SARVANA Msc IM
Analysis in to outsourcing and off shoring of activities and destination countries.Keywords:
Out sourcing, information technology, market Growth, globalization, change in variable costs and fixed costs in companies.
Introduction: Thesis Statement
The modern framework of globalization and competition is out sourcing. Within this framework, the biggest challenge faced is also activities of out sourcing and off shoring. Services are being off shored because of the rise in demand, rising salary cap and shortage of man power and skill. In particular the mid 90’s had created a string market due to the increasing demand in the IT sector. This in fact created a scarcity in skilled labor to support the increasing demand in the IT sector. This situation of scarcity and managing the rise in demand resulted in rise in salary cap, particularly in the IT sector.
Apart from this there were many such new innovations and technologies that came into existence requiring highly demanding customers. This forced many such companies to outsource partially or wholly their activities of projects. This outsourcing benefits many factors such as company to fulfill their projects, save time and money, helps in restoring globalization and also provides employment in the destination country.
Theoretic information was gathered mostly from academic literature and also from related websites. Information was also collected on reports and journals of a few companies. There are a few articles written by a few authors on the reason for the rise in out sourcing and the competition within their country. These articles have been taken in to consideration for an analysis and comparative study.
Out Sourcing has been the trend of the current century and has been the primary source for rise in globalization. It played a huge role in major economies of the world and show casing their skill as well. Hence there were many books and articles published on the same.
I have managed to review few of such books and will be trying show case the strategies mentioned in these books in particular destinations such as India, South Africa and Philippines.
There is broad range of problems related to out sourcing and which have been addressed and a few are yet to be addressed.
To identify the best destination for out sourcing will be the biggest challenge. At the same time it is important to check the domestic skill level with respect to the activities being outsourced.
To analyze the issues which gave rise to this situation of out sourcing?
How is this affecting and will affect in the near and long future the regional and global economy?
Is that trend creating or destroying jobs?
To meet the objectives of the thesis, this thesis incorporates descriptive research design. This implies that certain data is collected from published or unpublished sources and the primary data has been obtained through various surveys using questionnaire as a primitive method. Other methods deployed may include the below patterns:
Internet, Google, yahoo, books, e-books, articles etc
Data analysis Wikipedia, various outside sources, asking colleagues professors students and professionals, my own conclusions etc…
This thesis highlights the importance of the Out Sourcing but emphasizes the main effect of Off shoring. Therefore the main objective of the thesis is to familiarize and understand the motto of out sourcing its importance and effects of both the company and the destination country.
The precise objectives are as follows:
To identify the main motive of the company for out sourcing.
To analyze how companies manage their strategies while choosing a destination.
To illustrate the different conditions required for out sourcing.
Area of Project:
The project aims to inspect the theory of outsourcing and also to examine the concept of outsourcing activities of the several countries in the current generation in order to establish a measure and find out the competition nationally and globally.
In this current generation of modern framework, globalization and competition, one of the primary problems faced by any scale industry or company is of activities related to out sourcing. All the services related off shoring have risen mainly because of the skill shortages and due to surge in the salary costs. These two reasons have become a vital source of delivery model. The mid 90’s has seen a great increase in globalization and created a huge market growth. In particular with countries like India, this made major policy changes in terms of business and economy which created a great opportunity for off shoring activities to take place.
This rise in the world market created a huge demand in the IT sector and simultaneously created a scarcity in the skilled man power. There were thousands of such companies which needed thousands more IT workers in order to work for their projects and other infrastructures. This scarcity in man power and demand for skilled workers created a huge rise in the IT sector salaries. This finally resulted in out sourcing these projects with new technologies helping them with their off shoring activities.
The companies were in search for skilled man power at the same time they were interested with manpower that has the willingness to offer quality service. They also intended to attain flexibility in management which helped them to concentrate on their core projects and aims and out sourcing their rest of the projects.
All these factors forced many of the popular companies to move to the offshore destinations in order to be able to benefit from different advantages available. Currently, the companies may prefer many of the available off shoring countries. Among the most prominent off shoring locations where in the majority of the companies choose as their destination are India, South Africa, Philippines and Mexico.
Selecting an off shore destination has also been a big challenge for most of the companies. As there are many factors which needed to be considered before choosing. It is also important that the companies need to initially determine their own requirement and objective.
According to their objective they need to choose their off shoring destination that will in turn help them reach their goal (Offshore Insights Market Research Paper, 2004: p.2).
This section intends to provide an introduction to the current project concept of and brief the theory of out sourcing and also intends to provide an overview of the most popular out sourcing destinations.
The concept of outsourcing :
The theory of outsourcing in frequently used and inter changed with that of off shoring and business process outsourcing. Therefore it is very necessary to differentiate among them and have a clear definition for all these terms.
Outsourcing is to reallocate a few or part of business operations, processes or projects to a different location or a different country for a fixed or on a long term period. (Gentle, C. 2003: p.1). Whereas Business process out sourcing is one of the types of outsourcing in which a while project of business operation of any given company including its human resources is delegated to a third party company within the same location or abroad.
