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Assignment on Outsourcing
by Commerce Solutions in

OUTSOURCING

Definition:

Ø Outsourcing involves an organization passing the provision of a service or the execution of a task previously undertaken in-house to a third party to perform on its behalf.

Or

Ø The transfer of a business functions to an external service provider.

OUTSOURCING TO INDIA

The idea of outsourcing has its roots in the 'competitive advantage' theory propagated by Adam Smith in his book 'The Wealth of Nations' which was published in the year 1776. What started off as the shifting of manufacturing goods to countries providing cheap labor during the Industrial Revolution, has taken on a new connotation in today's scenario. In a world where information technology has become the backbone of businesses worldwide, 'outsourcing' is the process through which one company hands over part of its work to another company, making it responsible for the design and implementation of certain business process under the requirements and specifications of the outsourcing company.

Despite being a fledgling in the global ITES/BPO industry, the Indian ITES industry recorded a growth rate in excess of 50% in the years 2002-03. Industry experts consider this a positive indication of the times to come and a look at the ranking and the revenue and headcount statistics show the potential of the industry. The global ITES/BPO industry was valued at around US$ 773 billion during the year 2002 and according to estimates by the International Data Corporation worldwide, it is expected to grow at a Compounded Annual Growth Rate (CAGR) of 9% in the future. NASSCOM lists the major indicators of the high growth potential of the ITES/BPO industry in India as the following.

  • During the years 2003-04, the ITES-BPO segment achieved a 54 percent growth in revenues as compared to the previous years
  • ITES exports accounted for US$ 3.6 billion in revenues, up from US$ 2.5 billion during the years 2002-03
  • The ITES-BPO segment also proved to be a major opportunity for job seekers, creating employment for around 74,400 additional personnel in India during the years 2003-04
  • The number of Indians working for the ITES sector jumped to 245,500 in the year 2004

In the future, the BPO segment is expected to employ over 1.1 million Indians, according to studies conducted by NASSCOM and leading business Intelligence company, McKinsey & Co. Market research shows that in terms of job creation, the ITES-BPO industry is growing at over 50 percent.

Surveys of the Indian ITES/BPO industry have shown the following trends:

  • Customer care: Customer care and support services will continue to lead in terms of revenue generation.
  • Finance: With the financial services segment moving into value added domains like insurance claims processing, financial management services and equity research, this segment is expected to clock the highest growth.
  • HR services: HR services are also expected to grow in the future.
  • Payment services: This segment has also been identified as a high growth area within the industry, and is expected to generate high revenues.
  • Administration: Revenues from the administration services segment are expected to increase in the future.

Content development: The content development services segment which includes engineering and design services, digitization (GIS), animation, network management and biotech research, is expected clock a large turnover in the future.

OUTSOURCING TO CHINA

Investors betting on the growth of business process outsourcing (BPO) to China should focus on engineering and IT areas of investments, because these job functions are most easily bundled into a project format and moved offshore. On the other hand, industries that sell services to the U.S. government (e.g. aerospace and defense contractors), require significant U.S. government regulatory approval (e.g. pharmaceutical manufacturers), or rely heavily on proprietary intellectual property (e.g. high-end microchip design) may be a less appropriate bet for those hoping to profit from increase outsourcing to China.

Most of the plastic widgets at Wal-Mart Stores (WMT) seem to be made in China. Does this mean that the rest of our jobs will be moving to China soon as well? From an investment perspective, it is important to understand which service sector industries might be affected by competition from China and start to think about which companies may profit from that trend.

Following are the companies benefiting from outsourcing to China:

* Microsoft, Dell, SAP, Nokia, General Electric, Alcatel-Lucent, and Unilever (UL) have meaningful engineering and IT off shoring operations in China.

* Accounting and consulting firms like Accenture (ACN), BearingPoint and Infosys Technologies (INFY) are well-positioned to benefit from China's highly-educated, lower cost workforce.

* Wal-Mart Stores (WMT) and other big box retailers benefit from low cost manufacturing in China.

Newell Rubbermaid (NWL) and other manufacturers have shifted much of their production to China; Newell Rubbermaid outsourced 75% of its manufacturing to China in 2007.

OUTSOURCING TO RUSSIA

Russia's strength is its engineering and scientific talent. It has about 3,500 engineers for every 1 million people, nearly the same ratio as the United States. The technical skills of the Russian workforce go beyond basic programming and extend to complex engineering tasks.
To take advantage of this talent, companies such as Sun, LG, Google, Oracle, Siemens, Intel, Boeing, IBM, Dell, Motorola and Citibank have established a presence there.

