Software Outsourcing www.softheme.com Why, When, What
Sep 05, 2014
Software Outsourcing
www.softheme.com
Why, When, What
www.softheme.com Outsourcing to Softheme™ Software Outsourcing: Why, When, What
Table 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 Projections
www.softheme.com Outsourcing to Softheme™ Software Outsourcing: Why, When, What
Today’s business environmental, organizational, and technological factorsrequire businesses to operate efficiently and effectively in order to be competitive.Toward those goals, managers employ many strategies to improve productivity,including standardization, automation, and business process reengineering. Additionally,they restructure the business organizations to be lean and flat so that they can becomeflexible in responding quickly to changes in environment and customers’ needs.
Outsourcing is another valuable strategy managers use to achieve the above goals.
Preface
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Historical Background
The predominant supply chain model for severaldecades was vertically integrated. Each member of a supply chainwas considered to be part of the same industry. All the ancillaryactivities that support the supply chain directly or indirectly wereincluded.
Steadily, products became complex and the scale ofoperations increased and management of entire operations within
one corporation became less feasible. This resulted in the increasingly popular use ofoutsourcing and has resulted in vertical disintegration of corporations and supply chains. Astravel and communication became easier in the 1970s and 1980s, as trade restrictionsincreased, and as the gap in wages between developed and developing countries increased,outsourcing began to move off-shore.
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Historical Background
In 2002, for instance, India had 90% of U.S. organizations’ informationtechnology (IT) off-shore business.
China looms as India’s biggest competitor, although some considerthe two as noncomparable at this time. Other countries considered tobe attractive as off-shore outsourcing sites include Malaysia, theCzech Republic, Singapore, the Philippines, Brazil, Canada, Chile,Poland, Hungary, Russia, and Vietnam.
www.softheme.com Outsourcing to Softheme™ Software Outsourcing: Why, When, What
Historical Background
In the age of the Internet and World Wide Web, a company’s locationhardly matters. In the past, the educated and skilled labor from low-cost countriesimmigrated to the U.S. During the last decade, faster communications andimproved information allow companies to easily send information oriented workto any location on the globe. Ultimately, countries with low-paid but well-educatedworkers will benefit greatly. However, the country of origin of the outsourcing alsobenefits.
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Why Do Firms Outsource?Companies outsource functions for reasons that are organizationally
driven, improvement driven, financially driven, revenue driven, or cost driven.Outsourcing can be viewed as a component of corporate and industry internationalexpansion and restructuring.
Five horizons of the global industry value chain
Market entry
Product specialization
Value chain disaggregation
Value chain reengineering
New market creation
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Why Do Firms Outsource?
Product specialization
Market entry
Entering a country for purposes of market expansion
Product specialization
Specialization takes place in different locations. Eachlocation may engage in final goods trade with each other
Value chain disaggregation
Product components are manufactured in a certain locationand assembled elsewhere
Value chain reengineering
Reengineering processes to capture additional advantages from production cost differentials
New market creation
New market segments are penetrated as a matter of capturingthe full value of the company’s global activities.
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When to Outsource?
Product specialization
Factors that Support Outsourcing
Characteristics of today’s outsourcing environment are many and varied. Thestrategic change to outsourcing is highly evident in the software industry. Frequent changes tosoftware especially often result in an organization turning to outsourcing as a solution. Reasonsstudied for this can be generalized to all outsourcing, and include:
The turbulent market will need corporations to be customerfocused
There are pressures on corporations to continuously develop newproduct at reduced cost
Extensive customization is enabled by IT through masscustomization
The market need can be fulfilled by flexible and adaptableorganizational structure which is possible with IT-enabled processes
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When to Outsource?
Product specialization
Factors that Support Outsourcing
Previously identified factors includetime compression, short product life cycles,strategic discontinuity, increase in knowledgeintensity, and customer-focused approach.These changes are:
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When to Outsource?
