed to be committed to a physical medium (Dossals Kenney, 2004).However, offshore outsourcing as a trend didnt begin until relatively recently. Since Sodas initial decision to outsource the bulk of 12 their IT functions in October 1989, they have outsourced the bulk of their data centre operations to IBM in an initial IIS$250 million deal that was originally scheduled to run for a 10-year span (Lacily Hillocks, 2000; Dibbers, et al. 2004; Patton, 2005). It was a momentous occasion for Kodak and dozens of other large companies would soon follow the film giants lead. Sodas deal set the stage for massive outsourcing negotiations with vendors such as IBM and DES, and brought about a basic change in the way corporate America approached IT. Suddenly Coos were paying more attention to core competencies, cost saving and strategic partnerships with their IT vendors. Service quality was also an important factor (EBBS, 2006; Patton, 2005). Because of the success of the Eastman Kodak outsourcing agreement of 1989, multi-sourcing has become an integral part of the IT industry.General Electric (GE) was a business leader in the offshore outsourcing arena. In the early sass Jack Welch, then CEO of GE, introduced a new rule that governed Gees offshore actions called the 70:70:70 rule (EBBS, 2006). In an e- mail to GE employees, Welch mandated that 70% of Gees IT work would be outsourced. Out of this, 70% of that work would be completed from offshore development centers and from that, about 70% would be sent to India. This has resulted in a total of about 30% of Gees work being outsourced to India (Scope, 2009; Spray et al. 2006). Currently, offshore outsourcing to India receives the most press but other countries such as Poland, Ireland (sometimes referred to as the Celtic Tiger) and Israel are just as prominent. Emerging countries such as China, the Philippines, Russia, Mexico and South Africa should also be included in any discussion about major offshore outsourcing venues. The strong growth in IT outsourcing can be attributed to the tight US labor market caused by the dot. Com boom and the year 2000 problem (Y K) (Friedman, 2005; Hillocks, Fenny, 2006). In Australia, national organizations such as National Australia Bank (NAB) and Tellers continue to outsource to offshore IT groups (Dibbers et al. , 2004). BP- Billion and Shell Australia have transferred data centers and IT support to Malaysia and Singapore from Melbourne (Bogota, 2005). In the late 1 9905 and early 20005 outsourcing maintained a growth rate of 20% per year, although recent figures indicate that it appears to be slowing. In 2005, the total contract value of such mega-deals was just under ISSUES billion -? the lowest such 13 total since 1996.HTTP predicts that the first absolute decline in commercial IT outsourcing revenue could occur between 2006 and 2007 (Gibson, 2006). Some authors argue that this was due to more focused outsourcing deals i. E. Multi-sourcing and tighter IT budgets which may have lessened the prevalence of long-term mega deals. Wagner et al. , (2006) highlighted best of breed in their study and linked it to ERP systems that are responsible for the current trend of layering in which existing ERP systems that replaced best of breed as part of the rationalization are being enhanced with specializes systems.In interviews conducted at Tellers, a new terminology of layering was used to describe current systems (Herbert Murderer, 2001; AAA, 2007; AAA 2, 2007; Pair Cinematographic, 2005; Peppier, 1999). A typical example is NAB, which uses SAP as core ERP but layers specialist systems such as Bank Analyses on top of ERP/SAP. Although not following a best of breed concept in special circumstances, this methodology does leave room for exceptions in strategic requirements. Table 2. Gives a timeline for relevant outsourcing literature.TimeLine for Outsourcing Literature Related Articles 1776: Adam Smith, in The Wealth of Nations, formulates a theory of competitive advantage, expounding the notion of outsourcing as a way to cut costs by hiring cheaper labor in less developed countries. (Smith, 1776) 1963: Electronic Data Systems signs an agreement with Blue Cross of Pennsylvania to handle its topdressing services the first time that a large corporation has turned over its entire topdressing department to a third party. (Electronic Data Systems, 2008) ass and ass: Cost reduction pressure and need for deter communications. Lacily, Hillocks Fenny, 1995; Costa Beaumont, 2001 1989: Total outsourcing of Sodas IT function with the anticipation of about 50% savings in cost. (Hierarchies Lacily, 1996; Kelly, 2004; Lee, 2000) Cost containment as well as reduction and the need to hire IS professionals are proposed as the reasons behind outsourcing. (Cobol Apt, 1995) Improved cost predictability focus on strategic use of IS, resulting in Transaction Cost Theory (TACT) being proposed as a measure of outsourcing. (Williamson, 1979) General framework Of procurement strategies for IS development. (Sardine Pepslnine, 1994) .NET 8 T PI is a sourcing advisory company; refer: wan. . Tip. Net 14 TimeLine for Outsourcing literature Related Articles Contingency framework for analyzing economically efficient relationships after the outsourcing decision. (Sleeper, 1993) Transaction Cost Theory (TACT) is disproved and fails to explain outsourcing experience and contradiction Of TACT. TACT is