Russian engineers are highly skilled in software development.

In 2010 ACM-ICPC World Finals in Harbin, Russians took 50% in top 10.
In 2009 ACM-ICPC World Finals in Stockholm, Russians took 50% in top 8.
In 2008, Russian universities won five of the top ten places (including first place!) in the International

Russia has approximately 1 million technically trained employees, more then China, Japan or the United States, and three times as many as India.
(The World Bank)
In fact, more people work in R&D in Russia than in any other country in the world.
(American Chamber of commerce in Russia, 2003)


Education

Worldwide, Russia has the third-largest pool of engineers, mathematicians, and scientists per capita. Many universities, mainly in the major cities, offer a steady stream of technical graduates.


Infrastructure

Infrastructure is best in technology parks and major cities.


Prospects for growth

Worldwide spending on information system (IS) outsourcing exceeded billion in 2001 and are expected to reach 10 billion by 2005 (IDC). Two major consumers of outsourcing services are the USA and Western Europe respectively. According to IDC, the US-based companies will spend billion on IS outsourcing in 2005, while Western Europe will spend billion.

Approximately 18% (billion) of this spending falls at offshore contracts. Particularly, US-based companies have spent .5 billion on offshore outsourcing services and the amount will more than triple by 2005 (.6 billion, according to IDC).

All of the global IT outsourcing market, including the large Indian component, has been facing temporary but acute challenges in a recessionary global economy that was impacted by Sept. 11th and its aftermath (Gartner Group). Security issues of all kinds have come to the fore. Blue chip clients for outsourcing are typically spreading their development activities among several sources in order to minimize risks. In this connection the Gartner Group and others record a growing readiness among this clientele to outsource their software development in Eastern Europe, where Russia is a major player.

Russia has all the prerequisites for taking these new contracts. It has more personnel working in R&D than any other country in the world and ranks 3rd in the number of scientists and engineers per capita. According to the World Bank, Russia has one million specialists waiting in the wings who are capable of quickly joining its IT sector.

The domestic outsourcing industry is maturing. Currently, more than 250 Russian-based companies are active in offshore software development. The major software development centers (Moscow, St.-Petersburg, and Novosibirsk) have adequate telecommunications infrastructures. The leading Russia-based software companies have 200+ permanent staff, established quality assurance teams and are building their presence in the USA and Western Europe by opening sales and marketing offices.

At least a dozen major international companies have established offshore development centers in Russia. These include Motorola, Intel, Sun, Boeing, LG, Lucent and Nortel.

Other advantages are competitive labour costs, proximity to Western Europe and good transportation links to the USA, a shared European culture and history that facilitates cross-cultural understanding.



Global risks

Indian strengths in software outsourcing are well-known, so we will be brief here. The Indian software industry is a decade older than Russia's and has gained a world-wide reputation for its software development resources. Bangalore vendors have strong business ties with the Indian Diaspora in the USA. It is no exaggeration to say that Indian experts hold leading positions in the US IT-sector.
Indian companies have proven their commitment to quality. The majority of companies worldwide which have achieved CMM Level 5 are located in India.

However, the IT industry in India today faces geopolitical risk that has come to weigh on procurement decisions of even its faithful foreign clientele. There is the ongoing saber rattling between India and Pakistan over Kashmir and other border flash points. An outbreak of war has seemed close several times in the last year. And there is also the unrelated but still real anxiety of frequent business travelers to the region that Al Qaeda of nearby Afghanistan and Pakistan has not been totally vanquished and exposes them to unwanted risks.

Meanwhile, Russia's standing in the geopolitical risk scorecards of management consultancies have gone in the opposite direction from India's these past 18 months. The economic and political climate has stabilized and improved during President Vladimir Putin's first term in office. Putin enjoys popular support in his domestic constituency as well as an increasing respect in the international community.

Russia's debt and credit ratings are improving. Standard & Poor's recently revised its outlook for Moscow and St. Petersburg to positive from stable and affirmed its B+ long-term credit and debt ratings on the two cities. Major legislative, regulatory and legal reforms planned and/or underway as well as rapid adoption of international accounting standards suggest stronger prospects for continued improvement of Russia's economy, international standing and general business climate.

