prof..moses

C H A P T E R 4 B U S I N E S S P RO C E S S A N D I T O U T S O U RC I N G

W H A T R O L E D O E S O U T S O U R C I N G P L A Y I N B U I L D I N G A S U C C E S S F U L O R G A N I Z A T I O N ? “You’ve got to realize that information technology is a catalyst for change at General Motors. The whole end goal...is to build cars and trucks, not to build great IT—it’s just an enabler. Whoever can help me do that, do that together...that’s going to be the company that wins at General Motors.”

—Ray Szygenda, Group Vice President and CIO of General Motors1

E L I L I L L Y : W H Y M A N A G E R S G E T I N V O L V E D I N O U T S O U R C I N G

Eli Lilly is a multinational pharmaceutical company that operates mainly in the United States and Europe.

Its headquarters is in Indianapolis, Indiana, and it employs roughly 44,500 people. Recent annual

revenues were nearly $16 billion.

In drug research and development, the cost and time required to bring a new product to market have

been increasing for decades. Drug companies are struggling to reverse these trends while simultaneously

creating new drugs that are more effective for specific patient groups. Eli Lilly believes that effective

solutions cannot be found simply by “tinkering at the margins of our current business model but rather [by]

finding wholly new ways to realize and deliver the full value of our products.”2 Eli Lilly is taking the

“approach of mapping the critical path for all phases of drug development and implementing more efficient

alternatives. In many cases, the result will be a more global approach.”3

Researchers at U.S. pharmaceutical firms use clinical trials to evaluate new drugs on patients in

strictly controlled settings and are required to submit the findings of these trials to obtain approval from

the U.S. Food and Drug Administration. They use a clinical data management system to capture, record,

and analyze the large volume of data associated with a clinical trial. At the end of the clinical trial, the

data in the system is sent to regulatory authorities for independent analysis and approval of the trial’s

findings.4

In November 2006, Eli Lilly awarded a multiyear contract for business process outsourcing to Tata

Consulting Services (TCS), Asia’s largest IT services firm. TCS has annual revenues of more than $4

billion and nearly 100,000 employees.5 Under the contract, Tata will establish a new medical information

sciences center in northern India to work with Lilly’s Medical Information Sciences disciplines and

provide a wide range of services in clinical data management, statistical analysis, and medical writing.6

The new center will open with a staff of more than 100 professionals, including doctors, biochemists,

software engineers, and microbiologists. The staff is expected to grow over time.7

“The goal of our relationship with TCS has several dimensions beyond reducing cost and risk,

including gaining access to a global talent pool, increasing scalability and flexibility of our resources, and

maintaining a global workflow that is operational 24 hours a day,” according to Dr. Steven Ruberg, Group

Director of Global Medical Information Sciences at Lilly.8

“TCS was selected because of its rich and varied experience as well as for its strong management

capabilities, and ability to provide customers with talented persons and innovative approaches to

address their needs,” said Jay Turpen, Director of Sourcing Capabilities at Lilly.9 TCS has worked with a

number of leading pharmaceutical and healthcare companies, including the Danish pharmaceutical firm

Novo Nordisk for the data management of its clinical trials in India.10

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TCS’s deal with Lilly is yet another indication that India’s largest outsourcing firms are ready to

expand the scope of their operations beyond their well-established basic IT and business services.11

L E A R N I N G O B J E C T I V E S

As you read this chapter, ask yourself:

● How do managers determine which business processes are good candidates for outsourcing?

● How can I ensure the success of an outsourcing project?

Outsourcing has become a frequent management strategy to achieve lower costs, improve organizational focus, and upgrade capability. Many outsourcing contracts are mul- tiyear, multimillion-dollar deals that require approval by an organization’s board of directors. Unfortunately, many problems are associated with outsourcing, including qual- ity problems, legal issues, negative impact on customer relationships, and data and secu- rity leaks. The potential for problems is so great that only about half of all outsourcing efforts are considered successful. Thus, the stakes are extremely high and the potential for a major business setback is great.

The probability of having a successful outsourcing project can be increased greatly if the business managers who lead the effort are forewarned about potential problems. These managers must be able to choose projects and activities that are appropriate for outsourc- ing and avoid those that are not. They also must follow an effective outsourcing process to minimize risks and ensure success.

Institutions that have failed to apply best practices to their outsourcing operations have, in some instances, experienced a significant decline in performance, putting the future value from their outsourcing venture at risk.

W H A T A R E O U T S O U R C I N G A N D O F F S H O R E O U T S O U R C I N G ?

Outsourcing is an arrangement in which one company contracts with another organiza- tion to provide services that could be provided by company employees. When the people doing the work are located in another country, the arrangement is called offshore outsourcing. Either way, the responsibility for control of the outsourced business func- tion or process is shared between the firm contracting for services and the outsourcing service provider. Frequently, the employees who were performing the work internally are transferred and become employees of the service provider. Outsourcing can cover large and small projects alike. For example, a large organization can approve a billion-dollar,

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10-year contract for a company like IBM to manage its entire IT services, or a single con- tractor might be hired to cover the responsibilities of a worker on maternity leave.

In 1989, Kodak outsourced its data center operations to IBM in a 10-year, $250 million deal. While the Kodak IT contract was certainly not the first outsourcing deal, the contract was big enough and broad enough in scope to draw worldwide attention.12 Soon many large compa- nies with large and experienced IT organizations, such as DuPont, J.P. Morgan, and Xerox, were employing outsourcing. In some cases, the entire IT operation of a company—including plan- ning, business analysis, and the installation, management, and servicing of the network and workstations—is outsourced to a single firm. For example, Sears, Roebuck and Computer Sciences Corporation (CSC) entered into a 10-year, $1.6 billion outsourcing contract in June 2004, prior to Sears’ merger with Kmart. The pact called for CSC to provide support for the retail giant’s desktop and server computers, voice and data networks, and systems that support Sears’ Web sites.13

Today outsourcing takes many forms and is by no means limited to information tech- nology outsourcing (ITO). Nor is outsourcing used only by large corporations; small and medium-sized organizations have turned to outsourcing to meet their needs. Many organi- zations contract with service providers to handle complete business processes such as accounting and finance, customer services, human resources, and even research and devel- opment, in what is called business process outsourcing (BPO). They also outsource selec- tive components of business processes such as benefits management, claims processing, customer call center services, and payroll processing. Contracts often include an IT com- ponent to provide BPO.

Outsourcing can involve the sale of hardware, software, facilities, and equipment used in current operations to the outsourcing service provider. The outsourcing provider then uses these assets to impart services back to the client. Depending on the value of the assets involved, this sale may result in a significant cash payment from the service provider to the customer or vice versa. For example, Galaxy Nutritional Foods, Inc. is a producer and marketer of plant-based dairy alternatives for the retail and food service markets. Galaxy decided to outsource the manufacture of its food products to Schreiber Foods, and expects to achieve substantial and ongoing cost reductions as a result. However, prior to the completion of the outsourcing, Galaxy had to report a nonrecurring charge of $7.9 million. This charge reflected the difference between the carrying cost of production equipment on Galaxy’s books and the amount to be received from Schreiber Foods upon sale of the equipment.14

A more advanced stage of outsourcing involves evaluating all aspects of an organiza- tion’s business activities to take advantage of an outsourcer’s best practices, business con- tacts, capabilities, experience, intellectual property, global infrastructure, or geographic presence by tapping resources and providing capabilities anywhere around the globe. Out- sourcing firms that can provide these services are referred to as global service providers (GSP). They fill a higher-level need than outsourcing firms that simply provide low-cost staff augmentation services.15 GSPs provide high-value services such as performing certain core business processes and enabling new revenue opportunities around the world. A core business process is one that provides valuable customer benefits, is hard for competitors to imitate, and can be leveraged widely across many products and markets. It takes the unique knowledge and skills of the organization’s workers to operate these processes effectively. Core processes typically have a direct impact on the organization’s customers,

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are major cost drivers, or are essential for providing services.16 For example, a core busi- ness process for Honda is the design of engines. Honda was able to leverage this process to develop a wide range of quality products, including ATVs, automobiles, lawn mowers, marine motors, motorcycles, personal watercraft, scooters, snow blowers, and trucks.

