Fundamentals of Outsourcing Module 2

2 Types of Outsourcing

Third Party Shared Service Center (SSC)

Owned by a service provider, a local entity or part Wholly owned by the mother group.
of a global group.
Providing services to the clients of the service Providing services entirely to affiliates and
provider. subsidiaries, or more rarely to clients of the
mother company.

Example – Third Party

Microsoft and their service SharePoint. Client companies rely on Microsoft to leverage its technical
expertise to ensure for an optimum user experience by providing the following:

a. Intranet portals
b. Document file management
c. Collaboration
d. Social Networks
e. Extranets
f. Websites
g. Enterprise Search
h. Business Intelligence

Example – Shared Service Center

San Miguel Packaging Products (SMPP), SMPP the total packaging solution to San Miguel Beer’s Division.
SMPP provides San Miguel Beer with the bottles and cans, the crowns for the bottles, the labels for the
bottles, even the plastic palettes or cartoons for easy transport of products.

In similar fashion, SMPP also works with other beverage products of San Miguel doing the same service
it provides for SMB.

Third Party Shared Service Center

Accenture ANZ Bank
AEGIS Chartis Technology and Operations
Convergys Management
EGS Chevron
Sitel Citigroup
IBM Dell
SPi Global DKS
Stream Global HP
Sutherland HSBC
Sykes JP Morgan and Chase
Teletech Maersk
Teleperformance Manulife
Telus Shell Shared Services Asia
Thomson Reuters

Strategies for Outsourcing

a. Multisourcing
b. Crowdsourcing
c. Onshoring
d. Nearshoring
e. Offshoring
Multisourcing

Multiple vendors for client’s outsourced project.

It simply means contracting or using multiple vendors for fulfillment of a client’s outsourced project.

Example:

- GM’s Brazilian E – Commerce site. Vendors: Oracle, AT & T, Microsoft Cisco, HP Enterprise Services,
IBM.
- GM’s 2007/$7.5B IT outsourcing contract with HP Enterprise Services, IBM, Capgemini and Wipro
Ltd.

Advantage

Buyer or the client can leverage the best possible: technical expertise, support infrastructure, system or
product support from the host of service providers that they engage through separate contracts.

Disadvantage

Possibility of incompatibilities of technologies intended to work together. Then again this is easily
overcome with project planning, testing, training and quality assurance.

Crowdsourcing

Outsourcing to an unidentified, generally large group of potential offerers in the form of open call. (Jeff
Howe)

Company puts out a call for a project; best solution/submission is accepted and contracted.

It is also the practice of obtaining needed services, ideas or content by soliciting contributions from a
large group of people especially from an online community, rather than from traditional employees and
suppliers.

Example:

A game developer who releases a beta version of a game for public testing. To test and evaluate a
product, they invited people to see and test it as they finalize the product.

It would have been an added cost to company to hire professionals so as an alternative, they invited
people to see and test the software.

Onshoring

Vendor is in the same home country as the client.

It simply means that the vendor or service provider is based in the same country as the client company.

Example

San Miguel Beer (SMB) and San Miguel Packaging Products (SMPP)

Advantages

-Allows immediate response; product designers in the same country to market feedback quickly.

-Local contractors have same market knowledge, culture, language, communication style; minimize
culture issues.
Disadvantage

-Risk of inadequately, selected, trained, supervised staff i.e., less skilled because contractor staff are
lower paid.

-Risk of higher attrition (lower business acumen/process knowledge) than internal staff, less motivation
to deliver quality.

Given these potential disadvantages it is critical for a client to conduct a thorough market research for a
service provider that not only fits budgetary requirements but also can provide sufficient proof based on
a track-record related experience.

Nearshoring

The transfer of business to nearby a country, often sharing the same boarder.

Both parties expect to benefit from one or more of the following dimensions of proximity: geographic,
temporal (time zone), cultural, linguistic, economic, political or historical linkages.

Advantages

-Fee-for-service-variability rather than fixed compensation

-Significant labor cost arbitrage

Variability implies a certain degree of uncertainty that is something uncontrollable. Yet in this instance,
fee variability over fixed costs actually works in favor of the client or buyer. As you can forecast, the
number of transactions and not be locked to a fix plan and potentially to pay for unused capacity.