During off shoring the company completely or partially moves a business operation which may be a core function or other wise of the company; it could move to a high cost country to a low cost country or remain within the same country. In this current generation, there are many medium and small scale outsource many of their business to a third party company which may be located within the same country or in a different country.
Outsourcing Destinations :
In the early 1990s, some big Multinationals such as American Express, General Electric and British Airways has began to move some of their back office activities to India for cost efficiency. Then, other companies started to follow this increasing trend and moved their business functions either establishing their own subsidiaries in India and other low cost destinations such as China and Mexico or by subcontracting to third party service providers.
These offshore outsourcing activities provide the companies several advantages. However, there are many aspects that the companies have to determine when choosing best off shoring destination.
Today India is the most attractive outsourcing destination. In addition to India, China and Philippines are increasing their outsourcing activities. In Europe, Russia, Czech Republic, Poland and Hungary is enjoying being an attractive near shore destination. Moreover, Canada and Mexico are preferred for American companies in terms of outsourcing.
Against the background mentioned above, this thesis also aims to address a broad range of questions through a mixture of business strategies and economical theories. The primary research problem of this current thesis is to identify the leading offshore outsourcing destination. The comparison of these outsourcing destinations which illustrates the different criteria that companies look for when outsourcing.
So the suitable conditions that are needed by companies are analyzed in this research project. Such determining factors such as exogenous and semi exogenous factors are examined by pest analysis in order to establish a scoring table about the competitiveness of countries. This thesis also aims to measure the competition within the country before a project can be off shored. Checking the local employment rate is also very important.
Aim of Project
This research will try to ensure that factors which may influence a company’s decision with regards to the off shoring destination or why to outsource. An assessment of these factors will be undertaken in order to draw a conclusion on how the company’s think before they offshore their operations. It also aims to assess the factors they consider to choose a particular destination.
I believe that this research will also attempt to contribute to the global literature on the impact and consequence of off shoring by focusing on different criteria’s of the companies. It also measures the positive relationship with the destination company.
This thesis also aims to analyse the ground reality of the domestic countries employment rate and domestic competition. This is because the domestic governments ensure that the domestic skilled manpower does not go in vain. Such rules and regulations ensure that company’s abide by the law of land and ensure that they show there interest within the country first and later think of off shoring.
Moreover, many companies are facing a very stiff competition in order to have an advantage in the global market due to others business strategies. Therefore it is very essential to identify the factors that make a country better or favourable than other country. This research aims to conduct a PEST and SWOT analysis of such countries which claim to be favourable destinations.
Finally this research analysis if India is the top player in being the most favoured destination as claimed by many other countries.
Project Objectives :
Apart from the objectives mentioned in the abstract there a few other objectives which this thesis aims to focus. The objectives are as follows:
To identify the main motive behind a company to off shore their project.
To analyse the conditions Required by the company to ensure that the country they chose in a suitable destination.
To highlight the different conditions offered by the different off shoring countries.
To examine how the countries manage their domestic competition in terms of off shoring.
To measure that global impact of off shoring services and consequences of the same.
Structure of the Report :
Below is a brief outline of the structure of the report summarizing the content of each chapter in order to highlight the main thrust of the arguments?
The first chapter explains the rationale for choosing the offshore outsourcing in general and the examples of most important outsourcing destinations. It establishes what the study sets out to do, how and why by formulating the research purpose, problem and objectives.
The second chapter talks about the methodologies that are applied throughout the research. It consists of a detailed report on the analysis done and reports of the same will be presented.
The third chapter delivers the necessary background information and the context within which the research has been conducted. It will be shown that in an era of heavy international competition, outsourcing has became an alternative option which promises cost savings, better quality and most importantly, the ability to free resources to focus on the company’s core business area. For that reason, countries are competing in order to benefit as much as possible from this increasing trend.
The fourth chapter briefs about the general concept of outsourcing. Initially this section first explains the core reasons why companies deal with off shoring or out sourcing. This is then followed by the criteria that the companies consider when deciding on the out sourcing destinations.
The chapter five consists of an analysis of the off shore destinations by using the PEST and SWOT analysis. This analysis compares the outsourcing destinations from their political, economical, social and technological perspectives. A detailed report of these factors will be explained in this section.
The sixth chapter will consist of the result of this thesis. In this section all the data mentioned in the concurrent chapters will be explained with help of a few models and accordingly with the ranking of each country with regard of out sourcing.
Finally, the seventh chapter will summarize the conclusions drawn through their research and will present a few valuable recommendations related to off shoring, out sourcing and even recommendations on how to improve as a favourable country for off shoring.
This section of this project presents an overview of the primary and secondary research method deployed in this research in order to conduct this study. With this type of research methods, the problem questions and the objectives will be answered and be given a solution.