As an example of a firm that has chosen outsourcing, consider Banco Pichincha. Ecuador’s largest private bank has more than 1.5 million clients, a loan portfolio of more than $1.5 billion, and more than 230 branches in Ecuador, Peru, Colombia, Panama, Spain, and the United States. The bank signed a 5-year, $140 million outsourcing contract with Tata Consultancy Services to redesign and develop the bank’s core banking solutions and provide BPO services for the bank’s operations. Antonio Acosta, joint president of the bank, said, “We chose TCS as our strategic partner on the strengths of its end-to-end tech- nology capabilities, reputation in providing certainty of results, deep domain expertise in banking, and committed scale of operations in this region.”17 To provide the necessary busi- ness process services, TCS will set up a new company in Ecuador with a staff of 500 people supported by TCS’s offshore BPO center in Chile and global delivery centers across the world. TCS will retain all Banco Pichincha’s staff that currently are working in these pro- cesses and bring in their best human resources and practices worldwide to train TCS employees in Ecuador.18

There are more than 1000 outsourcing firms. Table 4-1 presents the 2006 Top 10 best- managed global outsourcing vendors, as compiled by the Brown-Wilson Group.19 A total of 12,755 qualified outsourcing purchasers and users and 3340 outsourcing corporate employees answered the survey. The survey rated companies on their consistent strength in four areas: human capital performance, CEO commitment, corporate direction, and leadership impact.

TABLE 4-1 Brown-Wilson’s 10 best-managed global outsourcing firms

Rank Company 2005 Estimated Revenue($ billion)

Employees Services

1 Affiliated Computer Services $4.4 52,000 BPO, ITO, HRO*

2 Satyam $1.1 29,000 BPO, ITO

3 Cognizant $0.9 25,000 ITO, BPO

4 Perot Systems $2.0 18,000 ITO

5 Infosys $2.2 58,000 ITO, BPO

6 Patni $0.5 12,000 ITO

7 Tata Consultancy Services $2.9 54,000 ITO

8 HCL $0.8 13,000 ITO

9 GenPac $1.0 30,000 BPO

10 Mellon $4.3 17,000 BPO, HRO*

* HRO is short for Human Resources Outsourcing.

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Why Do Organizations Outsource? Organizations decide to outsource for many reasons. Three of the most frequently cited reasons are to cut or stabilize costs, improve the firm’s focus on core operations, and upgrade the firm’s capabilities and services.

To Cut or Stabilize Costs

The top reason to outsource is to cut or stabilize costs. Outsourcing service providers typi- cally have a lower cost structure due to greater economy of scale, specialization, or exper- tise, which means they can perform the work at a much lower cost than their clients. In addition, the fundamental costs of doing business in a developing country—employee health care, retirement, and unemployment; taxes; and environmental and regulatory compliance—are much lower than those in a developed country.20 Such cost advantages tip the scales in favor of outsourcing and offshore outsourcing. Thus, organizations that do not outsource probably have greater recruiting, training, research, development, market- ing, and deployment expenses. These costs must be passed along in the form of higher prices to the customer, placing the firms at a competitive cost disadvantage.

One firm that exploits outsourcing to its advantage is Pizza Inn, headquartered near Dallas, Texas. Pizza Inn operates more than 360 restaurants domestically and internation- ally, and had recent annual sales of about $150 million. The firm outsourced its ware- house management and delivery services and realized a significant reduction in its operating costs. As a result, Pizza Inn was able to reduce the prices of products distributed to its fran- chisees, thus improving their profitability and, in turn, boosting the firm’s operating income. In the fiscal quarter following completion of the outsourcing, general and admin- istrative expenses were slashed 30 percent ($391,000) due primarily to lower payroll costs, plus a reduction in property taxes and insurance expenses.21

To Improve Focus

Another reason for outsourcing is to enable an organization to focus on its most impor- tant priorities. It is highly ineffective to divert the time and energy of key company resources to do routine work that does not require their unique skills and intimate knowledge of the firm, its products, its services, and its customers. Outsourcing “frees up” a large amount of resources and management effort that can be redirected to other more strategic issues within the company.

For example, many of the services required to operate an insurance firm, such as bill- ing, human resources, and transaction processing, are important but not essential to future growth. So, insurance firms increasingly are turning to outsourcing to enable them to reduce costs and grow, as they can now focus on their core business. For example, AIG Entrepreneur specializes in property and casualty insurance for small and medium-sized enterprises. It signed a 10-year, $100 million agreement with the outsourcing firm Accen- ture to provide IT hardware and software plus insurance support services. The goal is to sim- plify, automate, and optimize AIG business processes to increase profitability, improve operational performance, and enhance services. Annuity, life insurance, pension, prop- erty, and casualty services will be provided through Accenture’s multilingual service cen- ter in Bucharest, Hungary. Underwriting, policy, and claims services will be supported by Accenture computer hardware and software.22

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To Upgrade Capabilities and Services

Often, an outsourcing service provider can perform a business process better than its cli- ents ever could. The outsourcing provider might be highly efficient, with world-class capa- bilities and access to new technology, methods, and expertise that would not be cost effective for its clients to acquire and maintain. Thus, outsourcing a function can pro- vide a considerable upgrade in capabilities and service.

For example, Mumbai International Airport Limited contracted with Tata Consultancy Services to implement and manage the IT infrastructure at Chhatrapati Shivaji International Airport (CSIA). The primary goal was not savings, but to introduce the best technology solu- tions to build the country’s busiest airport into a model, world-class experience that rivals any airport in the world.23

As another example, logistics service providers have developed a wide array of ser- vices that enable their clients to improve operating efficiency and effectiveness, reduce inventory, and increase customer service by reducing delivery times and providing deliv- ery status at any point in the pipeline. The providers usually can deliver all these services at a lower cost. As a result, many organizations have outsourced their logistics opera- tions to third-party logistics providers to manage complex global supply chains.

Issues Associated with Outsourcing While companies can gain many potential benefits from outsourcing, these gains do not come without potential problems. Four areas of risk include quality problems, exposure to legal liabilities, negative impact on business partner and customer relationships and sat- isfaction, and potential data and security breaches.24

In a recent InformationWeek research survey of 420 IT professionals, half of them rated their companies’ outsourcing efforts a success (see Table 4-2).25

TABLE 4-2 Results of outsourcing projects

Evaluation Percent of Outsourcing Efforts

Success 50 percent

Neutral 33 percent

Disaster 17 percent

According to the Diamond Management and Technology Consultants 2006 outsourc- ing study, 47 percent of outsourcing “buyers experienced an abnormal contract termina- tion in the past year, while only 2 percent stated that their outsourcing expectations were exceeded.”26

While outsourcing may prove beneficial for many companies, several potential issues must be addressed. Any organization that considers outsourcing must be aware of these issues and develop solutions for them.

