Transcript Outsourcing and Offshoring: - Pennsylvania State University

Outsourcing & Offshoring:
Some Key Factors Guiding
the Academic & Research
Questions
Risk Identification, Analysis &
Management
Research & Instructional
Opportunities
Abstract
Academic inquiry using industrial organization theories from
economics, law and strategy have developed some useful
conceptual frameworks for the study of outsourcing and the
design of related research streams. Provisionally, outsourcing
is the sub-contracting by organizations to external component
suppliers for product supply or service organizations for
expertise or work that is either unavailable internally
or where internal capacity is planned for elimination. Offshoring
is the outsourcing of various services, including IT, to nations
outside the organization's host country.
Significant research questions are raised by domestic outsourcing
and these are further complicated by offshore outsourcing.
This presentation examines the identification and valuation of
transactions cost risks attendant to outsoruce agreement
negotiations. Research issues are discussed concerning due
diligence failures, service level performance metrics,
dispute resolution risks, ownership and control of data and
intellectual property as well as risks in maintenance of
confidentiality and the protection of privacy. In practice,
there are inevitable difficulties triggered by widespread
ignorance of key cultural and infrastructure differences
that increase the risk of these transactions.
Outsourcing What Activities?
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Traditional Outsourced Services of Expertise
throughout the 20th Century:
• Accounting, Advertising, Auditing, Law, Management
Consulting, Investment Banking, IT Services,
Transaction Agency, Employee Recruitment
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1970s Wave: Manufacturing: components 1st then
finished goods assembly
1990s the Modern Wave: BPO
• Business Process Outsourcing
• HR, Call Centre/HelpDesks, S/W programming, ERM/
EDD, ASP, Medical Diagnosis (xRay)
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Contrast with Traditional InSourcing
• Vertical Integration of 19th Century
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EX: Japanese Keiretsu
Outsourced Activities
(Out)Sourcing Destination?
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Autonomous Internal Unit
Independent Domestic Service Provider
(traditional outsourcing a/k/a
homeshoring)
Int’l: Mandatory Offshore Local (Captive)
Agent
Int’l: Offshore Independent Service
Provider (offshore outsourcing)
Multi-Nat’l Service Provider (pre-Enron
MDPs)
(Out)Sourcing Destination!
Some Persistent Theoretical
Constructs for Outsourcing Analysis
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Theory of the Firm & Transactions
Costs
Agency Costs, Moral Hazard
Labor Economics
Contracting
Core vs. Comparative Advantage,
Specialization
International Relations
• Forcing interdependencies
Theory of the Firm & Transactions
Costs
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Adam Smith’s “Division of Labour”
Coase, Berle & Means, Oliver
Williamson
Optimal Form of Organization
• In-house vs. Out-House
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Firms are “Bundles of Contracts”
Government Agencies Traditionally
InSource but Increasingly OutSource
Agency Costs
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Moral Hazard
Conflicts of Interest
Monitoring
Incentive Alignment
How do Insource Agency Costs Differ
from Outsource Agency Costs
Do Any Additional Agency Costs Arise
in OffShore Outsourcing
Labor Economics
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Anti-Unionism
• Runaway shops, plant closing
restrictions
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United Textile Workers v. Darlington
(S.Ct.’65)
• Union lose “Jurisdiction” over “Work”
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Classic “Race to the Bottom:”
• Job loss & relocation of work
• Labor standards
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Wages
Terms & conditions of employment
• 90s EX: Maquiladora (Maquila)
Contracting Theory
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Form, virtual & long-term contracting
• Alan Blinder, “Offshoring: the Next
Industrial Revolution,” Foreign Affairs
Mar/Apr ’06 @ p.113
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Restrictions on Delegation or
Assignment of contract rights
• Personal Services: NO w/o permission
• Generic Services: YES
International
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Competitive/Comparative Advantage
Cross-Cultural Ignorance Obscures
Outsourcing Vulnerabilities
Trade Barriers, Protectionism, Local
Content Limits Degrees of Freedom
Interdependency Reduces Risk of
Conflict
Incentives to Outsource or Offshore
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In-House Expertise (In)Sufficiencies
• Demand Cyclicality: Under/Over-Capacity
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Supply-Demand Imbalances
• Whose Core Competencies
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ID, evaluate then locating competencies
Comparative Advantage
Scale Economies
• Cost Effectiveness:
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In-House Capacity vs. Outside Provider
Scale Economies & Scarce Supply
Justifying an Outsourcing
Some Key Outsourcing
Variables
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Locus of Specialization
Costs of Activity, Monitoring/QC
Control over Work Performed
Ownership of Work Product
Quality of Work Product
Backups, Substitution, Scalability,
Adaptability
Hoarding Incentive: Size Buffers External
Threats
Negotiating Service Level
Agreements
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RFPs Typically Start the Process
Must Negotiate Commitment Levels
Must Design Effective Metrics
Foolhardy NOT to Predict Capacity Needs,
Costs, Future Expansion & Scalability
SLAs Create Thresholds of Reward &
Penalty
• Define Rights of Termination & PostTermination Transitions
SAS 70: An Achilles Heel?