Basically there are many ways to collect any type of data. This thesis implements the most common and popular type by using the quantitative and qualitative research. This research will involve both quantitative and qualitative techniques in collection of data. This research also deploys collection as the major model for investigation and evaluation of qualitative data.
To be precise, qualitative data is concerned with understanding of the concept where as quantitative data is measurements of data or other things that deal with subjective and value judgments.
There are several such models that help us collect qualitative data. The type of model used for collecting qualitative data in this research in interview.
An unstructured interview is a research method of interviewing few personalities in which the questions posed are not pre determined and change dynamically based on the person interviewed. The interview is completely free to probe the research to any extent and all the details are asked.
An interview on Skype was conducted with a company manager named Kunuthu Sreenath in Hyderabad. I approached this personality as he has immense knowledge on offshore out sourcing and due to his experience dealing with offshore consultancy.
The interview was a no-protocol and an unconventional type of an interview. Where in many questions regarding offshore outsourcing were asked which had no specific answers or were just a solution less issues. The questions were also open ended. The questions and the specifics of the interview will be discussed later in this thesis.
At the end of the interview, more questions were asked on one of the book named “Outsource to India – an offshore advantage” written by an Englishmen named Mark Hillary and also about a few other multi National companies which primarily deal with outsourcing to India. He was humble enough to provide me more contacts of individual who belong to the similar industry with which I can have face to face interviews and procure more such information.
One of such individual was Sambit Patra; he is the Vice President of the Tata Interactive solutions for the UK, Europe and the Middle East. This was a more of a conversation than an interview, and this concluded with discussions and questionnaire on topics related to offshore and outsourcing and countries related to them.
Advantages of Interviews:
Interviews are great opportunities to the candidates to have a proper exposure on subjects and help them acquire depth knowledge on the topics. And since this research enables a one on one interview hence this research can be very effective. One of the main advantages is it can be flexible in nature and since it is one on one its can be confidential with regards to the content which is sensitive in nature.
It can also be favourable to the researcher as he can sometimes ask sensitive operational information with prior permission where in certain individuals will be glad to provide such information.
But the biggest challenge is to set up this kind of interview. It would be difficult to get access to such contacts. Dates, time and flexibility of the individual might cause delays in scheduling such interviews.
These delays and consumption of time may also cause severe constraint in the researches mind in conducting the research or survey. This can be considered as the biggest limitation as the interviews from the beginning to the end might take a long time.
In spite of these limitations, these kinds of research methods provide great insight to the researcher and in general most of the researchers have followed the same method in the past.
Considering the nature of the subject and the content related to these subjects, the research findings were mostly drawn from secondary resources as well as a few published books. As mentioned, these secondary resources consists of journals and magazines if big companies such as the Economists, Business Week, and a few News Papers such as Times of India, Financial Times, The Hindu etc. Few other private and even government records have also been recorded. For example, the government records on Foreign Direct Investment where in Multi National Companies play a huge role.
One of the main sources of information and data to acquire such information are government firms and huge consulting firms such as Nasscom, Deloitte and TCS. And a few websites related to foreign trade and affairs have been taken into consideration.
It is ideal to have this literature review analysed as it measures with competition domestically and the procedure of the off shoring. This literature is very useful as it deals with the significance of this particular research in the area of out sourcing and off shoring companies and the destination countries.
To be precise this literature review primarily consists of theoretical knowledge of the concepts related to this area and also involves a study or a review of the summary of a few previous researches done by a few noted scholars.
This chapter will provide an insight of a few articles and research documents and provide a blow up of these articles wherein the researcher feels that these concepts are relevant for this project. These articles and the research documents will play a huge role in helping the researcher understand the primary concept of outsourcing and off shoring. This knowledge is also acquired by comparing the findings of the researcher through the survey conducted if any, with the findings of any previous findings through a few other noted scholars.
The Significance and Growth of off Shore ; Out sourcing
The noted scholar McKinsey of Global Institute states that “It’s a win-win game”. This research focuses and intends to address the question on the main and key factors which result in off shoring. Therefore these out sourcing factors are subjected to an examination in a few main changes in concept of business environment. According to McKinsey’s text, one of the main important reasons that encouraged off shoring is improvement or rise in global tele communications and also a sharp decline in the cost of these global communications.
The other reason which immediately follows the first is the rise in information technology or simply the digitalization of business services globally which enables any company or an individual to transmit their message, information, files, documents or even confidential information to any part of the world very quick time and at a very nominal rate.
This study also intends to analyse the economic benefits of off shoring both to the company as well as the outsourcing destination. In this thesis, the researcher precisely identifies the cost saving as the primary economic advantage of off shoring. As per McKinsey’s report, even after considering all possible costs of the company it can still save 45% of their costs when they off shore part of their operations to any of the most favoured out sourcing destinations. The report also suggests that as per the survey the companies decide to off shore not only to save cost but it also drives their revenue growth globally.
