The Handbook of Global Outsourcing and Offshoring (available through auckland uni library) is the textbook for Course InfoSys701. I will be reading it and putting notes into this article.

Key Terminologies in the Sourcing Literature

Sourcing

Sourcing is the act through which work is contracted or delegated to an external or internal entity that could be physically located anywhere.

It encompasses various insourcing (keeping work in-house) and outsourcing arrangements such as offshore outsourcing, captive offshoring, nearshoring and onshoring.

Outsourcing

Outsourcing is defined as contracting with a third-party supplier for the management and completion of a certain amount of work, for a specified length of time, cost and level of service.

Offshoring

Offshoring refers to the relocation of organisational activities (e.g., information technology, finance and accounting, back office and human resources) to a wholly owned subsidiary or an independent service provider in another country.

This definition illuminates the importance of distinguishing whether the offshored work is performed by the same organisation or by a third party.

When the work is offshored to a centre owned by the organisation, we refer to a captive model of service delivery.
When the work is offshored to an independent third party, we refer to an offshore outsourcing model of service delivery.
And when organisational activities are relocated to a neighbouring country (e.g., US organisations relocating their work to Canada or Mexico), we use the term nearshoring.

In addition, there are various common buzzwords such as best-sourcing (or best-shoring, right-shoring and far-shoring (as opposed to nearshoring), usually coined and used by supplier companies. Finally, there is also the backsourcing trend, which implies bringing work back in-house.

Current situation of outsourcing

While, during 2014, many wondered whether automation and backsourcing (also known as re-shoring) would see the erosion of offshore outsourcing, in practice offshore outsourcing has been growing worldwide.

In more recent years, clients have pursued a cost-plus agenda when offshore outsourcing, and for large multinationals, offshore outsourcing increasingly has to fit into a larger global sourcing strategy that mitigates risk and links different sourcing options in a coordinated manner.

Drivers, Benefits and Risks of Global Sourcing

Outsourcing Client’s Motivations

The main driver for outsourcing is still cost reduction
Access to skills and flexibility in how human capital is utilised
Flexibility in how human capital is utilised

Drivers for growth of Global Outsourcing

Technological advances in the telecommunications industry and the Internet have shrunk space and time and have enabled the coordination of organisational activities at the global level.
The supply of skilled yet low-cost labour in countries such as India and the Philippines and subsequently now over 125 further locations;
Investments in infrastructure
An improved business, economic and political climate in a number of developing countries;
The standardisation of IT processes and communication protocols that contribute to the efficiency of inter-organisational activities.
Many countries have invested heavily in improving their telecommunications infrastructure, which is essential for electronically transmitted services.
Many countries have provided tax advantages to attract offshoring.

Benefits of Global Outsourcing

Global sourcing may offer several benefits associated with the advantages of outsourcing in general.

A company may reap significant cost advantages through the creation of economies of scale, access to the unique expertise of a third party and the reduction or stabilisation of overhead costs.
A company may benefit from outsourcing by concentrating on core activities, organisational specialisations, or by focusing on achieving key strategic objectives.
- More specifically, a strategy of building core competencies and outsourcing the rest may enable a company to focus its resources on a relatively few knowledge-based core competencies where it can develop best-in-the-world capabilities.
- Concentration on a core business may allow a company to exploit distinctive competencies that will lead to a significant competitive advantage.
Outsourcing can give the organisation access to the supplier’s capabilities and innovative abilities, which may be expensive or impossible for the company to develop in-house (Quinn and Hilmer, 1994).
A network of suppliers can provide any organisation with the ability to quickly adjust the scale and scope of its production capability upwards or downwards, at a lower cost, in response to changing demand. In this way, outsourcing can provide greater flexibility (McCarthy and Anagnostou, 2003).
Outsourcing can decrease the product or process design cycle time if the client uses multiple best-in-class suppliers that work simultaneously on individual components of the system, as each supplier can contribute greater depth and sophisticated knowledge in specialised areas and thus offer higher quality inputs than any individual supplier or client can (Quinn and Hilmer, 1994).
- On this basis, having several offshore centres can provide around-the-clock workdays.
- In other words, development and production can take place constantly by exploiting the time difference between different countries.

Disadvantages of Adopting sourcing strategies

Adopting sourcing strategies poses several other disadvantages.

Loss of critical skills or overdependence on an outside organisation for carrying out important business functions may evolve into significant threats to a company’s well-being.
Security and confidentiality of data can become major issues for many companies.
Losing control over the timing and quality of outputs since these will be undertaken by an outside supplier: the result may be a poorer quality of the final product or service, and this may sully a company’s image.
Additional outsourcing risks are associated with organisational changes. For example, outsourcing is usually followed by changes in organisational structure with redundancies and layoffs. Internal fears and employee resistance.
Outsourcing can be associated with problems related to the company’s ability to learn because it can increase insecurity among the workforce and decrease its motivation, reducing employees’ willingness to question and experiment.

