TDDD31 Software Engineering with International Partners Lecture 1 Introduction to Outsourcing Peter Bunus Department of Computer and Information Science, Linköping University Sweden peter.bunus@liu.se What All This Companies Have in Common? 2 1
What the key financials are telling you? Source: Fortune Magazine 3 What the key financials are telling you? 4 2
What the key financials are telling you? 5 Top Paying Companies Average total pay: $249,607 For: Senior Account Executive* Best companies rank: 43 Average total pay: $120,657 For: Engineering Software Development Engineer in Test* Best companies rank: 51 6 3
Why this matters to you? "We are at the earliest stages of a fundamental transformation from regional economies to a single, integrated global economy. Just as companies now compete globally, workers need to realize that they, too, are competing globally. globally Michael Corbett, president and CEO of New York based Michael F. Corbett & Associates Not too long ago, knowing how to program a computer was almost a sure ticket to guaranteed employment. NOT ANYMORE!!!!! 7 What does outsourcing means? Outsourcing is often viewed as involving the contracting out of a business function commonly one previously performed in house to an external provider. Whenever a business procures resources purelyfrom an external source to accomplish business objectives, it engages in outsourcing When a manufacturer acquires raw materials from a supplier, it engages in outsourcing. When a wholesale company contracts with an external delivery firm, it engages in outsourcing. When a firm hires a computer consultant, it engages in outsourcing 8 4
What can be outsourced? A modern organization often contracts out entire business functions to other companies that are specialists in their specific fields. A firm might turn rnoerto over eternals external suppliers its human resource functions, its information technology functions, its shipping functions, or any other functions for which an external supplier is more efficient and effective than is the host company. 9 What is actually outsourced? The 20 largest outsourcing contracts signed 2008 Source: Garner Research Gartner on Outsourcing 2008 2009 10 5
What is actually outsourced? cont The 20 largest outsourcing contracts signed 2008 11 Outsourcing trends Of the 20 deals reported, several qualify as "megadeals" (greater than $1 billion in total contract value), and 16 different providers were named. The average contract value for these top 20 deals was just under $1 billion ($998 million) and the average contract term is six years, nine months. HP and EDS were the only providers winning more than one deal, and they have collectively won five of the largest deals. Three India based providers TCS, Wipro and Tech Mahindra are in the top 20, each with one contract. TCS signed the largest IT outsourcing deal in 2008. It will provide process outsourcing services, application development and infrastructure support to Citigroup for a period of nine and a half years in a deal valued at $2.5 billion. (TCS also acquired the Citigroup center as part of this contract.) Noticeably absent on this list is IBM Global l Services, and Accenture appears only as a secondary provider on one contract. Since 1990, IBM has been one of the leading providers for the largest outsourcing deals. IBM and Accenture have continued to perform strongly in the past 12 months, which suggests that their outsourcing deals are smaller, that they may not be aggressively pursuing some large deals that some sizable deals are sole sourced and not reported, or that add ons to existing outsourcing contracts are not reported. 12 6
Outsourcing trends Large contract signings represented diversity across different vertical markets, including six in manufacturing (five of which are in the process manufacturing sector), four in communications, five in government, three in financial services, and one each in transportation and healthcare. From a geographic perspective, "global deals" represented 10 of the largest contracts, while the most mature markets, North America (with four) and Western Europe (with three) collectively accounted for seven deals, with the Asia/Pacific region accounting for three. The impact of globalization was clearly evident. In terms of service focus, ITO accounts for 14 deals, BPO for three, and combined ITO and BPO for three. Of the total 20 deals, 13 are new contracts and the remaining are renewals or extensions, indicating that long term partnerships make up a healthy source of follow up business. The trend to multisource (one organization using multiple providers) was exemplified by Royal Dutch Shell signing three megadeals in 2008 with three different providers: AT&T, T Systems and EDS. 13 Who is outsourcing? Percentage of outsourcing contracts signed by vertical markets 2007 2008 14 7