fraught with imprecise constructs that are difficult in operational. (Lacily Hillocks, 1995; Auber Weber, 2001) Risks and benefits of outsourcing lost in rhetoric (Backchat, Panegyric Cravings, 2004; Meyer, 1994) Loss of control over the quality of the software.Fox, 1 994) Reduced flexibility and loss of strategic alignment are linked as drawbacks of outsourcing. (walker, 1985) Analysis of pitfalls and potential risks of outsourcing gives guidelines for successful contracts, costs of negotiating, monitoring outsourcing contracts and cost of incurring. (Dibbers et al. , 2004 Lacily Hierarchies, 1995) Conduct in-depth interviews with firms and executives in order to understand the forces that drive outsourcing decisions and how these decisions are made. Clark, smug McCrae, 1995) Analysis of advantages and disadvantages of outsourcing based on 11 risks. Earl, 1996) Observation that major driver for outsourcing is disparity in the salary levels between developed and Third World countries. (Apt Mason, 1 995) Studies find that some strategic applications are not (and are unlikely to be) outsourced to foreign countries in the future due to issues of communication and coordination, potential violation of intellectual property rights, concerns on unclear government rules, cross-border twofold and trade in service. Paten Jurists, 1 994) Hidden cos t of outsourcing from users perception. (Birthlimy, 2001 ) Literature identifies service quality (SURVIVAL) as n important instrument used to measure the service actually experienced by customer due to outsourcing. (Wrigley, Dry Farmhand, 1997) Changes in reasons for outsourcing: L]Delivered quality of service; C]Decades to new technology; C]Divisible and responsive systems; C]Defocus on business competencies; and C]Teleprompter in cash flow. AAA-Grim, 2003; Kebabs Kebabs, 2003) 15 Attempts to provide a complete guide to the complex issue of outsourcing and strategies: C]Dont Outsource Core Competencies; and ADSTAR Small. (Your, 2005) Globalization seen as a part of the world economy tit both positive and negative aspects. For positive aspects see (Robinson Oklahoma, 2004; Patterson, 2006; Underwater, 2005) and negative aspects (Trucker, 1997; Greene, 2006; Interrogator, 2001 Examines how counties provide and implement IT outsourcing services e. G. China. Drivers and obstacles of outsourcing practices in China. (Luau Ghana, 2006) Table 2. 1: Timeline of Major Outsourcing Literature Most of the current literature is based on the American offshore outsourcing experience, with the remaining literature primarily concerned with European experiences in this field. 2. 3. 1 ERP offshore outsourcing Fortune 500 companies have implemented ERP systems such as SAP, Peoples and Oracle (Snyder Basel, 2010). ERP systems were originally embraced because they promised the power of enterprise-wide, international coordination and integration. ERP technology has moved from mainframe-based, batched operations to the clerestories architecture and Internet-enabled, real-time operations (Lenders, 2000). Currently, Accentuate, IBM and Price Waterholes Coopers dominate the field of ERP systems implementation consultancy. ERP are a rapidly growing segment of the IT market. In 1996 ERP IT outsourcing was estimated at around LOSSES billion Ross (Thralldom Guarani, 1998), while in 2008 Gardener estimated that the world outsourcing market for IT services had grown to IIS$748 billion in 2007 (Gardner, 2008; Richter, 2008).Studies have indicated that for every dollar spent on ERP systems such as SAP, an expense of $10 in consultancy can be expected (Perez, Went Mathematician, 2004). As defined by Pair Cinematographic (2005), ERP functional development and deployment have been classified into four main areas, namely: ICC]markets; 9 Gardner is a major IT research company; refer www. Gardner. Com 16 Kicked operations; C]Administrators; and Addressers. This standardization in corporate systems has also allowed standardization in processes, procedures and support.This then brings into question the need for internal business IT support for generic processes and development, as individual resources are better able to focus on value adding (MacDonald, 1996). 2. 32 IT organization workings Organizations are becoming increasingly complex with multiple business units and various IT departments, both internal and external, combined in strategic partnerships. One of the problems for management is achieving a reduction of internal and external boundaries so that diverse groups can ark with better coordination.There are several ways in which an outsourced IT group can work with users to reduce the us versus them boundary. Authors such as Gaffe Ridings (2003) suggest reduction of the inter-group boundaries in order to increase the perception of responsiveness and thus increase their acceptance of the IT work by creating shared goals, user education and joint work activity. In a typical Australian IT project, touch points, direct and indirect lines of communications exist between: Itinerant business unit users; Collaborate business units; L]The head office;C]The IT department for application and hardware support; specialized project teams; Elderliness; and C]Outsourcing partners. These various teams are split into a multitude of roles that include business experts and analysts, developers, managers, functional experts and testers. In essence this means that outsourcing adds another dimension to a complex situation. 