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Quality Problems

Outsourcing part or all of a business process introduces significant risks that the service provider will create quality problems. For example, the toymaker RC2 is not well-known, although it has major licensing deals with Sesame Street, Winnie the Pooh, Disney, Nickelodeon, and Thomas & Friends. The firm works with third-party suppliers in China and Hong Kong to manufacture its products. RC2 and industry observers were shocked in June 2007 when the firm issued a recall for 1.5 million Thomas the Tank wooden trains and related components that had been contaminated with lead paint. The manufacture of the toys had been outsourced to a factory in Dongguan, China.27

Legal Issues

The details of the outsourcing arrangement are documented in a formal contract. The con- tract describes how responsibilities are divided between the client and the outsourcing firm, what services are to be provided, what service levels must be met, and how prob- lems between the two firms will be resolved. Many outsourcing contracts are multiyear, multimillion-dollar deals that require approval by a board of directors. The average length of an outsourcing contract is five years,28 so the life of the contract can extend well beyond the reign of the executives who crafted it. As might be expected, ending such megadeals pre- maturely can generate expensive legal fees.

For example, Sears Holdings, the corporate parent of Sears and Kmart, ended its $1.6 bil- lion, 10-year outsourcing contract with Computer Sciences Corporation after less than one year. Sears Holdings stated that it terminated the contract for cause, while CSC attempted to hold Sears liable for up to $100 million in contract termination fees.29 It took years to settle the dispute. J.P. Morgan Chase & Co. scrapped a $5 billion service agreement with IBM follow- ing its merger with Bank One Corp. Suncorp-Metway Ltd., an Australian banking, insur- ance, and investment firm that focuses on retail consumers and small and medium-sized enterprises, terminated its outsourcing contract with CSC following its acquisition of AMP General Insurance.30 These examples illustrate the need to include terms of disengagement in the original contract to avoid spending excessive time and money in court.31

Negative Impact on Customer Relationships and Satisfaction

Outsourcing can greatly reduce the amount of direct communication between a company and its customers. This prevents a company from building solid relationships with its cus- tomers, and often leads to dissatisfaction on one or both sides. For example, based on an unusually heavy volume of customer complaints, Dell decided to stop routing U.S. tech- nical support calls for its OptPlex and Latitude notebook computers to a call center in Bangalore, India. Dell customers complained of language difficulties and delays in reach- ing senior technicians when speaking to support personnel. The drop in customer satisfac- tion was noticeable enough to be measured and reported by both Consumer Reports and Technology Business Research.32

Data Security and Integrity Issues

Another key outsourcing issue is concern over maintaining data security and integrity to safeguard against data security lapses. For instance, the state of Florida contracted work on its payroll and human resources system to Convergys, a U.S.-based outsourcing service

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company. Convergys, in turn, subcontracted work to index state personnel files to GDXdata, another U.S.-based firm. GDXdata allegedly outsourced the indexing work to a firm in India, a violation of the GDXdata contract with Convergys. Florida state employ- ees had to be warned that their personal data might have been compromised, including sensitive information about the state’s law enforcement agents.33 Besides the security issues, this example illustrates the need for outsourcing firms to put limits on addi- tional outsourcing and subcontracting.

Special Issues Associated with Offshore Outsourcing

Firms that consider establishing offshore outsourcing agreements must be aware that major differences between outsourcing and offshore outsourcing must be taken into account. The most obvious issues are how to control and manage the work being performed when your outsourcing partner may not speak your language and is guided by different cultural val- ues and industry standards. This issue is only intensified by thousands of miles of sepa- ration across multiple time zones and the extreme difficulty of meeting face to face. Such separation creates a high potential for lost productivity due to communication problems and increased opportunity for misunderstandings.

Other issues also are associated with offshore outsourcing:

● Cost advantage—Salaries in developing countries such as China, India, Latin America, and the Philippines are increasing at more than 15 percent per year. At these rates, the cost advantage to outsource to such countries is being reduced.

● Turnover—The rate of employee turnover is as high as 50 percent at outsourc- ing firms in some countries.34 Thus, there is a high potential that key employ- ees at the service provider for your account or project might leave, causing significant project disruptions or delays.

● Intellectual property rights—Various countries have widely divergent stances on the protection of corporate data, copyrights, patents, and trade secrets. Not only must you consider whether the country has laws to protect your firm’s intellectual property, you must ask whether the laws are enforced. For example, one U.S. software manufacturer outsourced the code develop- ment for a new release of its software to an Indian-based firm. To protect itself, the U.S. firm required the employees of the Indian firm to sign a nondisclo- sure agreement—a contract in which parties agree not to disclose important corporate information. However, an employee of the Indian firm stole a copy of the code and tried to sell it to a competitor. Despite solid evidence gath- ered by the FBI, prosecutors in India have failed to convict the man, who con- tinues to work.35

● Important technology issues—The outsourcing firm must be able to provide a high level of system availability and network uptime and guarantee that all processing applications operate efficiently and reliably. High IT reliability, availability, and efficiency are essential so that business processes can be executed on a timely basis without significant service interruptions. The potential for problems is exacerbated by offshore outsourcing with service pro- viders in developing parts of the world.

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Now that we have identified many of the issues associated with outsourcing and off- shore outsourcing, we will outline an effective outsourcing process that manages these issues.

Planning an Effective Outsourcing Process Outsourcing is like any other business initiative: it takes planning, knowledge, and skill to execute well. As already discussed, roughly 50 percent of outsourcing efforts are consid- ered successful, while the other half are evaluated as so-so or outright disasters. Many of the organizations that were successful carefully planned and executed their outsourcing efforts following a multistep process. This process is shown in Figure 4-1 and discussed in the following sections.

Establishing a “Smart” Outsourcing Strategy

The critical component to obtaining successful results from any outsourcing activity is executive-level understanding and support for a smart sourcing strategy. Smart sourcing is based on analyzing the work to be done, its associated current processes, and level of effec- tiveness and resources required, and then determining the best way to do the work in the future—whether with internal employees, on-shore or offshore outsourcing firms, or some combination. Organizations that move to smart sourcing recognize that outsourcing is not just about lowering labor costs. Outsourcing can achieve strategic competitive advantages by reducing time to market for new products, cutting the time required for prob- lem resolution, and freeing up resources to enable greater innovation. Armed with this more complete understanding of the potential of outsourcing, the organization can make better strategic decisions about appropriate activities and projects for outsourcing, as well as which outsourcing firms they will hire. As this chapter discusses later, smart sourc- ing requires an organization to work in a true partnership with the outsourcing provider. This partnership must be built on a high level of collaboration, mutual trust and respect, and a sharing of common goals.

Evaluating and Selecting Appropriate Activities and Projects for Outsourcing

Many outsourcing projects have failed to meet expectations, especially when work was relo- cated simply to cut labor costs or to clean up a poorly performing operation. Generally, shifting seriously flawed operations to a less expensive organization does not solve funda- mental problems. Thus, an organization must carefully consider which process and projects it should assign for outsourcing.

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Establish Smart Sourcing Strategy

Measure and Evaluate Results to Provide Data to Improve Outsourcing Process

Evaluate and Select Appropriate Activities and Projects for Outsourcing

Evaluate and Select Appropriate Service Providers

Evaluate Service Provider Locations

Benchmark Existing Services

Establish Outsourcing Governance Process

Develop Outsourcing Contract

FIGURE 4-1 Multistep process for successful outsourcing

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The most significant outsourcing risk is dealing with increased management complexity. This level of risk is heightened as the organization increases the scope of pro- cesses being outsourced. Many organizations hesitate to outsource processes that are con- sidered mission critical, that are tightly linked to other key processes, that clearly differentiate them from the competition, or that strongly influence sales. Thus, an organi- zation’s initial experience with outsourcing probably should not involve a critical, core busi- ness process. Organizations can ask the following key questions to separate core business processes from their less critical processes:36

● How critical is the project or process to unique strategic differentiation? ● How competitive and innovative is the organization in this business area? ● How cost effective are activities in this business area? ● How much customer value does the project or process provide?