Table 1.1 Offshore outsourcing risks

Table 1.1 Offshore outsourcing risks
Risk category	Sample risks
Source: Adapted from Willcocks and Lacity, 2006.
Business	No overall cost savings Poor quality Late deliverables
Legal	Inefficient or ineffective judicial system at offshore locale Intellectual property rights infringement Export restrictions Inflexible labour laws Difficulty obtaining visas Changes in tax laws that could significantly erode savings Inflexible contracts Breach in security or privacy
Political	Backlash from internal IT staff Perceived as unpatriotic Politicians’ threats to tax US companies that source offshore Political instability within offshore country Political instability between USA and offshore country
Workforce	Supplier employee turnover Supplier employee burnout Inexperienced supplier employees Poor communication skills of supplier employees
Social	Cultural differences Holiday and religious calendar differences
Logistical	Time-zone challenges Managing remote teams Coordination of travel

The Future of Outsourcing and Offshoring

Trend 1: Spending will continue to rise in all global sourcing markets, but BPO will overtake ITO

BPO is outpacing ITO because many executives recognise that they undermanage their back offices and do not wish to invest in back-office innovations.

Trend 2: The ITO and BPO outsourcing markets will continue to grow through multisourcing

Although ITO and BPO spending is increasing, the average size of individual contracts and the duration of contracts has been decreasing.

Multisourcing is becoming the dominant practice, and its overall growth is driven by client organisations that are signing more contracts with more suppliers.

Although multisourcing helps clients access the best suppliers and mitigates the risks of relying on a single supplier, it also means:

increased transaction costs because clients must manage more suppliers.
suppliers themselves incur more transaction costs
- they must bid more frequently because their contracts are shorter;
- they face more competition because smaller deals mean that more suppliers qualify to bid,
- they need to attract more customers in order to meet growth targets.

Trend 3: Global clients will view India primarily as a destination for excellence rather than a way to lower costs

Many US and UK clients initially engaged Indian suppliers to provide technical services such as programming and platform upgrades. As these relationships matured, US clients assigned more challenging work to their Indian suppliers.

Indian suppliers have also been taking actions to move themselves up the BPO value chain into complex BPO work and management consulting activities.

Trend 4: China’s investment in ITO and BPO services signals promise …

Trend 5: Developing countries beyond India and China will become important players in the global business and IT services market

Trend 6: Large companies will give application service provision a very strong second look, as it becomes cloud services

Many thought that application service provision (ASP) had died with the dot-com bust. But through cloud computing, small and medium enterprises (SMEs) and large organisations are increasingly buying into the proposition of renting applications software, infrastructure, applications, services and storage over the Internet.

Trend 7: Outsourcing will help insourcing … to an extent

In-house operations are facing tough competition in nearly every area and can no longer assume they will retain their monopoly status with the organisation. As a result, in-house operations are adopting the techniques of the market.

Trend 8: Nearshoring will become more prevalent

Compared to offshoring to remote locations, the benefits of nearshoring include lower travel costs, fewer time-zone differences and closer cultural compatibility.

Trend 9: More companies will sell their captive centres or create virtual captive centres

Cloud platform suppliers like Amazon, Google, Microsoft and IBM will move up the value chain with more automated platforms.
Software- as-a-service could become a dominant sourcing model in certain areas such as employee performance management, indirect procurement, payroll and benefits administration, as clients move to self-help through managed services.
Automation (also known as robotic process automation) will have significant impact on outsourcing industry.
- Generally speaking, work can be classified into four types: routine manual, routine cognitive, non-routine manual and non-routine cognitive.
- Of these, it is believed that routine manual work could be automated in the near future and routine cognitive work follows suit.
- Non-routine cognitive work is likely to be automated through the application of Big Data and business analytics, and non-routine cognitive work is also somewhat automated with the use of algorithms.

If this scenario is correct, then client companies will be able to significantly reduce the number of employees, for example, not by outsourcing but by automating.
Meanwhile outsourcing suppliers may try to combat this by offering cheaper automated solutions of their own.

Chapter 1 Summary

In this chapter, we have explained

the key terminology relating to global sourcing
an extensive review of past, current and future trends in global sourcing.

It is clear that more and more firms have introduced business solutions relating to global sourcing to

access scarce skills,
reduce costs and
streamline operations.

Furthermore, interest has been growing rapidly in outsourcing business processes. The success rate of outsourcing has been mixed, because outsourcing benefits are not easily won and managements on both client and supplier sides face multiple risks and challenges on the path to successful outcomes.

Meanwhile SMAC and related technologies are going to have a long-term significant impact on outsourcing, which will see outsourcing still grow but make more automated service propositions.