Software Outsourcing: Why, When, What

Software Outsourcingwww.softheme.comWhy, When, What www.softheme.comOutsourcing to Softheme™ Software Outsourcing: Why, When, WhatTable of ContentsPrefaceHistorical BackgroundWhy Do Firms Outsource?When to Outsource?What to Do and Not DoFactors that Support Outsourcing The Risks of OutsourcingCore Competencies and Critical Success FactorsOutsourcing Trends and Future Projectionswww.softheme.comOutsourcing to Softheme™ Software Outsourcing: Why, When, WhatToday’sbusinessenvironmental,organizational,andtechnologicalfactorsrequirebusinessestooperateefficientlyandeffectivelyinordertobecompetitive.Towardthosegoals,managersemploymanystrategiestoimproveproductivity,includingstandardization,automation,andbusinessprocessreengineering.Additionally,theyrestructurethebusinessorganizationstobeleanandflatsothattheycanbecomeflexibleinrespondingquicklytochangesinenvironmentandcutomers’needs.Outsourcingisanothervaluablestrategymanagersusetoachievetheabovegoals.Prefacewww.softheme.comOutsourcing to Softheme™ Software Outsourcing: Why, When, WhatHistorical BackgroundThepredominantsupplychainmodelforseveraldecadeswasverticallyintegrated.Eachmemberofasupplychainwasconsideredtobepartofthesameindustry.Alltheancillaryactivitiesthatsupportthesupplychaindirectlyorindirectlywereincluded.Steadily,productsbecamecomplexandthescaleofoperationsincreasedandmanagementofentireoperationswithinonecorporationbecamelessfeasible.Thisresultedintheincreasinglypopularuseofoutsourcingandhasresultedinverticaldisintegrationofcorporationsandsupplychains.Astravelandcommunicationbecameeasierinthe1970sand1980s,astraderestrictionsincreased,andasthegapinwagesbetweendevelopedanddevelopingcountriesincreased,outsourcingbegantomoveoff-shore.www.softheme.comOutsourcing to Softheme™ Software Outsourcing: Why, When, WhatHistorical BackgroundIn2002,forinstance,Indiahad90%ofU.S.organizations’informationtechnology(IT)off-shorebusiness.ChinaloomsasIndia’sbiggestcompetitor,althoughsomeconsiderthetwoasnoncomparableatthistime.Othercountriesconsideredtobeattractiveasoff-shoreoutsourcingsitesincludeMalaysia,theCzechRepublic,Singapore,thePhilippines,Brazil,Canada,Chile,Poland,Hungary,Russia,andVietnam.www.softheme.comOutsourcing to Softheme™ Software Outsourcing: Why, When, WhatHistorical BackgroundIntheageoftheInternetandWorldWideWeb,acompany’slocationhardlymatters.Inthepast,theeducatedandskilledlaborfromlow-costcountriesimmigratedtotheU.S.Duringthelastdecade,fastercommunicationsandimprovedinformationallowcompaniestoeasilysendinformationorientedworktoanylocationontheglobe.Ultimately,countrieswithlow-paidbutwell-educatedworkerswillbenefitgreatly.However,thecountryoforiginoftheoutsourcingalsobenefits.www.softheme.comOutsourcing to Softheme™ Software Outsourcing: Why, When, WhatWhy Do Firms Outsource?Companiesoutsourcefunctionsforreasonsthatareorganizationallydriven,improvementdriven,financiallydriven,revenuedriven,orcostdriven.Outsourcingcanbeviewedasacomponentofcorporateandindustryinternationalexpansionandrestructuring.Five horizons of the global industry value chainMarket entryProduct specializationValue chain disaggregationValue chain reengineeringNew market creationwww.softheme.comOutsourcing to Softheme™ Software Outsourcing: Why, When, WhatWhy Do Firms Outsource?Product specializationMarket entryEntering a country for purposes of market expansionProduct specializationSpecializationtakesplaceindifferentlocations.EachlocationmayengageinfinalgoodstradewitheachotherValue chain disaggregationProductcomponentsaremanufacturedinacertainlocationandassembledelsewhereValue chain reengineeringReengineering processes to capture additional advantages from production cost differentialsNew market creationNew market segments are penetrated as a matter of capturingthe full value of the company’s global activities.www.softheme.comOutsourcing to Softheme™ Software Outsourcing: Why, When, WhatWhen to Outsource?Product specializationFactors that Support OutsourcingCharacteristicsoftoday’soutsourcingenvironmentaremanyandvaried.Thestrategicchangetooutsourcingishighlyevidentinthesoftwareindustry.Frequentchangestosoftwareespeciallyoftenresultinanorganizationturningtooutsourcingasasolution.Reasonsstudiedforthiscanbegeneralizedtoalloutsourcing,andinclude:TheturbulentmarketwillneedcorporationstobecustomerfocusedTherearepressuresoncorporationstocontinuouslydevelopnewproductatreducedcostExtensivecustomizationisenabledbyITthroughmasscustomizationThemarketneedcanbefulfilledbyflexibleandadaptableorganizationalstructurewhichispossiblewithIT-enabledprocesseswww.softheme.comOutsourcing to Softheme™ Software Outsourcing: Why, When, WhatWhen to Outsource?Product specializationFactors that Support OutsourcingPreviouslyidentifiedfactorsincludetimecompression,shortproductlifecycles,strategicdiscontinuity,increaseinknowledgeintensity,andcustomer-focusedapproach.Thesechangesare:www.softheme.comOutsourcing to Softheme™ Software Outsourcing: Why, When, WhatWhen to Outsource?Product specializationFactors that Support OutsourcingCustomer focusShrinkage in product/systems life cycleCompetition and real-time operationsSocietal, political, and ethical factors3412Global economyChanging workforce and job lossTechnological