Many companies start with a short-term, low-risk outsourcing pilot effort, perhaps mov- ing responsibility for a small business process to an outsourcing provider that appears to be an attractive, long-term outsourcing partner. They may employ an experienced outsourc- ing consultant to help get started, provide ongoing feedback, and help evaluate the pilot results. At least six months are required to gain experience with the service provider and work through various start-up issues so that a fair assessment can be made. After this ini- tial experience, the company may want to expand the scope of its outsourcing efforts. It can do so with the experience gained from the initial pilot and try not to repeat the same mistakes. It also will have substantial experience with at least one outsourcing vendor and be in a better position to know what the company needs in an outsourcing partner.

Evaluating and Selecting Appropriate Service Providers

When outsourcing a major business process or project, an organization should think in terms of hiring a partner, not just a provider. Thus, choosing the best outsourcing service provider is not based solely on the lowest price quoted or the highest savings promised. Ideally, the organization can choose an outsourcing firm with which they can build a strong strategic partnership based on a mutually sustained commitment to achieve specific busi- ness goals. The customer must use due diligence in carefully researching the potential partner’s capabilities and reputation. This research can be conducted through discussions with current and former customers of the firm, seeking input from industry trade groups and consultants, on-site visits to the vendor’s facilities, and review of public records related to the firm. These records include Dun & Bradstreet credit reports, filings and reports from the Securities and Exchange Commission (SEC), and articles in trade magazines and the press.

Companies also can research outsourcers through documents generated as a result of the Sarbanes-Oxley Act. This legislation was enacted in response to several major account- ing scandals at Enron, WorldCom, Tyco, and other companies in the late 1990s and early 2000s. Under Sarbanes-Oxley, a report filed with the SEC by a publicly held firm must con- tain a statement signed by the CEO and CFO attesting that the report’s information is accurate. Penalties for false attestation include up to 20 years in jail and significant mon- etary fines. As a result, firms spend considerable time and energy to document and test internal control processes. But what if a fundamental business process is outsourced to a

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third party? An SAS 70 audit (Statement of Auditing Standards No. 70, Service Organizations) is a tool that can help evaluate an outsourcing firm’s internal controls. Under such an audit, the service firm prepares a written document describing its control goals and objectives. An outside service auditor then examines the document and the service firm’s operations to render an opinion on several issues:

● Are the control goals clearly stated? ● Are the controls suitably designed to achieve the service organization’s stated

control objectives? ● Are the controls actually being used? ● Are the controls operating effectively (Type 2 SAS 70 audit)?

Firms considering outsourcing need to spend considerable time and effort to thor- oughly review the outsourcing firm’s SAS 70 audit and ensure that they understand the firm’s control goals and implementations. They must be comfortable that the internal controls implemented by their potential partner are adequate. Failure to share the results of an SAS 70 audit should be a warning signal in dealing with an outsourcing vendor.

SAS 70 can help evaluate a firm’s internal controls, but it does not fully address infor- mation security control. ISO (International Standards Organization) 17799 identifies “best practice” information security controls and their objectives. An organization considering outsourcing can use this standard to evaluate the service provider’s security policy and measures more fully.

In summary, organizations should choose outsourcing firms based on several factors, as listed in Table 4-3.

TABLE 4-3 Factors for evaluating outsourcing partners

Factors

Proven experience in business process outsourcing

Reputation

Knowledge of the industry

Expertise in the organization’s processes

Price

Freedom from major lawsuits and customer complaints

Financial viability

Trustworthiness

Proven high level of innovative and continuous improvement

Proven ability to deliver services effectively to the countries in a company’s base of operations

Use of best-in-class processes and technology

Thorough review of the outsourcing firm’s SAS 70 audit reveals no problem

Review of the outsourcing firm’s security versus ISO 17799 best practices reveals no major outages

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Evaluating Service Provider Locations

Any outsourcing service provider, no matter what its base of operations, can be affected by economic turmoil, natural disasters, and political disturbances. The potential for these risks is greater in some places than others. Be sure that you understand the base of opera- tions that will service your needs. Ideally, your outsourcing partner can provide services from several geographic locations if necessary. Your company should investigate the capa- bility for avoiding business interruption whether the outsourcing firm is “on shore” (in your own country) or offshore.37

For example, Bangalore, with a population of about 6.5 million, is India’s fifth-largest metropolitan area. It often is compared with the Silicon Valley in the United States because many outsourcing service providers have offices there, including Infosys, IBM, Tata Consultancy Services, and Wipro. India’s outsourcing industry is an important source of national income, and so it is a prime target of terrorist groups. Indian authorities arrested a suspected member of a terrorist group for plotting attacks on several Bangalore outsourc- ing firms in 2006. In October 2006, these outsourcing firms closed their Bangalore facili- ties due to a public sector strike related to a border dispute. In January 2007, they shut down operations because of riots between Muslims and Hindus. In February 2007, they did not open their offices due to a labor strike over a court decision on water distribution from a nearby river.38

Other factors when considering location include the availability and reliability of high- speed communications networks and power grids, the availability of sufficiently trained workers, and the effectiveness of the outsourcing firm’s national legal system in protect- ing intellectual property, including copyrights, trade secrets, and patents. Of course, the challenges of outsourcing become even more difficult when the work is being done in a country that has significant language, cultural, and time zone differences. Such consid- erations may force a firm to change its initial choice of outsourcing service partner.

Table 4-4 summarizes the factors to consider when evaluating service provider locations.

TABLE 4-4 Factors for evaluating the location of an outsourcing provider

Factors

Potential for business disruption has been addressed adequately by the provider through use of effec- tive backup and alternate business recovery sites

Access to high-speed, reliable communications networks is readily available

Access to reliable power grids is readily available

Provider has access to an adequate supply of sufficiently trained workers

National legal system supports and enforces the protection of intellectual property

Benchmarking Existing Service Levels

Before signing an outsourcing contract, an organization should benchmark its existing ser- vice levels so that it knows how well the services are being delivered and it knows the asso- ciated costs. This benchmark can then be used to establish a reasonable baseline for

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negotiating target results and costs from the outsourcing service provider. The agreed-to tar- gets are then used to define the service-level agreement (SLA) of the contract.39

A key to effective benchmarking is choosing the right measures to evaluate the perfor- mance of the process. Remember, you get what you measure. For example, reasonable met- rics for a call center might be to measure average hold time for customers or the number of abandoned calls. Measuring these parameters and trying to improve performance would lead to better results for the firm and the customer. On the other hand, setting a mea- sure for the average number of calls handled per customer service agent may lead to coun- terproductive behavior. The agent might not fully listen to the customer and cut the call short to get to the next call.

The time and cost required to perform a benchmark depends on the size, scope, and complexity of the process being measured and the number of metrics used. It can cost more than $100,000 to hire an outside consulting firm to perform a benchmark. Doing the benchmarking with employees can be much less expensive and take less time because they already are familiar with the people and the process. However, employees need to be trained to perform the benchmark process, and internal benchmarks can be tainted by bias, especially if the people doing the measuring are part of the in-house process.40

Increasingly, experienced organizations include broad measures of desired business outcomes into the performance measurements they expect outsourcing partners to deliver. These measures define valuable business benefits that the organization wants from the out- sourcing initiative, including increased speed to market, reduced product or service defects and rework, and lower working capital requirements made possible by higher efficiencies.41

Developing an Outsourcing Contract

The development of an outsourcing contract is a job for experienced procurement and legal professionals. Although numerous issues should be addressed, only a few are covered in this section.

The ownership of assets and facilities is an important factor in determining the cost of the outsourcing contract. There are three basic alternatives:

● The firm can transfer ownership of the assets along with operational responsi- bility to the outsourcing service provider. The provider typically offers a finan- cial incentive to do this, such as a reduction in charges or a cash transfer to cover the value of the assets.

● The firm can transfer the assets to a third party (financial services firm) under some sort of leaseback arrangement.

