MDD

Tuesday, 11 September 2012

Outsourcing


Henry Ford’s Model T was the emblem of modern manufacturing systems characterised by suppliers and integrators working together to create value.
Industrial production, contracting, subcontracting and contracting out have been defining features of modern organisational forms since the industrial revolution and perhaps prior.
Two main organisational forms have prevailed in the modern era:
  1. Vertical integration, managing and owning the whole value chain process from procurement of raw materials through to production of end product.
  2. Horizontal specialisation, focusing on crafting/creating/delivering excellence at once core stage of the process of production before passing the processed good onto another stage.
  3. Fordist manufacturing created conditions for interfaces between different tasks, activity, input, output, or stages of transformation making up the manufacturing process.
  4. Japanese Kanban system is one extreme of layered specialisation from many small suppliers coming together under the umbrella of the main supplier/contractor/manufacturer in the manufacturing environment.
  5. Inter-firm information/data process specialisation was enabled by EDI (Electronic Data Interchange) standardisation initiatives from the 1970s through to the turn of the century, now continuing under the aegis of XML and newer standards.
EDI enabled ‘e’ interfaces to be constructed between firms in a similar way to the input/output models of staged manufacturing.
Along the way it demonstrated the overcoming of geographical, spatial and temporal barriers to data exchange.
The modern global supply chain is an extreme case whereby a process’s implementation is facilitated by data exchange between a diverse array of firms thereby creating the very possibility of an integrated supply chain.


As an outsourcing destination Ireland has lost appeal throughout the last decade.
Rising costs and competition from developing countries has eroded many of the advantages that Ireland once held.
Consequently Ireland has itself become a net consumer of outsourcing services.
A driver of this trend is the steady erosion in competitiveness in Ireland at country level, a trend which has been in place since the mid-1990s.
The Irish Central bank quarterly bulletin January 2010 provides harmonised competitveness indicators (HCIs) for the Irish economy. Cost driven deterioration in Irish competitiveness has been partially compensated for by increases in productivity but only it appears by shifting lower cost lower value added activities and processes offshore.
The picture for IT outsourcing is however less clear as Irish based offices of multinationals move up the value chain.
Like all mature markets Irish firms and multinationals based in Ireland often outsource organisational function activities to local or international-based outsourcing providers; for example traditional areas like payroll, accounting, finance, legal, HR, purchasing, and logistics, but also such as marketing focused on SEO (search engine optimisation), web development, website hosting, IT services like e-mail and spam filtering, virtualised storage, and telephony services.
Core or primary value processes may also be outsourced but at a higher risk or for reasons other than cost reduction alone.
Whether providers of outsourced services based in Ireland themselves source their activities offshore or not is a matter for their own operations.


Claims for the size of Ireland destined outsourcing activities and Ireland generated outsourcing vary, range widely between 100s of millions and billions.
Helpdesk and international call centre operations is one area where firms still see value in Irish based operations, particularly where multilingual skills and addressing the European market are important requirements.
In 2003, the value of the outsourcing market in Ireland passed €209 million ($234 million).
Irish banks have outsourced considerable operational activities to third-party providers (e.g. Bank of Ireland's multi-year deal with HP followed by the switch to IBM).
The public sector in Ireland also has long experience with outsourcing services particularly IT (e.g. The Irish Revenue Commissioners and Accenture).
Regardless of the provisioning destination (whether onshore or offshore) the trend is for organisations to increase the investment in outsourcing projects.
Even so firms experience with the outsourcing phenomenon is mixed as expectations to deliver higher levels of service grow and priorities change from simple cost reduction towards valued added.
Regardless of the experience with individual projects outsourcing is likely to remain a popular option with over half CIOs in Irish firms having budgets cut in 2009, cost saving will remain a huge driver or outsourcing initiatives.


HP Video Podcast: Be "on the business" for strategic IT and outsourcing
Tim Hynes, IT Director Europe, Middle East & Africa, Microsoft
HPVideoBlog_01

Why Global Sourcing?
I argue that the sourcing phenomenon is an intrinsic feature of human societies that is amplified by scientific advance, manufacturing innovation, technology more generally, and accelerated in the modern era of computer based infrastructures, high-tech products and services.

What organizational activities and products are amenable to sourcing beyond the traditional boundaries of organizations? And if activities and products can be sourced beyond the boundaries of the organisation what models or modes can be used?

Outsourcing isn't a business fad, it is a fundamental part of modern industrial production. Capital based manufacturing and production of goods and services is predicated on the basic idea of a division of labour. Specialised stages of manufacture, in other words a supply or value chain exist when skilled work is applied to some material, goods or activity to add value until an end point when the good or service is consumed. All industrial and professional specialisation represents therefore a kind of outsoucing. No one organisation, firm or individual has within its power the totality of knowledge, skills, resources, effort and time to produce everything we need or desire. Sourcing has therefore been and remains an intrinsic aspect work (labour and production) in society, from the most rural to the most metropolitan.

What therefore is sourcing? Consider the following definition:
“Sourcing is the act through which work is contracted or delegated to an external or internal entity that could be physically located anywhere. Sourcing encompasses various in-sourcing and outsourcing arrangements such as offshore outsourcing, captive offshoring, nearshoring and onshorning.” (Oshri et. al, 2009)
In light of the prominence and pervasiveness of inter-firm sourcing what are the advantages and disadvantages of different sourcing modes and how are they justified and applied in historical and contemporary settings? The current situation is never completely estranged from its historical contexts. Historical trends in global sourcing lead in to current topics and help to explain how local conditions have evolved.

For one reason or another various sourcing modes have proved more successful in particular industries and in particular locations. The relationship between technology trends and the emergence of expanding arrays of options around sourcing of product components and services offer one set of explanations, explanations such as the irresistible imperative of technology driven change or particular organisational structures. Other ways of understanding the success of sourcing through uncertain contextual conditions and processes of emerging knowledge adapting to and taking advantage of unique situations and knowledge.

An interpretation of global sourcing discourse that managers can use effectively should be more than the straight application of technological recipes, formulas, methods, rules, and organisational templates. Reflective actors will always seek to identify the interests involved, to be aware of who benefits (or looses) in order to juxtapose and evaluate among the various strategic decisions between in-house and outsourced delivery. Sourcing initiatives may proceed smoothly but if not what remedial measures can be employed addressing the organizational and technological issues relating to global sourcing?

The reflective manager has a broad palette of concepts and frameworks for interpreting and deciding sourcing cases. However this area of organisational operations is constantly evolving and changing and so the manager must be adept at identifying emerging trends in sourcing relationships that are likely to be important in the future with implications for current situations. In this way involved actors can merge theory with context, against a historical backdrop, extrapolate and justify the implications of changing sourcing arrangements in complex inter-organizational relationships.

Case: Bank of Ireland Outsourcing 2000-2011
Irish banks have, in the past, outsourced considerable operational activities to third-party providers. Bank of Ireland's multi-year deal with HP followed by the switch to IBM exemplifies one particular case of the benefits and risks of adopting a deep outsourcing strategy in a digital 'information' industry.

(24 February 2003: article-link) BOI license desktop and server software from Microsoft.
(4 April 2003: article-link) BOI announce 7 year deal with HP for IT services worth ~500M, over 500 bank employees to be transferred to HP.
(2 July 2003: article-link) BOI announce multi-million deal for banking software products.
(3 November 2010: article-link) BOI announce 5 year deal with IBM for IT services worth ~500M,


References
Oshri, I., Kotlarsky, J. & Willcocks, L. P. (2009) The Handbook of Global Outsourcing and Offshoring, Palgrave Macmillan.