This literature also intends to identify the major countries involved in off shore activities. According to a research, the US dominates approximately 70% of the global share of such activities. Europe and other countries like Japan share the rest of the part. While analysing the supply side, it has been noted that the countries which has English has the native language or where education in schools are in English plays a major role in acting as an out sourcing destination. For example, such countries involve India, Australia, South Africa, Israel and Ireland.
This literature also discusses the services that can be off shored. It has been noticed that the major services which can be off shored are Accounts, back end operations and primary being the call centre. The debate on Off shore is also discussed in the research. As per a report, off shoring activities will be increased by 40% to 50% in next few years. This rise is expected to generate at least 100 million jobs globally or domestically.
Hillary Mark – Off Shore out Sourcing to India – 2004:
This book authored by Hillary Mark focuses on advantages of out sourcing to India. And also does an analysis on why India is one of the most favoured nations for out sourcing any activity.
One of the extract of the book clearly states the out sourcing objectives in order to display the impressive business model India has been continuing in order to invite more out sourcing. The book also highlights the best competences, quality of services, agility, infrastructure and other employee benefits. The book also states that the companies must have specific goals in order to what they can expect from their out sourcing destination.
In one of its chapter, Hillary Mark shows an analysis in order to display the attractiveness of the country. He showed India in different angles, namely by location and people attractiveness. He tried to measure the attractiveness of people by their education, language skills and their labour force. And he also measured the location attractiveness by its location, infra structure related to the location, population, political stability and investment activities.
According to the Author, India is the premier destination for offshore outsourcing and several years into the future based on both; location and people attractiveness. He claimed that China and Philippines are the biggest competitors in terms of cost and Ireland is the biggest rival in terms of quality. This book valuable information on why India is the best destination for out sourcing but it failed to provide more information on other destinations when making comparison.
Rao Rammohan- “How to Tap Opportunities for Out Sourcing”- Financial Times
This article raises some of the most important aspects of successful outsourcing. The author declares that in the last few years the motive of off shoring has changed. According to him, in the early 1990s, companies such as American Express, General Electric, and British Airways began off shoring to India so as to cut costs. As a result, other multinational companies followed off shoring either to India or other low-cost destinations such as China, Mexico and Philippines. The Economic travails of past few years have changed the trend.
As it is highlighted in the article, all global companies take into account not only cost efficiency, but also quality aspect. The author tried to explain that choosing the right destination is much important than ever. As per this report, around 25 percent of the companies that have been surveyed were unhappy or disappointed with the result of outsourcing. The author also has made a few recommendations to the companies of several precautions in order to eliminate the dissatisfaction of outsourcing activities.
Some of the main noted solutions discussed were:
To begin the out sourcing with basic services such data processing.
Check for other accreditation through other providers with international standards.
Have a structured and a detailed terms and conditions before you finalize the contract.
Offshore Destination Assessment
A.T.Kearney’s2004-“Making of Off Shore Decisions”
This paper studies different countries in order to compare several factors that make countries attractive potential locations for offshore services. The research measures the feasibility of countries as offshore destinations based on their financial structure, people skills and availability, and business environment.
The index also highlights the complexities involved in the decision to move operations offshore.
According to this article, companies move their operations offshore not only to benefit from labor arbitrage, but also for greater productivity, improved service and superior technical skills. Findings of this study suggests that a major factor that contributes to the attractiveness of India and China and a lesser extent Russia, Brazil and the Philippines is the depth of the skill base in terms of education levels.
On the other hand, Singapore, New Zealand, Canada, and Ireland boast exceptional infrastructures and educational systems, high degrees of global integration and business friendly, low risk environment. Even though their cost is high, these countries have still managed to drive the off shore interest. This particular article also highlights the issues the CEO’s have while they make a balance in their thinking of off shore decisions.
Challenges with Off Shoring and out sourcing Activities:
This thesis also intends to highlight the specific challenges existing with the off shoring and the out sourcing activities. According to such a survey, these activities can be differentiated in three different phases, with respect to their complexity, transactional area to their comprehensive services. The research also identifies the genuine reasons why companies prefer off shoring services. This thesis also highlights the challenged while moving the operations outside the company.
As a conclusion of all these challenges, this research provides valuable and implementable recommendations to both the company and destination countries.
Impact of Out Sourcing on Europe’s Economy – Nasscom 2003
This report also examines the major impact of offshore and outsourcing on the potential growth of the European economy in the current and over the next decade. Primary growth players and their contribution of offshore outsourcing to the overall growth of the Europe’s economy will be highlighted in the research paper. This paper attempts to highlight the benefits and implications of global sourcing. In the research, the history of outsourcing and offshoring has been traced.
Not just the present status of these activities has been analyzed, even some of the few future predictions were also been predicted. The study also outlined the contribution of non locals or immigrants to the Europe’s economy over the years and has been successful in tracing the evolution of off shoring in different sectors and destinations. Apart from this, several offshore destinations were also analyzed in this research and their attractiveness for European companies was revealed. This report concludes stating that the Europe’s economy has gained and will gain immensely and substantially from the global sourcing of services.