17 The lines of communication are complex, in that service chains within a corporations structure and with outside customers and vendors are all interlinked in one way or another as demonst rated in Figure 2. . Customers Business Units Units Outsourcer Hardware Us port Vendors Vendor IT Department Support Project Teams Outsourcer Developers Corporate Figure 2. 2: Typical Touch Points in an IT Organization 2. 3. 3 Trends in IT The current trend is for organizations to view IT as a commodity that can either be managed with alliances or outsourced. An increased reliance on software giants such as Oracle or SAP to provide end-to-end solutions and the move away from best of breed has been replaced by a layering concept.For example, at Tellers the major Human Resources systems are provided on the primary SAP ERR system (with Organization Structure as the source of truth) UT they utilities specializes systems, each from different vendors, as layers to meet specified requirements such as training, portals and wages comparison (AAA 2007; Nordic 2006). This results in different outsourcing contracts with hardware vendors, system vendors and applications support. A hierarchy of support is employed from low-level (i. E. Alp desk) to high-level vendor support for strategic and complex problems. The result is a combination of a vertical, horizontal and matrix organization of relationships and partnerships. The role of the internal IT department has changed from one of a service reviver with skills in systems development to one of facilitating a partnering model that provides the social glue to hold diverse systems and support together (AAA 2006; 18 Based on the research of Zoning et al. (2006), Wagner et al. , (2006) Lee et al. 2003) AAA (2007), AAA (2007) and the researchers experience, Figure 2. I was constructed to give the timeline of IT trends in relationship to the technical models in use. The change towards layering has resulted in software giants buying out smaller specialist software providers whose products they then add or layer onto existing products (Ellis, 2007; Snyder Basel, 2010). A software companys assets are all inside peoples heads ((Poisons, 2007).. Examples of this are Peoples buying J. D.Edwards, then Oracle purchasing both Peoples and Hyperfine and attempting to integrate them. The combining of Oracle Financial, Hyperfine, Business Object, Peoples and J. D. Edwards allows the combined entities to compete with ERP market leader SAP, which in turn has purchased Business Objects in the late sass (Philips, 2007; Wailing, 2007). 2. 4 IT outsourcing: success or failure Authors such as Interrogator (2001) argue that globalization and the free trade yester have been the catalysts that have helped to make offshore outsourcing the success that it is today.Outsourcing has been the result of the global agreement on ideology, with a convergence of beliefs in the value of a market economy, trade liberations and a movement toward a borderless world (Raja, 2004). It can be argued that the emergence of off- the-shelf software such as SAP for corporate usage has helped develop a system for standardizing software applications, making the landscape suddenly more conducive to IT outsourcing (Levine Ross, 2003). The drivers of outsourcing can be summarized as in Table 2. Drivers of Outsourcing Identified by Improved productivity (Thralldom Guarani, 1998) Centralized IT delivery model (Currie Celestial, 2001) Flexibility in staffing levels( Aloof, 1996) Increase in cost-efficient foreign competition (Corroboratory Remington, 2005) Focus on core business (Delbert Inhere, 2006 in pervade, 2001) Organization structure (Your, 2005) IT sourcing partnerships (Welch 1999; Ye, 2005) Competitive advantage (Delbert Inhere, 2006) World Best Practice (Barr, 2005) 19 Table 2. : Drivers of Outsourcing Authors such as Catchalls Soil-Sthere (2005) have attempted to rank ritual success factors and link them to the management theory used in managing the outsourcing relationship. These are outlined in Table 2. 3.Rank Critical success factors Theory 1 Core competency management Theory of core competencies 2 Stakeholder management Stakeholder theory 3 Production cost reduction Neoclassical economic theory 4 Social exchange exploitation Social exchange theory 5 Transaction cost reduction Transaction cost theory 6 Vendor resource exploitation Resource-based theory 7 Contract completeness Contractual theory 8 Relationship exploitation Relational exchange theory 9 Vendor behavior control Agency theory 0 Demarcation of labor Theory of firm boundaries 11 Alliance exploitation Partnership and alliance theory Table 2. : Ranking of Critical Success Factors in IT Outsourcing Relationships 2. 41 Considerations in the outsourcing process The decision to outsource IT is a variant of the classic make/buy decision an organization can invest in the non-core activity of supporting IT infrastructure, or they can contract out (Lealer, 2006; Fine Whitney, 1999).The considerations and factors relating to outsourcing are many and varied but may be based on skill requirements, privacy of information, quality and tragic direction of organizations. Factors such as the quality of service rather than labor arbitrage, is emerging in European countries as a factor in the outsourcing decision (Kodiak Musketeer, 2008).