Term Paper: Is Outsourcing Inevitable?

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¶ … Outsourcing Inevitable?

Outsourcing as a strategy and ongoing approach to staying competitive is permeating both manufacturing and services firms globally. Having started primarily as a strategy of cost reduction, outsourcing has steadily grown to include new product research and development, the permanent re-aligning of more routine and easily replicable tasks, and the re-definition of customer service. Spanning the entire value chain of industries including manufacturing, outsourcing's impact on global business is permanent and has already re-defined the cost structures of industrial manufacturing, consulting services than span application development and maintenance, business process re-engineering, customer service and support, and the use of outsourcing for significantly impacting new product development timeframes through the use of computer-aided design techniques.

The goals of this paper are to provide a literature review of outsourcing, specifically as it relates to industrial manufacturing and the resultant impact on business process reengineering, which is also a very significant force in the entire global outsourcing industry today. Primary research has also been completed to review attitudes of industrial manufacturers to global outsourcing, specifically looking at their attitudes and experiences with this strategy. The bottom line is that this paper shows that outsourcing is indeed inevitable for a multitude of factors, foremost being the integration and sharing of processes between manufacturers and outsourcers themselves.

Preface

Global outsourcing is re-aligning the global competitive landscape. The intent of this paper is to provide a thorough literature review and define the essentials of vendor selection. Included in this analysis is a 2-dimensional model for understanding the relationship of global outsourcing to a company's tolerance of risk vs. return, definition of vendor options and negotiation. The specifics of outsourcing are also defined, as is a series of results from primary research completed on global outsourcing.

Introduction

Outsourcing

Definition of outsourcing

Outline of paper

Importance of outsourcing

History of outsourcing

Advantages and disadvantages of outsourcing

Literature Review

Essentials for Vendor Selection

Framework for outline

Environment Analysis

Determining if outsourcing is right for the situation. Determining business focus and what to outsource.

Buy-in from key constituencies

2-dimensional model for understanding the relationship

Documentation

Identification of vendor options

Request for proposal

Data collection

Evaluation/Comparison of vendor options

Comparison of data to make decision

Recommendation for backup choice

Negotiations

Used if decision can't be reached because of equal performance among vendors

Differentiation from negotiation of relationship development

Should be win-win

Specifics for Off-shoring

Off-shoring is different

Legal Considerations

Validate that the entity is legal

Know legislation in the foreign country that may affect partnership

Cultural Considerations

Power distance and individualism/collectivism

Geographic considerations

Knowledge Transfer and privacy issues

Executive Summary

The intent of this research effort is to define the current state of outsourcing, showing its inevitability and to illustrate that, and in completing primary research where 500 manufacturing professionals were contacted and interviewed through a series of web-based questionnaires, telephone and e-mail interviews, the focus on what's the evolving best practices in this area were discovered.

The key insights gained include the convergence of business process reengineering and manufacturing outsourcing are leading to best practices in manufacturers attaining their ROI objectives for outsourcing strategies. Of all processes that drive manufacturing, the quote-to-order and inquiry-to-order processes were most mentioned by respondents and the convergence of business process reengineering and manufacturing the most pronounced in this area. The manufacturers contacted in this research effort also mentioned the need for transparency in manufacturing capacity and the need to deliver Available-to-Promise (ATP) on their quotes, in addition to the need for having transparency into the manufacturing status of their specific orders. What emerges is a hierarchy of product customization strategies that begin with Assemble-to-Order and progresses to Engineer-to-Order shown within this report. The payoff of making achieving transparency throughout an outsourcing network between contract manufacturers and clients is also reflected in the tables showing a 33% reduction in order cycle times and a 41% reduction in incorrect orders due to the transparency achieved by integrating outsourcers' manufacturing plants and their client companies.