As it is mentioned in the journals, European companies and firms benefit from lower cost structures, access to high-skill labor and increased flexibility. Analysis of this study suggests that off shoring has had an impact on the Europe workforce and will lead to the displacement of workers.
In order to minimize the impact, the author suggests UK so as to upgrade its retraining infrastructure and provide displaced workers with additional assistance during the period of unemployment.
Karen – www.SearchCIO.com – 2004
This article represents an interview with the Roger Cox who is managing vice president of the Gartner Strategic Sourcing Practice. In this interview, Roger Cox explained the realities of offshore outsourcing and predicted where offshore outsourcing goes. According to him, 5% of IT jobs have gone overseas, and 25% will be offshored by 2010. He declared that global sourcing is inevitable; however there is a negative unemployment side of offshore outsourcing especially in the American IT sector.
According to the vice president, “India is way ahead right now and China is up and coming. One of the reasons that Indian companies are doing so well in the offshore space is because they are being creative. Some of the Indian companies are actually moving their operations into China and developing their back office capabilities there. At the same time some Indian companies are targeting other countries that have relationships with mainland Europe”. He also added that China has fallen down a little on the list. As a reason of this fall, he mentioned infrastructure, language and cultural compatibility.
Mr. Cox ordered the name of main offshore outsourcing destinations as India, China, Israel, South Africa, Northern Ireland, Southern Ireland, Czech Republic, Poland, Hungary and Russia and he also evaluated each of these countries based on language compatibility, government support, infrastructure, educational system, cost, labor, political stability, cultural compatibility and security.
Roger Cox concluded that every company should consider offshore outsourcing. But they should take into account four criterias in order to eliminate the failure of it. These four factors are alignment and vision, contract and relationship, customer satisfaction, and service level and pricing.
Mapping of Off Shore Markets:
The above mentioned article examined how the eco system of the off shoring activities has been morphed in past few years. The various off shore markets have evolved and has taken advantage of the rising demand of the US and the European clients. As per this report, it states that in spite of the fact that the off shoring having major risks when compared to on shoring, many companies still prefer off shoring their operations because of the advantages involved in it. As it adds a great value to the organization on a whole and also does a great deal in cost saving.
This report also highlights the issues which are needed to be considered while selecting a destination to outsource and provides an in depth analysis of the competences and skills of key countries involved based on the goals of the companies. Findings of this report suggest that there many other factors needed to be considered while choosing the destination to outsource which include:
Political Stability: A multi National company decides to outsource only a country which is liberal, follows diversity in unity and most importantly peaceful. There are many countries in the world which poses all the competences and skills to be a destination of out sourcing but because of their local political instability they fail to exhibit their skills on the global map.
IT Security: This is one of the biggest security breaches in this current generation. Since most of the companies deal with security and information it is very important for them to protect their information. Hence the destination country must have the basic knowledge and must possess the fundamental technology in order to preserve the confidentiality of the company.
Domestic Industrial Structure: There would be a certain companies where in they require a certain resources which can be procured locally. Therefore any growth in the industrial sector will be helpful for a few manufacturing companies. For example, car engine manufacturers, they expect local products in order to attain cost saving and regarding other aspects.
3.3 Specific Methodologies for Destination Comparison
3.3.1 Pest Analysis
This is one of the major tools to analyse and understand the fluctuations in the market environment such as its growth, decline and any potential direction for any given business. It also acts as a business measurement instrument. PEST stands for Political, Economical, Social and Technological sectors that are evaluated before commencing any given business. A PEST analysis fits into an overall market environment scan as in the diagram.
These factors include many aspects such as government regulations, laws related to business and foreign direct investment, crime rate and also a few general regulations which are to be followed by any registered firm to operate. For example, the laws related to the tax policy, employment laws, employment regulations and trade restrictions.
These factors include the one which affect the purchasing power of the potential customers and cost of the capital of a few firms. For instance, economic growth, interest rate, exchange rate etc. And also inflation plays a huge role among other factors.
Social Factors :These consists of are local or domestic cultural factors and their macro environment which might affect the customer’s requirements and ultimately define the size of potential market. But primarily the social factors include growth rate, age distribution, poverty, rate of education, emphasis on safety.
These are the factor that might lower the barriers to entry, reduce minimum efficient production levels, and influence out sourcing decision. Some of them are research and development activity, automation, technology incentives and rate of technology changes.
3.3.1 SWOT Analysis
Any strategic planning process consists of the SWOT analysis. This analysis is an internal, external or an in depth analysis of the situation or environmental factors. These environmental factors are classified as strengths, weakness, opportunities and threats. The analysis of all these environmental factors is SWOT analysis. This SWOT analysis is important to any form as it defines the characteristics of the firm and therefore helps them to match their resources and capabilities in which it operates. A SWOT analysis diagram is as follows:
For any firm its strengths are its skills and resources. These are the primary capabilities that can ensure a company to have competitive advantage. Illustration of such strengths are: patents, string brand names, good branding, good reputation in the market, cost advantages from proprietary, access to high grade natural resources and access to the distribution network.