● The firm can retain ownership of the assets while the provider takes on the operational responsibility. Experienced members of the client’s finance and accounting organization must become involved in analyzing the various options.

For example, Electronic Data Systems (EDS) was awarded a $1 billion, 8-year con- tract to provide a variety of IT services to KarstadtQuelle AG, which is headquartered in Essen, Germany. The firm’s core activities include Karstadt department stores through- out Germany, domestic and international mail-order companies, and its tourism business (Thomas Cook). As part of the arrangement, EDS will gain a 75 percent stake in Itellium,

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the firm’s in-house IT subsidiary. EDS will update Itellium’s IT infrastructure to form a new outsourcing center that will serve KarstadtQuelle and other European retailers. As another example, IBM won a contract to manage the IT resources of Switzerland’s Banque Cantonale Vaudoise, and is following a similar strategy to create a Swiss-based outsourcing center for European banks.42

The current trend is to reduce the size and complexity of outsourcing contracts. Instead of entering into all-encompassing outsourcing contracts with a single firm, organizations are opting for simpler, more business-specific arrangements that employ multiple service providers. For example, one service provider might handle network operations, another might manage servers in data center environments, and a third could handle the help desk.43 The goal is not only to cut costs by fostering competition among the vendors, but to take advantage of each vendor’s areas of specialization and technical expertise. This approach requires that the vendors work well together, cooperating to solve problems and not pointing fingers. It also requires additional overhead in the form of specialists who help manage the relationship with each provider.

Unfortunately, allocating pieces of a major outsourcing contract among several firms is not a foolproof approach to containing project costs. For example, the UK National Programme for IT in the National Health Service (NHS) has the ambitious goal of electroni- cally linking 50 million patients to 30,000 doctors and 270 healthcare providers by 2010. Healthcare records, appointment details, prescription information, and up-to-date research into illnesses and treatment will be made available both to patients and health professionals. Information will be available over a secure link whenever and wherever health-related decisions must be made. In 2003, the UK government awarded contracts to several IT outsourcing service companies to provide the regional IT systems and ser- vices needed to support the project. The UK government allocated $4 billion for the pro- gram in 2002, but it is estimated that the program will cost more than $55 billion!44

When entering into an offshore outsourcing agreement, it is critical to determine what legal system and which country will have jurisdiction over any contract disputes. Each party in the contract, of course, prefers to have its own country rule.

Establishing an Outsourcing Governance Process

Governance of an outsourcing contract involves formal and informal processes and rules to manage the relationship between the two organizations. Governance defines proce- dures such as periodic formal reviews between the outsourcing company and its service provider, and explicit escalation procedures in the event of a disagreement. The goal of such procedures is to ensure that the outsourcing initiative succeeds, even as personnel, busi- ness needs, and operating conditions change.

Governance requires dedicated, trained vendor relationship professionals to manage the working relationship between the organization and outsourcing service provider. These relationship managers engage the service provider and work collaboratively to find prob- lems and fix them. Good relationship managers should have excellent communication, problem solving, and negotiation skills. They also need a thorough knowledge of the busi- ness processes and technologies involved. Similarly, the outsourcing service provider has invested many years in the recruitment, development, training, and retention of relation- ship managers. They expect to encounter client relationship managers of similar status, experience, and knowledge that they can work with as equals.

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Measuring and Evaluating Results

A key component of governance is to implement ongoing monitoring and analysis of out- sourced business processes using an appropriate set of metrics. Such a program will deter- mine if an organization is realizing the full benefits of outsourcing and reduce the degree of operational risk.45 It also will enable the firm to hold its outsourcing provider account- able for implementing corrective action as needed. In a typical contract, if the service pro- vider’s performance and costs don’t meet the SLA standards, financial penalties can be assessed and the contract can even be terminated.46 How frequently measures are taken and how quickly changes are implemented depends on the importance of the business pro- cess in meeting true business goals.

In 2003, Procter & Gamble signed four major outsourcing contracts, each with a differ- ent provider: a $3 billion, 10-year deal with Hewlett-Packard to take over much of the firm’s IT services; a 5-year deal with Jones Lang LaSalle for facilities management; a 5-year deal with Sykes Enterprises to outsource customer care, customer relationship management (CRM) applications, and global fulfillment services; and a $400 million, 10-year deal with IBM for human resource services. An organization of 100 people was formed to focus solely on managing all outsourcing relationships and to avoid losing control of service levels or the scope of the outsourced project. The employees were trained by experts from P&G’s Purchasing Department in the best practices for dealing with suppliers. The group includes experts in disciplines from IT to CRM and facilities management. The P&G team uses soft- ware to track hundreds of service levels and enter data into a performance scorecard to see how well each vendor is performing. Each member of the team is assigned to “work on just one of the outsourcing contracts, but they interact and keep tabs on how their col- leagues manage the other vendors.”47

The ongoing tracking and measurement of important metrics enables the organiza- tion to use the data as feedback, so that each step in the outsourcing process can be improved based on the result of the project.

Read the following special feature to see what can happen when an organization does not take an effective approach to identifying and meeting its outsourcing needs.

A M A N A G E R T A K E S ( T H E W R O N G ) A C T I O N

Swansea City Council Outsources IT

Swansea is a historic city of 226,000 people on the coast of Wales, United Kingdom. Its beginnings trace back to the Vikings in 1013. The city’s location makes it a popular tour- ist resort, and it also is home to some high-tech industries.

In late 2004, the Cabinet of the Swansea City Council developed ambitious plans to launch an e-government initiative to enable residents to conduct business with the coun- cil face to face, by phone, or over the Internet. The initiative would extend hours of opera- tion, create contact centers to make it easier for residents to interact with the council,

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establish a call center that would enable 200 phone numbers to be replaced with a one- stop center and a single phone number, and provide a set of improved Internet services known as service@swansea. The initiative also would generate about £72 million in sav- ings by making the council more efficient and by cutting costs through reduced paper- work and duplication. The savings then could be invested to further improve council services such as education and improving the environment.

The city council decided to outsource not only the work of implementing the e-government initiative, but to outsource the operation and support of the council’s IT services. The value of the outsourcing contract was estimated at £119 million; it would be funded by transferring the money the council already spends on IT and adding a new investment of £2 million per year over the next decade.

The IT staff went on strike in August 2004 during outsourcing negotiations, complain- ing that the council had refused to fully consult the staff and that they had been insuffi- ciently consulted over being transferred as part of the outsourcing. Instead of outright transfer to the outsourcing firm, the staff wanted the council to second them to the out- sourcing firm. Secondment, or the detachment of employees from their regular organiza- tion for temporary reassignment, would protect pension arrangements and other staff benefits that may not be available from an outsourcer. There was talk of escalating the strike to all 5000 union staff. This potential escalation was condemned by deputy coun- cil leader Gerald Clement, who accused the union of “holding the council and the people of Swansea to ransom.”48

In September 2004, it was learned that the IT outsourcing project would cost £150 million over 10 years, an increase of nearly 50 percent over the original estimate. The new estimate included the addition of £5 million per year to cover the cost of acquir- ing a call center, a city center drop-in shop for residents, and transfer costs in switch- ing to a private company to run the project.49

After six weeks of the strike, and as the 5000 members of the union were set to vote on joining the strike, the Swansea City Council called in a third party, Acas, to assist in settling the strike. The IT workers finally suspended their strike after eight weeks and returned to work. Even though 63 percent of the 5000 union members voted to strike against outsourcing, the council still planned to award the outsourcing contract for the service@swansea project in December.