innovations and obsolescenceOrganization structure and corporate culture5678www.softheme.comOutsourcing to Softheme™ Software Outsourcing: Why, When, WhatWhat to Outsource?Product specializationThe Risks of OutsourcingDespitethepurportedbenefitsofoutsourcingandthewiderangeofsuccessstoriesthathavestimulatedanunprecedentedgrowthrate,therearepotentialrisksaswell.Anoutsourcingprojectmightfailbecauseofpoorselectionofthevendor,mismanagementoftheoutsourcingcontract,inferiorperformancebythevendor,lackofacceptancebytheendconsumer,orotherreasonsSelection of the VendorMismanagement of the Outsourcing ContractInferior Performance by the VendorLack of Acceptance by the End Consumerwww.softheme.comOutsourcing to Softheme™ Software Outsourcing: Why, When, WhatWhat to Do and Not Do?Product specializationCore Competencies and Critical Success FactorsDecisionsastowhatandwhethertooutsourceshouldbetiedtoanidentificationandunderstandingofanorganization’scorecompetenciesanitscriticalsuccessfactors.Suchanidentificationandunderstandingcanbealengthyprocess.However,itistheonetruewaytodeterminewhetheraprojectshouldbeorshouldnotbeoutsourced.www.softheme.comOutsourcing to Softheme™ Software Outsourcing: Why, When, WhatWhat to Do and Not Do?Product specializationCore Competencies and Critical Success FactorsIf a task is a both a core competency and a critical success factor, it should not be considered for outsourcing. Such tasks are at the heart of the company.Tasks that are core competencies but not critical success factors should be reassessed.Those tasks which are not core competencies are the most likely candidates for outsourcing.If an organization intends to bring an outsourced task back in-house a some future time, managers should be cautious. Once the expertise has been released to the outsourcer, it is difficult —if not impossible —to regain such expertise in-house.www.softheme.comOutsourcing to Softheme™ Software Outsourcing: Why, When, WhatWhat to Do and Not Do?Product specializationOutsourcing Trends and Future ProjectionsOutsourcing of information technology functionsOutsourcing of pharmaceutical functionsOutsourcing of customer care functionsOutsourcing finance and accounting (F&A) functionsOutsourcing of human resource (HR) functionsOutsourcing of research and development (R&D) functionswww.softheme.comOutsourcing to Softheme™ Software Outsourcing: Why, When, WhatWhat to Do and Not Do?Product specializationOutsourcing Trends and Future ProjectionsOutsourcingofinformationtechnologyfunctionsisahugemarketplace.IToutsourcingbeganasacost-reductiontool,buthasevolvedintoacomponentofbusinesses’overallcorporatestrategies.Ithasgrownfromsimpleapplicationstoamuchwidersetofbusinessfunctions:logistics,payroll,humanresources,legal,andsoforth.Ithasbecomepervasiveandstrategic.www.softheme.comOutsourcing to Softheme™ Software Outsourcing: Why, When, WhatWhat to Do and Not Do?Product specializationOutsourcing Trends and Future Projections“Back-sourcing”IT off-shoringWeb-based and e-business outsourcing partnershipsApplication service provider (ASP) industryGrowth Areas in IT Outsourcingwww.softheme.comOutsourcing to Softheme™ Software Outsourcing: Why, When, WhatWhat to Do and Not Do?Product specializationOutsourcing Trends and Future ProjectionsOutsourcingofpharmaceuticalfunctionstraditionallyhastakentheformofoutsourcingdrugdevelopmentandmanufacturingtocontratresearchorganizations(CROs)andcontractmanufacturingorganizations(CMOs).Outsourcingofcustomercarefunctionsbymovingentirecontactcentersoff-shorehasbecomeverypopular.Thefunctionsperformedbycustomerservicecentersaremoreimportantthantheirlocation.Thediscrepancybetweenlabor,realestateandinfrastructurecostson-shorevs.off-shore,makesthisalogicalfunctiontooutsource.Customercontactcentersarea$650billionindustry(Cleveland,2003).www.softheme.comOutsourcing to Softheme™ Software Outsourcing: Why, When, WhatWhat to Do and Not Do?Product specializationOutsourcing Trends and Future ProjectionsOutsourcingofhumanresource(HR)functions,suchaspayroll,recruitment,hiring,training,benefitsmanagement,employeeassistanceprograms,executivecompensation,aswellashealth,safety,andregulatorycompliance,isgainingmomentum.Outsourcingfinanceandaccounting(F&A)functionshavebeenprevalentsincethebeginningofbusiness.Now,thereisagrowingtrendforF&Afunctionstobeoutsourcedoff-shore,primarilytosavelaborcosts.www.softheme.comOutsourcing to Softheme™ Software Outsourcing: Why, When, WhatWhat to Do and Not Do?Product specializationOutsourcing Trends and Future ProjectionsOutsourcingofresearchanddevelopment(R&D)functionstakesvariousforms.Drugcompaniescontractwithoutsidefirmstoexplorenewcompoundsforpossibletestingandlaunching.AdifferentformofR&DoutsourcingisusedbycompaniessuchasDell,Motorola,andPhilipswhichbuycompletedesignofdigitaldevicesfromAsiandevelopers,tweakthemtotheirownspecifications,andattachtheirownbrandnames.AnotherapproachisthatusedbyBoeingCo.whichcontractswithIndia’sHCLTechnologiestoco-developsoftwareforeverythingfromthenavigationsystemsandlandinggeartothecockpitcontrolsforitsupcoming7E7Dreamlinerjet.Thank you!2010 | Softheme Team | Kyiv, Ukraine | Software Outsourcing Solutionswww.softheme.com»Outsourcing to Softheme™Questions?→info@softheme.com