Lack of any skills or capabilities in any aspect of the firm is classified as weakness. It is very important to analyze these weaknesses as these factors help the firm to define their future production. Weakness can be in many forms, such as natural ones or circumstantial weaknesses.
For instance, lack of access to any natural resources is considered as a natural weakness so as a weakness due to government regulations or laws. Whereas failure of production due to lack of man power or lack skill is due to lack of capabilities. It means that these kinds of weakness can be overturned or can be diminished.
This SWOT analysis might expose the firm to a few unknown or hidden opportunities which might help them with the firm’s growth and profit. For instance, an unfilled customer needs arrival of new technologies or loosening of regulations and laws by the local government. This will pave a great way for any firm to take advantage of such opportunities.
The biggest threat can only be a climatic or a natural calamity or threat. Every company spends a great time while analyzing this factor. For an agricultural firm or any other technological firm considers the local climatic conditions and its history before they start their operations in that particular region.
Even some changes in external environment may sometime reveal negative outcome to the companies. Few examples include: changes in the consumer tastes, new regulations, rise in emergence of substitution products and even trade barriers can pose a great threat to a firm.
The SWOT Matrix :A firm must try to diminish its weakness and try to utilize its strengths in order to benefit from upcoming opportunities. By doing so, it will be able to develop a competitive advantage in the global market. Therefore to be precise the SWOT matrix brings together the SWOT aspects and helps them define their future strategies.
Opportunities S-O Strategies W-O Strategies
Threats S-T Strategies W-T Strategies
S-O they strategize and pursue opportunities that are suitable to the company’s resources and strengths.
W-T they intend to beat the weaknesses and builds their strengths.
S-T they are helpful in classifying the ways that the firm can use its strengths in order to reduce the existing threats.
W-T they build up a defensive plan to prevent the firm’s weakness from being exposed or the company being exposed to any external threats.
Any multinational company ensures to go through the complete SWOT analysis that helps them define their future programs. This analysis therefore highlights the company’s strengths and weakness and helps them with their resources.
This analysis also helps the firm to improve their strengths and diminish their weakness which is the major threat to any firm which wanted to improve their global reputation.
The past decade has seen immense rise in the globalization in every sector. This resulted in the globalization of the economies and hence the trade barriers for international trade have been reduced significantly. These reductions in the trade barriers force certain firms to find out activities in different regions of the world to cut their overall costs and remain competitive in the world economy. The factors, globalization and improvement in the tele communications sector have created a great bade for pursuing international business for every firm which also posses different advantages in terms of cost and quality.
Offshore and Outsourcing
As mentioned above, due to globalization, firms need to apply for new models and behaviors in order survive the fluctuations in the world economy and also to remain significant in the market of international business. Therefore, it’s safe to say that firms or companies that are flexible, customer focused and which has the ability to source capabilities will be successful in the future. And through off shoring the activities, many companies can also obtain a long term relation with the destination country and can take advantage of the domestic help such us in finance, access to natural resources, human resources, logistics and even in the information technology.
Economic Benefits of Offshore and Outsourcing
Companies and firms have more than one or several reasons to outsource their business functions. As mentioned in earlier chapters the primary motivation to off shore would be cost saving. This is to be noticed that there are huge gaps in the pay scale between the North American and the Asian countries. For example, a basic salary for an American employee is 50000$ per year where as it is comparatively less with an Indian employee who earns on average of 10000$ per year where in both the employees are similarly skilled.
Therefore, cost saving which is the biggest factor for any successful company can be attained by choosing a low cost destination with a skilled work force. It is not necessary to completely relocate the firm but rather just a few operations can also be off shored. The firm’s may even merge their operations to reduce their dependence on the transport and logistics.
It has many benefits, one of the most unnoticed benefit is terms of motivation. In developed or western countries some jobs are considered as low profile or less desirable but these jobs have seek high attraction when out sourced and the company benefits a lot from such situations as well. Therefore such kind of jobs or opportunities can be performed well destination countries rather than their local country.
Moreover, companies also use offshore outsourcing as an opportunity to drive revenue growth. For example, by off shoring, computer manufacturers are able to expand their markets to more customers than before. For this reason, off shoring, businesses are creating far more jobs as well as value from increased revenues than from reduced costs.
The offshore outsourcing also allows firms to develop a flexible resourcing model for managing their growth in terms of size and revenue. Moreover, the difference in time zone of multiple offshore destinations gives companies the opportunity to speed their operations and work in a 24/7 time period across the globe.