Political and legislative changes are beginning to exert a positive influence on the Russian offshore software development industry. The Russian government is planning to introduce tax privileges for software developers and IT specialists. Other programs including incubators to train new entrepreneurs and cooperative research programs such as the Russian Ministry for Economic Development's recently announced .6 billion Electronic Russia Program are taking shape. There is a growing understanding of the role the industry should play in a modern Russian economy. The authorities, media, industry and academic communities now agree that offshore software development is one of the markets where Russia must be competitive.

Top Countries for Outsourcing

Earlier this year, consultancy A.T. Kearney identified the most desirable outsourcing destinations. Countries were ranked by a) financial attractiveness, based on such measures as compensation and infrastructure costs; b) a so-called people score, measuring a nation's people skills, availability of language and educational skills, and the size and quality of the IT industry; and c) their economic/political environment, infrastructure quality, cultural exposure, and IP security.

Country

Overall

Score

Financial

Score

People

Score

Environment

Score

INDIA

6.9

3.2

2.3

1.4

CHINA

6.6

2.9

2.3

1.4

MALAYSIA

6.1

2.8

1.3

2

THAILAND

6

3.2

1.2

1.6

BRAZIL

5.9

2.6

1.8

1.5

INDONESIA

5.9

3.3

1.5

1.1

CHILE

5.8

2.7

1.2

1.9

PHILIPPINES

5.8

3.3

1.2

1.3

BULGARIA

5.8

3.2

1

1.6

MEXICO

5.7

2.6

1.5

1.6

SINGAPORE

5.7

1.7

1.5

2.5

SLOVAKIA

5.6

2.8

1

1.8

EGYPT

5.6

3.2

1.1

1.3

JORDAN

5.6

3.1

1

1.5

ESTONIA

5.6

2.4

1

2.2

CZECH

5.6

2.4

1.1

2.1

POLAND

5.6

2.6

1.2

1.8

VIETNAM

5.5

3.3

1

1.2

UAE

5.5

2.7

0.9

1.9

USA (TIER II)

5.5

0.5

2.7

2.3

URUGUAY

5.5

3

1

1.5

ARGENTINA

5.5

2.9

1.3

1.3

HUNGARY

5.5

2.5

1

2

GHANA

5.5

3.3

0.9

1.3

LATVIA

5.5

2.6

0.9

2

LITHUANIA

5.4

2.6

0.8

2

SRI LANKA

5.4

3.2

1

1.2

MAURITIUS

5.4

2.8

1

1.6

TUNISIA

5.4

3

0.9

1.5

PAKISTAN

5.3

3.2

1

1.1

SOUTH AFRICA

5.3

2.5

1.2

1.6

JAMAICA

5.3

2.8

1

1.5

ROMANIA

5.3

2.9

0.9

1.5

COSTA RICA

5.3

3

0.9

1.4

CANADA

5.2

0.8

2.1

2.3

RUSSIA

5.2

2.6

1.4

1.2

ISRAEL

5.2

2

1.3

1.9

SENEGAL

5.1

3.2

0.8

1.1

GERMANY

(TIER II)

5.1

0.5

2.2

2.4

PANAMA

5.1

2.9

0.8

1.4

UK (TIER II)

5.1

0.5

2.2

2.4

MOROCCO

5.1

2.9

0.9

1.3

SPAIN

5

1.2

1.7

2.1

NEW ZEALAND

4.9

1.5

1.1

2.3

AUSTRALIA

4.9

0.9

1.7

2.3

UKRAINE

4.9

2.8

1

1.1

FRANCE

(TIER II)

4.9

0.5

2.1

2.3

TURKEY

4.8

2.1

1.3

1.4

The Different Sectors in Outsourcing

As business realities change, an increasing number of companies are looking at ways to minimize costs. Outsourcing non-core areas to a skilled vendor like Outsource2india can be a viable alternative for them. Adopting this strategy can help the business reduce costs without compromising on quality.

Today, businesses are outsourcing a diverse range of services. These range from the relatively low-skill call center services to market research and analysis, which requires expertise and skilled workers. In addition, Finance and Accounting Outsourcing (FAO) is becoming increasingly wide spread as is medical outsourcing. From healthcare providers to software developers, everyone seems eager to leverage the benefits of outsourcing.