Disadvantages

-Additional coordination costs, sourcing management, communications

-Transfer/Pricing Tax Margin Requirements

Example:

A retail firm in Hong Kong may outsource the manufacturing of their garments to Manila for some
reasons. However, they may need to train some Filipinos about their culture and language for better
communication. Transporting the garments and coordinating from Manila to Hong Kong would also
incur additional cost.

Offshoring

Vendor and country in different countries.

It is the most popular form of outsourcing.

Advantages

-Allows company to focus on core business.

-Opportunity to expand to new areas cost effectively

Disadvantages

-Data privacy/confidentiality issues

-Lack of right business acumen/right market knowledge in offshore location
-Cultural differences leading to delays and miscues
-Risk of high attrition in service staff, weak staff selection/training
 Module 2 Continued…

What to outsourced – 2 Types

Core Activities – Task – Processes

- Primary process or product of the business

- Tasks that deliver the primary product, the unique value proposition of the company.
- “Essential, defining activities of an organization,” what it needs to keep enhancing to improve
competitive advantage.

Non-Core Activities – Task – Processes

- Support activities, processes, functions

Example:

Reebok is an athletic company that creates and designs sports apparels. Keeping that in focus, Reebok
management chose to outsource its administrative Human Resource functions. In doing so, Reebok’s
total back office support manning the head-count is significantly lean.

Core activities –tasks processes are essentially what the company is known for, is what you bringing
home, is what you are paying for, or how the company makes its money. In our example, the core
activity of Reebok is to create and design sports apparels.

For Non-Core activities tasks-processes. Reebok needs a Human Resource Department to support their
internal operations but this indirectly affects the fulfillment of the value proposition to their customers.

What NOT to outsource?

- Design
- Product Development
- Process
- Recipe

Example

Both KFC an American brand and Jollibee proudly Pinoy, closely protect their chicken recipes. Core
activities are the bread and butter of the business – the money makers of the company.

What to Outsourced?

Well defined/documented tasks, standard outputs.

Example:

- IT development: programming, documentation, unit and integration testing, implementation of

new systems, conversion to new platforms.

- IT maintenance: application maintenance, helpdesk and network support.

Typically Outsourced Activities – Tasks – Processes

- Business Process Outsourcing

- IT Outsourcing

- Support Functions

- Routine activities or activities that can automated at larger centers

- Seasonal Activities

- Part-based Activities
Example:

Business Process Outsource (BPO) – Outsourcing of entire business process components: e.g. HR,
payroll, accounting, financial, etc.

Business Process Companies that outsource the Companies that caters to the
function function

Human Resource (HR) Reebok Shell SSC, Deutche Knowledge

Services, Coca-Cola Bottlers
Business Services
Financial Sallie Mae, Washington Mutual Aegis, DSM “Manila” LLC, Du
and Expedia Baladad and Associates
Payroll and Accounting Del Monte Philippines Manulife Financial, DKS, BPO
International, Inc.

IT Outsourcing

- IT technical Support

- IT application development

- IT Application Management

- Data Center Operations

- Software as a Service

- Cloud

Companies that caters to IT Outsourcing

- Accenture

- Chartis

- Chevron

- HP

Support function/Services

- Cafeterias

- Copy Centers

- Security

- Janitorial Services

- Trucking/Shipping

- Building Maintenance

Routine Activities

- Small Banks outsourcing check processing to larger banks, riding on ATM base of multibank
network

- Small vendors using Amazon.com as data center, marketing and payment processing platform.

- Banks using common/multibank core banking services of large technology providers

Seasonal Requirements

- One day 50 employees needed, next day only 10 are needed

- Christmas hires to handle additional volume of transactions

- Temporary extension of operating hours to accommodate foot traffic.

All Part Based Activities

- These are activities that are routine, scheduled, with little uncertainty

- Automobile Assembly

- Electronics Assembly

- Packaging Solutions

- Handicrafts or garments for mass production.