The council let it be known that employment arrangements for the IT staff would not be finalized and communicated to the staff until February 2005. A director of an outsourc- ing consultancy who was not involved in the Swansea situation stated, “Looking at sign- ing a deal in December but only sorting out the staff issues in February 2005 is courting disaster. The affected IT people deliver support for critical services. Without clarity on their future, how can Swansea expect anything but further issues?”50

Final selection of the outsourcing firm was delayed until January 2005 and the con- tract was expected to be signed in April 2005. Capgemini, a large IT, consulting, out- sourcing, and professional services company with more than 75,000 employees in 30 countries, was the winner, although the contract represented its first major outsourc- ing contract in local government.51

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In April 2005, a decision was made to transfer 70 percent of the IT staff to Capgemini. A council spokesman said that the IT department’s proposals were considered but the plan to transfer IT staff to the supplier was preferred because it offered better value and faster return on investment. In addition, secondment created greater legal risks.52

Council official Mary Jones said, “Our [IT] staff will join one of the world’s leading IT companies, where they will be able to develop their skills and careers. We have heard their concerns and have agreed with Capgemini to a range of measures to ensure protection of their terms and conditions for the period of the 10-year contract.”53 These concerns included the right not to have to work outside the Swansea local area and the ability to remain on the local government pension plan. The contract was expected to be signed in June, with the staff transfers completed by July.

In September 2005, the Swansea City Council announced that it would give its IT staff just two weeks notice of their new terms and conditions of employment prior to their transfer to Capgemini on October 1. However, there were further delays in the signing of the contract and the number of staff to be transferred was reduced to 66 from 73.54

The contract with Capgemini finally was signed in January 2006 after a delay of 18 months. In addition, the council decided to implement a less ambitious e-government project and cut the value of the contract to £83 million. In January 2007, the Swansea City Council cancelled the e-government component of the outsourcing contract, slash- ing the contract value to £40 million.

After one year of operating under the outsourcing contract, frustrated council mem- bers complained that computer systems and support services cost more and delivered less under the new outsourcing arrangements. Council members have given up using the help desk, which was transferred to Aberdeen, Scotland. Councillors complained that help desk workers did not even know where Swansea was or what a councillor was. In addition, the e-mail system was slow and difficult to use, and often was unavailable for use altogether.

Discussion Questions:

1. Businesses and public organizations in the UK have long been successful adopt- ers of outsourcing. In fact, the UK is recognized as being the most advanced country in Europe in terms of outsourcing. So what went wrong with the Swansea City Council’s efforts, which is described as a “PR disaster” for outsourcing? Identify three serious mistakes you think the city council made.

2. Should the city council have handled the outsourcing of ongoing operations and outsourcing the building of the new e-government initiative as two separate issues? Discuss fully.

3. How should the city council proceed from here?

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The manager’s checklist in Table 4-5 provides a set of recommended actions for busi- ness managers to consider when contemplating outsourcing. The appropriate answer to each question is yes.

TABLE 4-5 Manager’s checklist

Actions Yes No

Do you know what your organization’s core business processes are?

Is there a clear goal to be achieved through outsourcing, such as cost stabilization, improved focus, or upgraded capabilities?

Have you fully considered the four key areas of risk associated with outsourcing?

If you are considering offshore outsourcing, do you understand the special issues involved?

Has your organization established a smart sourcing strategy?

Does your organization follow a logical, well-defined outsourcing decision-making pro- cess similar to the approach outlined in this chapter?

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Chapter Summary

● Outsourcing is an arrangement in which one company contracts with another organiza- tion to provide services that could be provided by company employees. When the people doing the work are located in another country, the arrangement is called offshore outsourcing.

● Outsourcing takes many forms, including IT outsourcing, business process outsourc- ing, and human resources outsourcing.

● Global service providers offer high-value services, including handling certain core busi- ness processes and creating revenue opportunities around the world.

● Organizations turn to outsourcing to cut or stabilize costs, improve the firm’s focus on its core operations, and upgrade the firm’s capabilities and services. In a recent survey, roughly half of the companies contacted rated their outsourcing effort a success.

● Outsourcing is a high-risk activity that raises the potential for quality problems, expo- sure to legal liabilities, negative impact on business partner and customer relationships and satisfaction, and potential data and security breaches.

● Other issues are associated with offshore outsourcing. For example, it can be difficult to manage and control work done by people who do not speak your language, who are guided by different cultural values and standards, and who reside several time zones and thousands of miles away. Also, the cost advantage for offshore outsourcing is eroding; wages in many developing countries are increasing at more than 15 percent a year. In addition, countries have varying ideas about the protection of intellectual prop- erty, and there are potential problems with the availability and reliability of power grids, IT networks, and their applications.

● An eight-step process to successful outsourcing includes: 1) establishing a smart out- sourcing strategy, 2) evaluating and selecting appropriate activities and projects for out- sourcing, 3) evaluating and selecting appropriate service providers, 4) evaluating service provider locations, 5) benchmarking existing service levels, 6) developing the out- sourcing contract, 7) establishing an outsourcing governance process, and 8) evaluat- ing and measuring results.

Discussion Questions

1. What are some differences and key issues that distinguish outsourcing from offshore outsourcing?

2. How would you distinguish a global service outsourcing provider from a staff augmenta- tion outsourcing firm?

3. Give three primary reasons why organizations turn to outsourcing.

4. Can a firm be successful without outsourcing? Discuss the question fully and identify an example to support your position.

5. What key issues must be addressed when considering whether to outsource?

6. What are the key areas of risk when a firm enters into an outsourcing effort? How can these risks be reduced by following an effective outsourcing process?

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7. What additional risks arise when a firm is considering offshore outsourcing? Is there any way to minimize these risks?

8. What is the difference between outsourcing and smart sourcing?

9. Give an example of a business process that would be appropriate to consider for a firm’s first venture into business process outsourcing. Give an example of an inappropriate busi- ness process.

10. What is the difference between an outsourcing service provider and a partner? Does it mat- ter if your firm treats your outsourcing firm as a provider or a partner? Why or why not?

11. Discuss the impact of the Sarbanes-Oxley Act on choosing and managing an outsourcing firm.

12. Can you choose an outsourcing service provider without knowing the locations from which your operations will be serviced? Why or why not?

Action Memos

1. General Motors group vice president and CIO Ralph Szygenda is a strong advocate of the multisourcing approach. His groups employ more than a dozen outsourcing firms to pro- vide IT-related services and equipment. Such multisourcing requires that vendors work well together. To that end, GM works with its vendors to improve integration and adopt standards.55 GM employs about 2000 IT staff around the world to focus on managing out- sourcing vendor relationships. Senior GM IT managers meet with each outsourcing pro- vider on a monthly basis to identify projects and issues that need attention. This approach to outsourcing has been credited with reducing GM’s IT expenses by $1 billion per year over the past six years.56

One of your classmates has just finished an on-campus job interview with a GM representative. During the interview, the recruiter discussed the need for qualified people to serve on a team that manages an outsourcing vendor relationship. Your classmate has sent you a text message that says you should cancel your interview with GM because the role discussed seemed meaningless. How would you react? Would you cancel the interview? What would you say to your classmate?

2. You are an experienced and respected claims manager in a midsized financial services firm. Your firm is about to close a five-year deal to outsource the servicing of its claims pay- ment process to a respected firm in India. You have mixed feelings as you stare in amaze- ment at the text message you have just received from your manager: “We need an experienced manager to relocate to India for 6 to 9 months to make sure that we get off to a good start with this outsourcing project. I’d like to put in your name for this opportunity. I’m on my way into a meeting to discuss potential candidates. What do you think?”

How would you respond? How might you want to follow up with your manager later?

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Web-Based Case

Make a list of three publicly held outsourcing firms: one located in your country and two located outside your country. Attempt to perform steps 3 and 4 of the outsourcing process discussed earlier in this chapter, using data you can find on the Web. As a reminder, steps 3 and 4 are evalu- ating and selecting appropriate service providers, and evaluating service provider locations.