What is the price? Total contract value of contracts signed by vertical markets in 2007 2008 15 Types of Outsourcing Total Outsourcing refers to the decision to transfer the provision and management of at least 80% of services to the external service providers. Total Insourcing refers to the decision to retain the provision and management of at least 80% of services internally after a reasoned evaluation of the external service provider market. Selective Outsourcing refers to the decision to source selected services from external service providers while still providing between 20 80% (typically 24%) of services internally. De Facto Outsourcing (Insourcing) refers to the exclusive use of internal resources to provide services, which arises from historical precedent rather than a reasoned evaluation of the external service provider market. 16 8
Types of Outsourcing con t Offshore Outsourcing refers to the decision to transfer the provision and management of services to external service providers outside of the client organization s home country and also on cruise ships off territorial waters. Business Process Outsourcing refers to the decision to transfer selected areas of the client organization s repeated core and noncore business processes to external service providers; for example, financial statement analysis and statutory reporting. Business Transformational Outsourcing refers to a type of relationship that involves both Information Technology Outsourcing and Business Process Outsourcing. While traditional use of outsourcing is to offload non core activities and leverage economies of scale, Business Transformational Outsourcing is instead utilized to gain strategic competitive advantage on an enterprise wide basis and share risks in innovating to enhance business performance. 17 Types of Outsourcing con t Retro sourcing refers to a cyclic relationship where an offshore service provider outsources some degree of services back to the client organization s home country, typically by the creation of a business division sometimes misclassified as Insourcing Insourcing. Rural sourcing refers to an obscure form of Outsourcing in which the provision and management of services are transferred to rural regions of the client organization s home country. The concept of retaining jobs onshore while benefiting rural communities in the process presents opportunities for companies to project a positive public image; hence, Rural sourcing is expected to be an increasingly viable alternative to Offshore Outsourcing. 18 9
TDDD31 Software Engineering with International Partners This course will mostly cover notions about Offshore Insourcing and Outsourcing of IT Related services (IS) 19 Categorization of Sourcing Alternatives Categorization of sourcing alternatives based on How Should We Source Instead of Should We Outsource (Wibbelsman & Maiero, 1994, as cited in Dibbern et al., 2004, p. 11) 20 10
Categorization of Sourcing Alternatives Categorization of sourcing alternatives based on How the Client Manages or Utilizes the Suppliers (Currie & Willcocks, 1998, pp. 122 125) 21 Sourcing and Shoring Onshore Centric View 22 11
Sourcing and shoring: Insourcing centric view 23 List of Sourcing Alternatives 24 12
List of Sourcing Activities cont 25 List of Sourcing Activities cont 26 13
Application Service Providing 27 Backsourcing Insourcing what was outsourced 28 14
Benefit Based Relationships / Business Benefit Contracting Linking payments to realization of benefits Using contract personnel 29 Type of Outsourcing Business process outsourcing Vendor performs client s entire business processes Multiple clients and multiple vendors in a single contract or alliance Cooperative sourcing Client s internal IS department and the vendor perform IS activity cooperatively 30 15
Co Sourcing Co sourcing: Client s performance determines vendor s revenue Co sourcing: Helping the client s IS department mature Co sourcing: Multiple clients jointly seek services from vendor 31 Distributed Consulting Dyadic Outsourcing Distributed consulting Vendor has teams both at onshore and offshore Independent client dealing with independent vendor 32 16
Facilities Management and Sharing Facilities management Vendor maintains the client s assets Facilities sharing 33 Global Delivery global delivery Large vendor delivering services from various global locations to clients at various global locations 34 17
Managed offshore facilities Outsourcing the process of setting up facilities for offshore insourcing 35 Top 6 World Outsourcing Countries 36 18
Top 6 World Outsourcing Countries 37 Top 6 World Outsourcing Countries 38 19
Where is China? 39 20