The Handbook of Global Outsourcing and Offshoring

By end of 2009, Information Technology outsourcing (ITO) revenues exceeded US$ 250 billion while those for Business Process outsourcing (BPO) were more than US$ 140 billion. The revenues from offshore outsourcing of business and Information Technology (IT) services exceeded US$ 60 billion, and over the next five years the compound annual growth rate for offshore outsourcing is expected to be about 20%. By 2006, over 200 firms from the Forbes 2000 companies and nearly 50% of the Fortune Global 250 had offshored IT and business process activities. In 2008 India posted some 65% of the ITO and 43% of the BPO market (Willcocks and Lacity, 2009). It is common to talk of Brazil, Russia, India and China as the BRIC inheritors of globalization, offering both offshore IT and back-office services, and also, with their vast populations and developing economies, huge potential markets. In 2008 India exported US$ 40 billion of such services, while China, Russia, and Brazil managed US$ 5 billion, US$ 3.65 billion, and US$ 800 million respectively. But the phenomenon of offshoring and offshore outsourcing is certainly expanding, with, on our count, some 120 centers developing around the world. Therefore it has become increasingly important to understand the phenomenon, not least as a basis for suggesting what directions it will take, its impacts, how it has been conducted, and how its management can be better facilitated.

With the advent of globalization and enhanced levels of competition, many organizations have started to have considerable difficulties in developing and maintaining the range of expertise and skills needed to compete effectively. The emergence of American, European, Japanese, and Third World multinationals has created a new competitive environment, requiring the globalization, or at least semi-globalization of corporate strategy. This need has led many companies to engage with various kinds of sourcing strategies, such as outsourcing, offshoring, offshore outsourcing, nearshoring, and onshoring. Therefore, this chapter will focus on: the key terminologies used in the sourcing literature;the key drivers of global sourcing;the benefits for clients and vendors from engaging in global sourcing;present market trends in the global sourcing market;future developments of the global sourcing market.

While global sourcing has been gaining wider recognition as a significant approach to boost the efficiency and competitiveness of the firm, various types of global sourcing models have begun to emerge. These include domestic outsourcing, offshore outsourcing, domestic insourcing, and captive models. The major distinction between these models lies in whether the function is performed by a subsidiary business unit of the firm or by an external vendor, and also whether the function is performed in the country where the organization is located or in an offshore location. More specifically: Domestic outsourcing refers to contracting with a third party who is situated in the same country as the client organization for the completion of a certain amount of work, for a specified length of time, and at a certain cost and level of service.Offshore outsourcing, on the other hand, refers to outsourcing arrangements with vendors who are situated in a different country from the client organization.Domestic insourcing refers to managing the provision of services internally, within a business unit that is located in the same country as the organization.Captive models refer to the strategic choice to locate organizational activities within a wholly owned subsidiary in another country.

This chapter discusses the maturity of various geographical locations worldwide and the factors that clients and suppliers take into account when deciding on their offshoring and offshore outsourcing strategies. We focus on the following aspects: the comparative advantages of different countries;why certain countries dominate certain areas of services;the advantages of nearshoring as a sourcing option;which countries emerge as the most attractive destinations for offshoreoutsourcing and offshoring (beyond Brazil, Russia, India, and China).

As has been more extensively illustrated in Chapter 1, the global sourcing market is large and the services it offers range from relatively simple processes or call centers to the radical transformation of entire back-office functions. The supplier base is equally diverse, ranging from locally based firms that specialize in particular services and/or industries to offshore or global providers that promise to offer a high quality of service at a low cost.

What happens to knowledge when an organization outsources? Despite the rapid growth of IT outsourcing and business process outsourcing over recent years, there is still a considerable time-lapse in grasping the implications for knowledge and expertise management in these processes. Organizations often have limited understanding of how new knowledge can be created and exploited, especially when outsourced activities are considered as “non-core” services. As Willcocks et al. (2004) point out, in an increasingly commoditized outsourcing market, with evermore-demanding client companies, competing on leveraging knowledge-related value may well become the new game in town.

One key factor in achieving success in global sourcing arrangements is the quality of the client-supplier relationship. Similar to marriage between two people, a sourcing strategy should be geared toward selecting the most suitable partner. Selecting the right vendor is critical to maximizing the benefits and minimizing the risks associated with the venture. In this chapter we will review the major considerations during the vendor selection process, such as: the key criteria for evaluating vendors;the number of vendors involved in one sourcing contract;which capabilities are needed to be developed and retained;the critical legal issues involved in outsourcing and offshoring;the role of the contract in managing risk.