Off shoring Countries & Destinations
The U.S companies mainly dominate the global share of offshoring activities. They have got control of almost 70 percent of the total market. The rest of the market belongs to Europe and Japan. In Europe, U.K. is the dominant player. Basically, U.S. and U.K. businesses are the leaders of off shoring. The reason is that both the U.S. and the U.K. have liberal employment and labor laws which allow companies a greater elasticity in reassigning tasks that let them to capture off shoring opportunities effectively.
In the supply side of off shoring, the main element that determines the attractiveness of the location is the language. Off shoring has been primarily conducted to the countries where the business language is English. As a consequence, the attractiveness of offshore destinations is determined mainly by the English speaking population rate. Since the language is the key factor in offshore destination decision, Canada, Israel, India and Ireland are attractive offshore destinations.
There are other countries such Australia, Philippines, South Africa which is considered to be less attractive. This also suggests that language also played a huge factor in determining a good destination for out sourcing. A non English speaking nation has not been in the most favorable list for off shoring.
For instance, countries like Japan, Germany and China in spite of them having skilled labor have failed to be a top destination of out sourcing. In fact they are even forced to off shore some of their operations due to language factor such as customer service and human resources services.
Which Services are to be off shored?
It is completely dependent on the company’s aims. It is at their discretion that they can completely or partly off shore an operation. There is possibility to offshore a wide range of business functions. In fact, this possibility depends on the digitalization or computerization of that business function. New technologies are changing the tradability of information-based services. For instance, all kinds of information can be stored and saved by digitalization. The use of these ICTs allows production of more services which can be located elsewhere in order to get advantage of cost, quality, time and economies of scale. Basically, it allows producing certain services in one location and consuming them either simultaneously or in a different time, in another location.
Nevertheless, the success criteria of off shoring functions are based on whether the appropriate skills are available in the off shoring center and how effectively these functions are transformed.
As mentioned before, there is not an exact list of choices for off shoring. Indeed, companies in general offshore those functions which are not cored to their business but are important for ongoing of core activities. Core activities in most cases kept within the company in order to eliminate the risk of technology transfer. Companies, so as to decrease their operational cost and to focus on their core competencies, offshore their non core activities.Among the business functions to be off shored the well known ones are back-end processing, call centers and accounting. In addition to this, higher value work has since been added to the list in areas such as software maintenance and development and recently automotive, aerospace component design, and pharmaceuticals researches have been attracting increased investment to the offshore facilities.
Davenport in his article summarizes the candidates for business processing outsourcing as:
Finance and Accounting that includes billing processing, tax processing, internal audits, revenue accounting, asset management and claims administration.
Human Resources activities such as recruitment, payroll processing, and education and training.
Logistics, that includes warehouse management, distribution management, contract manufacturing and inventory management.
Customer relationship, which also involves customer service and support, customer analysis, telemarketing / telesales and sales force support / management.The Debate about Off shoring
Enabled by the presence of cheap, reliable worldwide telecommunication networks, sharply reduced telecom costs, increased broadband width, opportunities offered by foreign governments, increased competition and available low cost labor pools, the offshore service delivery model has grown rapidly. Today, an increasing number of American and European firms outsource many portions of their business functions to offshore destinations and empirical studies show that this trend is ever increasing.
According to the article of Sinha Arunava in India Times, India is expected to take in $57 billion in information technology services and back office work by 2008 (Economic Times, Dec. 2, 2003) and According to Reuters, In the United States, the offshoring accounted for technology service spending is expected to rise from $16.3 billion in 2003 to $46 billion by 2007 (Reuters, Nov. 21, 2003). Mc Kinsey Institute expects that Off shoring will grow at a rate of 30 to 40 percent a year over the next five years.
According to the Nasscom-Mc Kinsey report on global outsourcing, the market size of offshore Business Process Outsourcing is expected to grow to US $ 141 billion by 2008. Furthermore, Reserve estimates that the off shoring of Business Process Outsourcing will create 2.12 million job opportunities by 2010 in developing countries where the wage rate is low. (NASSCOM)
Several empirical studies show the positive trend of offshore outsourcing. Each year off shoring is gaining momentum and many countries are competing in order to get more shares from it. For instance, there have been significant growth rate in the service export of India, Philippines and Russia. In addition, countries such as Czech Republic, Poland, Hungary and Mexico emerged from relatively insignificant markets to legitimate candidates for market share in the growing Business Process Outsourcing market.
The competition among these countries makes it harder for companies to choose an off shoring destination. Nowadays even the local governments are wooing the companies with easier laws. Consequently, businesses have to consider numerous factors in order to make a comparison of these locations and differentiate one off shoring destination from another.
How to select an out sourcing destination?
Companies must consider a number of factors while evaluating offshore destinations according to their specific business necessities. While there are several differentiating characteristics which offer advantages over others, it is not possible to make a clear cut of these factors. However, there are few important characteristics that need particular attention.
It is possible to list the most important characteristics for assessing offshore locations in three main buckets depending on their nature, relative importance to the outsourcing organization and the position of the factors in the sequence of decision making. The first category is cost related factors which are associated with expenses of companies. The second set of factors is people related factors that drive the attractiveness of the location as an off shoring destination. The last category is related to the location which exists in the off shoring locations.