Introduction

All companies are asking their IT departments to reduce IT costs and head count, and this is hitting white collar workers the hardest. These account for 19% of the IT budget by many industry sources, making them an attractive target for cost savings. However, rather than just cutting resources and doing without, many companies are lowering their costs by using offshore outsourced resources on a project-by-project basis. Although tactical, project-focused offshore outsourcing consistently saves companies money, increased project management costs, schedule delays, and project rework are common, creating project overhead and reducing savings by half. Only by adopting a strategic approach to offshore resources can companies minimize the overhead and maximize the savings and accomplish their strategies.

According to AMR Research, project-based offshore outsourcing can save companies 25% of in-house costs. By many accounts, an additional 25% to 30% of savings are possible. Although service providers are expanding their offshore service capabilities, most of the work being done offshore is application development and maintenance. In the future, companies will be able to use offshore Business Process Outsourcing (BPO) and IT operations service offerings to further increase their savings. Companies using offshore resources for development projects indicate savings from a low of 0% (no savings) to a high of 50%, but the majority of companies report 25% to 30% savings of the cost of doing the project in house.

25% reduction in labor costs sounds attractive; however, the labor rates for programmers in India (where most offshore work is being done today) are between 40% and 50% of the cost of an in-house salaried programmer. The difference between the labor rates and the actual savings achieved by companies is the result of communication and project management problems between companies and their offshore service providers. The problems increase costs as follows:

The growth of onsite contracted resources -- Companies using offshore resources are using a blended delivery model that comprises 10% to 30% onsite and respective 90% to 70% offshore resources. The onsite resources ease communication and project management concerns since they manage the offshore resources, but they cost 2.5 to 4.0 times that of offshore resources.

Managing Project delays -- Companies report that the transition to offshore resources takes several months: project management relationships need to get established and communications need to become efficient. The exact amount of time depends on the scope of the project and the ratio of onsite to offsite resources, but a 30% increase in project schedules for projects that comprise 20% onsite and 80% offsite resources is a reasonable estimate.

Unforeseen Project rework -- Rework caused by the misunderstanding of specifications and project plans contributes to the overhead. One company using offshore resources to build a B2B application reported that modules required three rework cycles to overcome the developer's misunderstanding of project requirements.

Companies can reduce the gap between the in-house and outsourced offshore labor rates and the actual savings by adopting a more strategic approach to offshore resources.

Project-based offshore outsourcing carries with it a high overhead. Worse, most companies engaged in project-based offshore outsourcing never improve their ability to manage offshore relationships and reduce the overhead. Projects are often done by independent groups with no communication of best practices among them. A strategic approach, however, can result in the following benefits:

Minimize the overhead associated with the projects by using expertise developed to manage offshore projects.

Increase the number of projects being supported by offshore resources to increase the overall savings to the company.

A strategic framework for using offshore resources includes two models:

model for segmenting projects into strong and poor outsourcing opportunities model for determining the optimal offshore delivery model for projects based on company process maturity and project specifics key lesson learned is to outsource based on a project's strategic value to the company first, and for cost reductions second. The guideline that most companies follow when selecting projects for outsourcing is to keep core competencies in house and outsource the rest. The problem with this is that companies often hold core competencies that provide little or no competitive advantage to the company. Worse, IT departments only waste management focus and in-house resources when perfecting their ability to perform low-value tasks, such as application maintenance.

Rather than following the core competency guideline, companies who are getting the best results from outsourcing are following three major strategies: saving money, accessing specific skills, and allowing management to focus on more strategic initiatives. To best achieve these goals, companies getting the best results segment their activities into three categories:

Activities that are strategic and provide competitive advantage - Companies should invest their own resources in activities that provide competitive advantage. Only in unusual circumstances should they outsource components of this work (e.g., the need for short-term skilled resources to complete a critical project). Lowering costs and reducing management attention are extremely bad reasons to outsource strategic tasks.

Activities that are critical but provide minimal competitive advantage - Critical tasks are essential for keeping a company functioning, and failing to execute these… [END OF PREVIEW]

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Is Outsourcing Inevitable?.  (2006, July 25).  Retrieved November 21, 2019, from https://www.essaytown.com/subjects/paper/outsourcing-inevitable/29135

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