Discussion Questions

1. Based on the data you can find on the Web, which firm and which location would you choose, and why?

2. What additional data would you need to make a truly well-informed decision? Where and how could you get this data?

Case Study

Accenture: A Model of Western Outsourcing Success

During the past five years, India-based outsourcers such as Tata Consultancy Services, Wipro, and Infosys Technologies have been pulling the rug from under the feet of the high-tech outsourc- ing giants. Between 2002 and 2006, the market share of these Indian companies rose from 0.5 to 7 percent. With significantly cheaper labor and overhead costs, these companies have been able to underbid IT leaders like IBM and Hewlett-Packard. Yet one Western outsourcing com- pany continues to grow and thrive: Accenture.

Accenture was formed in 1989 when a group of partners broke away from nationally and inter- nationally based Arthur Anderson firms to form a new organization specializing in consulting and technology. Over the next decade, Accenture expanded from systems integration to consult- ing, outsourcing, and related technology services.

Accenture’s Recent Projects

Powered by SAP software, Accenture will implement the largest total cost management system to date for the U.S. Army. The system will serve more than 79,000 users and supplant more than 80 Army legacy systems.

Best Buy partnered with Accenture to build new supply-chain and analytical capabilities while reduc- ing its server requirements by 39 percent.

BT, one of the largest global communication providers, outsourced much of its UK human resources to Accenture. Accenture reduced absenteeism by 33 percent, increased productivity, and reduced human resource costs by 20 percent.

By 2000, Accenture was netting more than $9.5 billion annually and had more than 75,000 employees in 48 countries. The company outgrew its locally owned independent partnership structure and went public in 2001. At the same time, when most IT profits were plunging during the dot com bust, Accenture scored double-digit growth.

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The key to their success? “They never took their eyes off business development,” said Rauline Ochs, a former vice president at BEA Systems, an enterprise software developer that partners with Accenture to deploy BEA platforms for their clients.57

Accenture carefully researches market developments and implements strategy based on this research. The company’s business strategy is highly focused on technological innovation, main- taining its global presence, and expanding its vertical assets.

Expanding Vertical Assets

A horizontal market consists of businesses that produce the same or interchangeable goods or services. By contrast, companies that are based on vertical structure may own everything from the mine or factory where the raw material is produced to the plant where the final product is shipped. Whether serving the automotive, retail, or pharmaceutical industries, Accenture focuses on business process outsourcing (BPO), supplying services to handle complete business processes. For example, Accenture’s IT staff may create databases and algorithms for a drug trial. Accen- ture doctors can then conduct the tests and review the clinical data. The result of this vertical approach is that companies do not have to oversee and coordinate the work of a series of con- tractors, but simply can turn to one consulting firm to manage the entire project.

Customers increasingly are looking for contractors with expertise in their specialized areas. It reduces their time to market and gives them access to new talent pools that they could not build in-house. By outsourcing a project, companies also can concentrate on their core business and more effectively pursue their own strategic goals.

DuPont had an IT organization that successfully supported the company’s strategic goals, but IT was costing the company $1.2 billion annually. By 1996, the organization managed to reduce its IT-related expenses by 45 percent through infrastructure consolidation and layoffs. However, DuPont wanted to be able to focus its energy on developing science innovation in food, health care, home products, apparel, transportation, and electronics.

“We had eliminated work and consolidated but didn’t invest in people or new technology or, especially, process management,” said Maryann Holloway, DuPont’s director of global alliance management and IT operations.58

In a 10-year, $4 billion deal that has been called the “big bang” of the conservative chemi- cal industry, DuPont contracted with Accenture and Computer Sciences Corporation (CSC) to develop and maintain IT systems in more than 40 countries. Accenture took over the manage- ment of DuPont’s manufacturing and engineering systems; order processing; materials and resource planning; and safety, health, and environmental analysis systems. The deal set a pre- cedent in outsourcing IT, both in the scope and duration of the contract.

“This was a real precursor to multisourcing,” said Holloway, who explained that a great deal of hard work is still involved in integrating the service providers.59

By stabilizing its fixed IT costs, DuPont was able to enjoy greater financial flexibility and con- centrate on its core business: the pursuit of scientific innovations in its own industry. In addi- tion, DuPont was able to reduce IT costs by another 5 percent.

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Accenture has developed its position as a business process outsourcer. However, some busi- ness analysts have warned that Accenture is spreading itself too thin. Accenture maintains five operating groups: Financial Services, Communications and High Tech, Products, Resources, and Government. The company must build specialization across a broad range of areas, as shown in the following table.

Accenture’s Areas of Expertise by Industry

Aerospace and defense Government

Airlines Health and life sciences

Automotive Industrial equipment

Chemical Media and entertainment

Communication Metals

Consumer goods and services Mining

Electronics and high tech Public transportation

Energy Retail

Financial services Travel

Forest products Utilities

Freight and logistics

The risk is that an investment in one area may not pay off if the company cannot offer that ser- vice to its other clients. “Even IBM focuses on a core of four processes, and EDS recently whittled down its offerings after discovering that its $3 billion BPO business was too scattered across multiple processes to give it any significant momentum,” cautioned Forrester analysts.60 Yet, Accenture has continued to aggressively pursue vertical expansion.

Technological Innovation

Given its vertical strategy, Accenture not only must research and develop emerging technolo- gies, but anticipate how new technologies can benefit its clients and improve business processes. In addition, Accenture researches business processes in and of themselves: its well-regarded research program has reviewed more than 6000 companies to determine what factors provide business with strategic advantage over time. Accenture’s staff track the latest trends, such as the recent growth of Indian companies as they move into the global market by acquiring or merg- ing with companies in Europe, North America, and elsewhere. Accenture’s staff produce reports on the Japanese insurance market, supply chain management for the aerospace industry, and trends in retail outsourcing.

At the same time, R&D’s staff develop new advances in fields such as human-computer inter- action, business process analytics, and intelligent device integration. During fiscal year 2006, the company had 1368 patents pending. To fuel this innovation, Accenture opened its fourth tech- nology lab in 2006, in Bangalore, India.

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Global Positioning

Accenture operates a Global Delivery Network with more than 40 centers in strategic locations. Beyond traditional Western hubs like London, Madrid, and Chicago, Accenture has facilities in countries such as the Czech Republic, Latvia, Slovakia, and Brazil, which allows it to provide on-shore, nearshore, or off-shore options to Latin American, Northern European, and Eastern European clients. Just under half of Accenture’s 2006 revenue came from the European Middle East Africa (EMEA), with most of the rest coming from the Americas. Accenture also is build- ing inroads into Asia and the Pacific, with centers in Shanghai and Dalian, China to gain access to the world’s fastest-growing economy. By setting up shop in China, Accenture not only has access to cheap labor but to the country’s rapidly expanding business markets. Accenture recently picked up contracts with China National Offshore Oil Corp., TCL, Lenovo, and Diageo Shanghai.61

Revenues Before Reimbursements by Geography (in billions of US$)

Americas $7.7

EMEA $7.6

Asia Pacific $1.3

Total $16.6

When the Indian consulting companies began to pull profits from the “Big Six” Western com- panies, Accenture responded by accelerating its move into India. By August 2006, 35,000 of its 160,000 employees were located in India.

Accenture’s Advantage

As Accenture competes with Tata, Infosys, and Wipro in India, China, and elsewhere, it has one enormous advantage over these companies: its vertical structure. Indian companies have not built broad expertise in specific industries yet. They cannot offer the same range of specialized out- sourcing and consulting services. Therefore, the Indian firms cannot compete with Accenture for the increasing number of customers who are looking for consultants or outsourcers with exper- tise in their own industry.