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Customer (user) of “Service
Organizations” must submit to audit of
outsourced services incl IT services
Service Provider should be obligated under
engagement contract of could simply
refuse to submit or cooperate
Type I: service auditor’s opinion of
provider’s description of controls & their
design suitability
Type II: Type I + testing
Sarbanes Oxley’s Internal Controls (but
only) for publicly traded cos
Are there OffShoring Problems?
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Cost Focus Myopia
• Unwarranted due diligence suspension
• Cultural Ignorance
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Identifying Scalability Challenges
Adequacy of Remedies for Service Failure
Retrieving Hosted Assets
Transitioning to Substitute Service Provider
Designing Service Level Metrics
Incompatible Functions (security)
Lou Dobbs engenders grassroots political
pressure to advance policy reactions:
• Protectionism, Xenophobia, Nationalism
Diagnosing Problems
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Unrealistic Expectations Trigger Most
Problkems
• Lack of Due Diligence
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Persistent Cultural Differences
Contribute to UnMet Expectations
Expanding Role of Outsourcing &/or
Offshoring Consultants &
Intermediaries
Intellectual Property
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Ownership: client, vendor, employees, 3d
parties
Pricing:
Control & Form of Transfer
Creation/Authorship:
Basic Distinction:
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Generic Engine vs. Customized Deployment
Who Owns the Data?
Unique Patentable BMP/Process
Improvements
Open Source
Cultural Respect for IP
Privacy
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THE Model: EU Private Data Directive
• Constrains Int’l trans-border data flows
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American Perceptions: PII Offshoring:
• http://www.whitecase.com/outsourcinga
ndprivacy
• Sensitivity by Data Type, OffShore
Destination
Outsourcing Security
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A Most Challenging Risk Analysis
• Internal security competence vs.
external security vendor trustworthiness
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Classic Expertise v. Expense Tradeoff
• Scale economies if outsourced
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Constrained by High Costs of Failure
Int’l IT Security Standards
• BS 7799, ISO 17799 & ISO 27001
Overcoming Outsourcing
Offshoring Difficulties
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Risks in Rush for Cost Containment
• Due Diligence Failure Arguably Key
• Reputation Raises Both Costs & Reliability
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Complex Negotiations Pre-Empt Difficulties
• EX: Asian ceremonial negotiations:
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Emphasizes: predictions of harmony, develops trust &
tolerance for uncertainty
Presumes: collectivism, avoidance of shame, power
distance
Might Policy Issues Predominate?
What Are the Likely Policy
Approaches?
What Are Useful Policy
Approaches?
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Policy Arguments
• Review the underlying evidence
• Use critical thinking & philosophy of science to
link evidence to arguments
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Predict & verify policy argument source
• Proponents: employers, providers
• Opponents: labor, protectionists
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Why do Policy Analysis of Outsourcing?
• Synthesize, integrate, resolve some conflicts
Academic Research of the Top
Problems Confronting OffShoring
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Scalability & Adaptation to Changing
Business Models
Service Level Quality Metrics/Rewards
Service Failure Dispute Resolution
Recovering Stranded Data
Ownership of IP, Data
Classic Lock-in Tradeoffs
Political Morass – “Lou Dobbs” Effect
Some Academic Research
Applications to OffShoring
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Social Psych, Management, Strategy
• Interviews, Questionnaires, Self-Reported
Behaviors & Attitudes
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Artifact, System Design
• Develop Standards, Best Practices, Applications
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Economic Modeling (macro & micro)
• Improve prediction & decision rules
• ID problems, remediate with process (re)design
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Public Policy Analysis
• Satisfy constraints
• Pre-empt or soften onerous policy changes
Developing my OutSourcing &
OffShoring Research Agenda
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Public Policy Analysis
Process Design Standardization
Service Level Commitment Ontology
OutSourcing Curricular Component in
Services Science Program Development
Multi-National & Cross-Cultural Risk
Assessment & Response Model
Multi-Disciplinary Practice (MDP)
Perspectives