Product specialization
Factors that Support Outsourcing
Customer focus
Shrinkage in product/systems life cycle
Competition and real-time operations
Societal, political, and ethical factors3
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Global economy
Changing workforce and job loss
Technological innovations and obsolescence
Organization structure and corporate culture
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www.softheme.com Outsourcing to Softheme™ Software Outsourcing: Why, When, What
What to Outsource?
Product specialization
The Risks of Outsourcing
Despite the purported benefits of outsourcing and the widerange of success stories that have stimulated an unprecedented growthrate, there are potential risks as well. An outsourcing project might failbecause of poor selection of the vendor, mismanagement of theoutsourcing contract, inferior performance by the vendor, lack ofacceptance by the end consumer, or other reasons
Selection of the Vendor
Mismanagement of the Outsourcing Contract
Inferior Performance by the Vendor
Lack of Acceptance by the End Consumer
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What to Do and Not Do?
Product specialization
Core Competencies and Critical Success Factors
Decisions as to what and whether to outsource should be tied to anidentification and understanding of an organization’s core competencies andits critical success factors. Such an identification and understanding can be alengthy process. However, it is the one true way to determine whether aproject should be or should not be outsourced.
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What to Do and Not Do?
Product specialization
Core Competencies and Critical Success Factors
If 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.
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What to Do and Not Do?
Product specialization
Outsourcing 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) functions
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What to Do and Not Do?
Product specialization
Outsourcing Trends and Future Projections
Outsourcing of information technologyfunctions is a huge marketplace. IT outsourcingbegan as a cost-reduction tool, but has evolved intoa component of businesses’ overall corporatestrategies. It has grown from simple applications to amuch wider set of business functions: logistics,payroll, human resources, legal, and so forth. It hasbecome pervasive and strategic.
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What to Do and Not Do?
Product specialization
Outsourcing Trends and Future Projections
“Back-sourcing”
IT off-shoring
Web-based and e-business
outsourcing partnerships
Application service provider (ASP) industry
Growth Areas in
IT Outsourcing
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What to Do and Not Do?
Product specialization
Outsourcing Trends and Future Projections
Outsourcing of pharmaceutical functions traditionally has taken the form ofoutsourcing drug development and manufacturing to contract research organizations(CROs) and contract manufacturing organizations (CMOs).
Outsourcing of customer care functions by moving entire contact centersoff-shore has become very popular. The functions performed by customer servicecenters are more important than their location. The discrepancy between labor, realestate and infrastructure costs on-shore vs. off-shore, makes this a logical function tooutsource. Customer contact centers are a $650 billion industry (Cleveland, 2003).
www.softheme.com Outsourcing to Softheme™ Software Outsourcing: Why, When, What
What to Do and Not Do?
Product specialization
Outsourcing Trends and Future Projections
Outsourcing of human resource (HR) functions, such aspayroll, recruitment, hiring, training, benefits management, employeeassistance programs, executive compensation, as well as health, safety,and regulatory compliance, is gaining momentum.
Outsourcing finance and accounting (F&A) functions havebeen prevalent since the beginning of business. Now, there is a growingtrend for F&A functions to be outsourced off-shore, primarily to savelabor costs.
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What to Do and Not Do?
Product specialization
Outsourcing Trends and Future Projections
Outsourcing of research and development (R&D) functions takesvarious forms. Drug companies contract with outside firms to explore newcompounds for possible testing and launching. A different form of R&Doutsourcing is used by companies such as Dell, Motorola, and Philips which buycomplete design of digital devices from Asian developers, tweak them to their ownspecifications, and attach their own brand names. Another approach is that usedby Boeing Co. which contracts with India’s HCL Technologies to co-developsoftware for everything from the navigation systems and landing gear to thecockpit controls for its upcoming 7E7 Dreamliner jet.
Thank you!
2010 | Softheme Team | Kyiv, Ukraine | Software Outsourcing Solutions
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