Although the multi-billion dollar outsourcing industry is flourishing, a number of outsourcing arrangements have been underperforming and some have even been terminated. Poor management and governance of the outsourcing relationship have been often cited as the primary reasons for less successful outsourcing contracts. Before we investigate the management and the governance of outsourcing relationships, which will be further discussed in Chapter 8, it is important to understand the key stages of the outsourcing process, as well as the key practices that can be applied in each stage.

As mentioned in Chapter 7, while the outsourcing industry has demonstrated an impressive growth during the past years, quite a few outsourcing relationships have ended in poor results and some have even been terminated early. Both the professional press and academic publications have cited poor governance as a primary factor leading to these results. In this chapter, therefore, we focus on understanding governance issues involved in outsourcing projects and the practices that could further support formal structures. In particular, we review the following issues: the governing structures for outsourcing ventures;the roles involved in governing outsourcing projects;the most effective governance practices for outsourcing projects.

Globally distributed work is an integral part of offshore outsourcing. Offshoring and offshore outsourcing often imply that client and supplier teams need to work together in a globally distributed fashion. In such cases, some teams will be based onshore, either at the client’s site or at the supplier’s onshore site, and others will be based offshore, for example in Mumbai, India. To define them, globally distributed projects are projects that consist of two or more teams working together from different geographical locations to accomplish project goals. These teams face major challenges on various fronts, including cultural differences, language barriers, national traditions, values, and norms of behavior. Therefore, this chapter will focus on the following aspects: the challenges distributed teams such as offshore outsourcing teams face;the methodologies available for managing globally distributed teams;the role of face-to-face meetings in facilitating collaboration and other social aspects that matter for distributed collaboration;the tools and technologies available to support distributed collaboration;what client firms can do to help build truly collaborative teams.

This chapter will discuss emerging business and technology-related trends in the field of sourcing. It will also consider how sourcing strategy can be used as a competitive differentiator and how firms can learn to innovate across geographical and organizational boundaries. We will focus on the following aspects: some of the most recent business and technology-related trends in global sourcing;whether strategic advantages can be achieved from introducing such business solutions;the strategies that captive centers could pursue;whether firms can produce innovative products and services through global sourcing.

This teaching case provides a practical illustration of the challenges of using IT outsourcing and evolving the IT function’s structure, governance arrangements, and capabilities in a dynamic business context. A central focus is on retained core IT capabilities at Commonwealth Bank of Australia (CBA) in the 1997–2006 period, needed to gain business value from IT and IT suppliers. It foregrounds two persistent issues in IT management. First, what are the IT capabilities that must be retained within an organization? Second, what are the mechanisms for developing, nurturing, maintaining, and evolving these capabilities? The teaching case shows the dynamic and evolutionary nature of this process.

Imagine you are the head of a back-office function in a multi-billion dollar, globally dispersed manufacturing company. Your CEO mandates that you have three years to slash your costs by 40% while improving service levels. A mission impossible?

“We have an innovative workforce solution for offshore outsourcing,” asserted Carlos Apéstegui, head of PanGenesis’s Costa Rican operations, speaking to his guest. “We have a unique apprentice program to tap young Costa Rica students and a special approach to importing highly qualified labor into Costa Rica. We have created a formula that allows us to lower charge rates, perform faster development — and all this in this attractive small nation.” He finished his sentence by waving at the many tropical plants all around him in the garden of the hotel which was hosting a large technology conference.

This teaching case provides a practical illustration of the challenges of using IT outsourcing and evolving the IT function’s structure, governance arrangements, and capabilities in a dynamic business context. A central focus is on retained core IT. The case was developed as a foundation for class discussions and learning. It is based on actual companies and events, though some details have been disguised or stylized. This case is about a small American firm exploring the possibility of setting up offshore IT outsourcing in China. The case took place in 2003. This version was created on November 20, 2003 and was updated in January 2009.

In December 1995, Philip Scott — General Manager of the Life and Pensions (L&P) business of Norwich Union (NU) — presented to his colleagues on the Group Board a progress report on the implementation of L&P’s business systems strategy. He was able to note a number of major achievements: under the restructuring and re-skilling plans instigated by Roger Taylor, L&P’s Head of IT, staff numbers had reduced by 40% but productivity had more than doubled;the rollout of Image technology, part of the wider Client Administrative Service Systems (CLASS) project, had been successfully completed ahead of schedule and NU was now believed to be the largest user of such technology in Europe;development of L&P’s client server / communications infrastructure had also made excellent progress and was similarly expected to reach completion ahead of schedule.

This teaching case was sponsored by MSc International Management/CEMS, the International Business Administration Masters Programme at Rotterdam School of Management. The material presented in this teaching case is based on research conducted by Anne Katrin Debusmann and Stephen Kronenburg, former students of the programme.