1. Call center outsourcing

Typically, BPO services include:

  • Inbound call center services – These typically include answering services that are available 24X7. Call center agents can also be trained to up-sell and cross sell services, take orders, and provide information on the benefits and features of products/services
  • Outbound call center services – These include services like telemarketing services, lead generation services, and market intelligence services
  • Technical helpdesk services – This includes technical after-sales support for products and services

2. Knowledge Process Outsourcing (KPO)

A KPO typically provides domain-based processes and employs advanced analytical skills and business expertise, rather than just process expertise. Some research services include:

  • Market research and analysis – These services help the business extract useful information that reveals current trends and provides inputs for decision-making
  • Web-based market research – These services help collect information from different websites. As compared to primary research where data is directly collected from respondents, data is collected from secondary sources like government publications and newsgroups

3. Data entry outsourcing

All organizations, whether big or small, have data entry requirements. Data entry outsourcing can be divided into:

  • Online data entry – These includes services such as compilation of data from websites and e-books, updating online catalogs, and creation of databases
  • Offline data entry – These include services such as offline data capture, fillings of forms, forms processing, data entry from one format/version to another, MS Word document data entry, etc

4. IT sector outsourcing

IT outsourcing typically includes outsourcing of software development. This may take the form of end-to-end outsourcing where all activities related to design, development, and testing are outsourced. In other cases, only a part or portion of the overall system is outsourced for development. This is in cases where the client does not have the requisite skills or technology for the development work.

5. Healthcare sector outsourcing

Medical outsourcing includes a diverse range of HIPAA compliant services. These include:

  • Medical transcription services – These include services to transcribe information from a variety of audio sources and file formats such as MP3, MPG, MOV, DSS, WMA, etc
  • Medical coding and billing services – These services are delivered using popular billing software like Medic and Lytec
  • Teleradiology services - These services provide 24X7 access to qualified radiologists

6. Financial sector outsourcing

Accounts outsourcing services include:

  • Accounting services – These include preparation of financial statements for the statutory annual audit, cash forecasting services, and payroll services
  • Bookkeeping services – These include preparation and maintenance of both day-to-day books as well as monthly and quarterly accounts. It also includes preparations of different kinds of reports like sales reports
  • Financial analysis services – These include analysis of financial information such as financial statements, portfolio structures, and offer documents

7. Engineering services outsourcing

These include a range of mechanical, civil, structural, and architectural engineering services:

  • Computer aided design (CAD) services to develop prototypes
  • 2D drafting services
  • Conversion of paper drawings into a digitized format
  • Design and analysis for residential and industrial buildings
  • Architectural visualization services (3D rendering or 3D animations)
  • Services for evaluation and strengthening of deteriorating structures

Various Outsourcing Businesses

  • Aerospace
  • Auto/Manufacturing
  • Communications / Telecommunications
  • Education / Non-profit
  • Engineering
  • Finance / Banks / Accounting
  • Government
  • High Technology
  • Insurance / Real estate / Law
  • Medical / Dental / Healthcare
  • Pharma / Biotech
  • Retail & Distribution
  • SMB / Small & Medium Businesses
  • Transportation
  • Utilities / Energy

By Function

  • Application Development / Maintenance
  • BPO / Business Process Outsourcing
  • Call Centers / Customer Service
  • Disaster Recovery
  • Finance & Accounting
  • HR / Human Resources
  • IT / Information Technology
  • Quality Assurance / Testing
  • Research & Development
  • Security
  • Supply Chain / Logistics
  • Telecom / VoIP

REFERENCES

  • http://www.outsource2india.com/why_india/articles/outsourcing_history.asp
  • http://www.wikinvest.com/concept/Outsourcing_to_China
  • http://images.businessweek.com/ss/09/01/0114_top_outsourcers/1.htm
  • http://www.independent.co.uk/news/business/news/airbus-to-outsource-half-its-work-438364.html
  • www.wto.org/english/tratop_e/serv_e/sym_april05_e/matto_wunschvincent_art_e.pdf
  • www.wto.org/english/tratop_e/serv_e/sym_april05_e/mashayekhi_e.ppt - 2005-05-13
  • http://www.ft.com/cms/s/0/ee59d88a-251c-11df-a189-00144feab49a.html?nclick_check=1
  • http://www.sourcingmag.com/content/what_is_outsourcing.asp
  • http://www.supplychainer.com/50226711/outsourcing_in_airbus_and_boeing_dilemma_of_strategic_destruction.php