Cost Related Factors People Related Factors Related Factors
Tax ; Compensation
Process Maturity Training Cost Labor Pool
Supportive People Factors Government Support
Physical ; Time Zone Displacement
Every firm must analyze all the above mentioned factors while they chose their destination to off shore. They must also be aware of their goals and expectations before they decide. The above mentioned factors are the conventional factors which help the firms decide their destinations. There could many such factors to be considered that might change or depend by case by case.
Cost Related Factors
These are the main factors that affect the attractiveness of an off shoring location.
Cost reduction is in fact one of the major motivations for outsourcing. Several studies confirm that majority of companies determine lower cost as prime reason for offshore outsourcing. Companies, in order to decrease their costs opt for lower cost locations and consolidate this with investing on infrastructure, training and management.
Countries differs in terms of their economic structure, gross national product, trade balance, monetary and fiscal policy and some other factors that affect the prevailing cost of labor. Since the cost savings are the major reason for offshore outsourcing, the labor arbitrage opportunity is the key concern that affects the destination decision. Basically, location selection is based on relative cost savings resulting from off shoring to low cost labor countries such as India, Philippines, Russia, China and etc.
Direct cost saving is related with the wage rates of different locations for similar profile of employees. For instance, for an offshore outsourcing U.S. based company, the wage rate difference could be around 60 percent when outsourced to India or China, on the other hand, the saving rate could be around 30 percent if outsourced to Canada or Ireland. Thus, from the perspective of direct wage rate difference, it is more profitable for a U.S. based company to offshore India or China. However, there are many other important cost factors to consider when making a destination decision.
These are; communication systems, physical infrastructure and support, transition, governance, resource redeployment, HR change management, training and productivity, disaster recovery, business continuity capabilities, offshore knowledge development, travel costs and exchange rate fluctuations. All of these represent the total cost of off shoring and have to be well considered by the companies before off shoring decision.
Countries differ in terms of the distinct competencies that they possess. The reason of that variation is explained not only by the difference in the education system of each country, but also by the existence of proximate industries that provide training ground. Besides the inherent competencies, experience in managing related projects in the past gives the service providers an extent of competence. If the employees gain necessary experience by working on many projects, they become more productive and as a result, the outsourcing company saves time and cost.
People Related Factors
Factors that drive offshore service delivery in a country. These factors are directly related with the quality and availability of labor pool offshore locations.
The volume of the available labor pool is a direct result of the population in the country. Therefore countries differ on the extent to which they possess a talented workforce, in terms of quantity and quality.
For companies which are looking to scale up their operations in specific offshore locations, the size of the talented workforce is one of the main determinants of offshore decision making. BPO and IT process experience, retention rates, education levels, education systems, size of labor market, etc., are all significant factors that differentiate one location from the other. Especially, the availability of labor for IT and BPO industry are the major critical factors of location decision of a company in the long term.
For instance, the total labor pool of China is much more than that of India but the quantity of people specialized in IT and BPO industries in India is much higher than that of China, and this affects the volume of businesses being off shored to these countries.
Even in the IT sector India ranks first among many such countries because of their skill on IT and also due to the fact their education is in English. Hence it is safe to say that both language and skills are primary criteria for deciding a location.
There is a tendency for countries to do business in countries where language is not a problem. However, communication capability is not just speaking the same language but it includes accents, use of colloquialism and etc. communication is especially vital for IT development since there is a high degree of interaction between the service provider and the client due to loosely requirements.
In voice based BPO, communication skills are the most essential requirement. For instance, the reason that India and Philippines are opted as off shoring destinations for U.S. and U.K. based companies is because speaking the same language. The language proficiency is not only about English, there are also specific locations that provide non-English proficiency.
For instance, voice based BPO in Mexico, Chile and Morocco address the Spanish speaking population in US, and Turkey has got some German specialized agents because in Turkey there is a valuable amount of German speaking labor pool that used to work in Germany and now live in Turkey. Moreover, Mauritius, Morocco, Senegal and Tunisia host call centers for the French Speaking market.
Cultural affinity is a vital element after language in terms of communication and strong personal relationships. Thus, when a high degree of value-added interaction is required, the tones of culture differences can be the most critical enabler.
For instance, for high risk and complex IT projects where high degree of trust is required between both parties; service provider and client, shared culture can speed up the trust building process. (Offshore Insights White Paper, Volume 2, Issue 6, 2004: p.7). Cultural affinity is especially essential in BPO operations where empathetic responses and rapid bonding with customers is required for the benefit of cross selling interactions.
However, where it is lacking, it can be developed to a degree by training institutes (NASSCOM, 2004: pp. 115-116). In this sense, for U.S. and U.K. based companies, the Philippines and Canada offer the most appropriate fit. Similarly, Eastern Europe is emerging as a favorable offshore location for Western European countries.