Accenture is in a position to do what Indian companies are only now positioning them- selves to do: hire professionals in India so that they can offer vertical solutions at lower prices. Originally, most employees in India staffed low-level IT posts and positions that did not require customer contact, but this has changed. In March 2007, Accenture announced plans to hire 2000 more Indian professionals. By the year’s end, Accenture will have more employees in India than in the United States.

“We are actively recruiting management consultants, professionals with deep industry and functional expertise, and graduates of India’s top business schools,” announced Mark Foster, Accenture’s group chief executive for Management Consulting and Integrated Markets.62

Other Western companies are adopting similar approaches. Cisco plans to have 20 percent of its “top talent” in India within five years. IBM is expanding its Bangalore research group. Once

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criticized for its overambitious investment in specialized industries, Accenture recently has been hailed as a model of success. No business analyst can argue with Accenture’s high annual growth rate and expanding market share.

Accenture’s Annual Revenue Before Reimbursements (in billions of US$)

2006 $16.65

2005 $15.57

2004 $13.67

2003 $11.82

2002 $11.57

As Indian companies reposition themselves for BPO, Accenture will have to stay one step ahead. The years to come will show whether the Accenture strategies of vertical growth, geo- graphical positioning, and technological innovation will prevent Indian outsourcers from grab- bing Accenture’s market share.

Discussion Questions

1. What strategic advantage have Indian outsourcers used to capture market share away from Western IT leaders?

2. What risks did Accenture face when developing itself as a business process outsourcer?

3. Why have companies like DuPont chosen to outsource entire business processes?

4. How do Accenture’s vertical assets give the company a strategic advantage over Indian competitors?

Endnotes 1 Patrick Thibodeau, “GM Awards IT Outsourcing Contracts Worth $7B,” Computerworld,

2 February 2006. 2 Eli Lilly 2006 Annual Report, page 6. 3 Eli Lilly 2006 Annual Report, pages 6–7. 4 “Clinical data management system,” Wikipedia. 5 Paul McDougall, “Drug Giant Lilly Outsources Clinical Data to India,” InformationWeek,

15 November 2006. 6 “Tata Consultancy Services Enters into Engagement with Eli Lilly and Company,” press release,

Tata Consultancy Services Web site at www.tcs.com, 15 November 2006. 7 Kirsty Barnes, “Eli Lilly Awards Major Indian Contract,” DrugResearcher.com,

14 November 2006. 8 “Tata Consultancy Services Enters into Engagement with Eli Lilly and Company,” press release,

Tata Consultancy Services Web site at www.tcs.com, 15 November 2006.

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9 Ibid. 10 Paul McDougall, “GlaxoSmithKline Outsources Data Management to TCS,” InformationWeek,

29 March 2007. 11 Paul McDougall, “Drug Giant Lilly Outsources Clinical Data to India,” InformationWeek,

15 November 2006. 12 Richard Pastore, “CIO Hall of Fame: Katherine M. Hudson,” CIO, 15 September 1997. 13 Ed Frauenheim, “Sears Ends $1.6 Billion Deal with Computer Sciences,” CNet News.com,

17 May 2005. 14 “Galaxy Nutritional Foods Reports First Quarter Operating Results,” 23 August 2006 (accessed

at www.lexdon.com/article/, 5 June 2007). 15 Theo Forbath and Peter Brooks, “Outsourcing’s Next Wave,” CRM Buyer, 9 April 2007. 16 Gary Hamel and C.K. Prahalad, “The Core Competence of the Corporation,” Harvard

Business Review, Volume 68, no. 3, pages 79–93, May–June 1990. 17 “TCS to Provide Complete Outsourcing Services to Banco Pichincha,” BPO Times,

17 January 2007. 18 “TCS Inks $140m Banco Pichincha Deal,” finextra.com, 16 January 2007. 19 Douglas Brown and Scott Wilson, “50 Best Managed Global Outsourcing Firms,”

www.sourcingmag.com/content/c060712a.asp (accessed 28 May 2007). 20 Andrew Burger, “Outsourcing, Part 1: Is Resistance Futile?” CRM Buyer, 26 April 2007. 21 “Pizza Inn, Inc., Reports Results for the Third Quarter Fiscal Year 2007,” PRNewswire,

9 May 2007. 22 “Accenture and AIG Europe Sign 10-Year Business Processing Outsourcing Agreement,” press

release (accessed at www.accenture.tekgroup.com, 18 January 2006). 23 “Mumbai International Airport Ltd. Signs MoU with TCS,” press release, Tata Consultancy

Services, 4 February 2007. 24 Ronald Schmelzer, “Outsourcing, SOA, and the Industrialization of IT,”

SearchWebServices.com, 16 October 2004. 25 Paul McDougall, “In Depth: When Outsourcing Goes Bad,” InformationWeek, 19 June 2006. 26 Andrew Burger, “Outsourcing, Part 1: Is Resistance Futile?” CRM Buyer, 26 April 2007. 27 David Barboza and Louise Story, “Train Wreck,” The New York Times, pages C1 and C4,

19 June 2007. 28 Paul McDougall, “In Depth: When Outsourcing Goes Bad,” InformationWeek, 19 June 2006. 29 Ibid. 30 Paul McDougall, “The Importance of an Outsourcing Prenup,” InformationWeek, 23 May 2005. 31 Ibid. 32 Ed Frauenheim, “Dell Drops Some Tech Calls to India,” News.Com, 23 November 2003. 33 Robert McMillan, “Offshore Outsourcing Cited in Florida Data Leak,” Computerworld,

26 March 2006.

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34 Nari Kannan, “Reducing Operational Risk in Business Process Outsourcing,” SourcingMag.com, 5 June 2007.

35 Bob Brown, “FBI Special Agent Recounts Outsourcing Horror Story,” Computerworld, 16 May 2006.

36 Thomas Koulopoulos, “Value Creation Through Smart Sourcing,” Optimize, Issue 22, March 2006.

37 “Outsourcing for Business Growth,” www.hp.com/changeartists, 7 June 2007. 38 Mary Hayes Weier, “Strike Shuts Down Outsourcing in India,” InformationWeek,

12 February 2007. 39 Bob Violino, “Benchmarking Takes Root,” InformationWeek, 3 October 2005. 40 Ibid. 41 “Delivering High-Performance Outsourcing: Best Practices from the Masters,” Executive

Survey Results, Accenture, 2004. 42 Paul McDougall, “EDS Wins $1 Billion Outsourcing Deal with German Retailer,”

InformationWeek, 7 May 2007. 43 Jennifer Mears and Ann Bednarz, “Take It All Outsourcing on the Wane,” InformationWeek,

30 May 2005. 44 Paul McDougall, “In Depth: When Outsourcing Goes Bad,” InformationWeek, 19 June 2006. 45 Nari Kannan, “Reducing Operational Risk in Business Process Outsourcing,”

Sourcingmag.com, 5 June 2007. 46 Bob Violino, “Benchmarking Takes Root,” InformationWeek, 3 October 2005. 47 Susannah Patton, “Cutting Costs with Multiple Outsourcers,” CIO, 16 January 2007. 48 Antony Sawas, “Swansea Strike is a ‘PR Disaster’ for Outsourcing,” ComputerWeekly,

13 September 2004. 49 Antony Sawas, “Swansea Project to Cost 50% More,” ComputerWeekly, 27 September 2004. 50 Antony Sawas, “Swansea IT Staff Put Their Case for Secondment,” ComputerWeekly,

1 November 2004. 51 Lindsay Clark, “Swansea Awards Capgemini £119m IT Services Deal,”

ComputerWeekly, 4 January 2005. 52 Antony Sawas, “Swansea Council Approves Transfer of IT Staff to Capgemini,”

ComputerWeekly, 15 April 2005. 53 Tim Richardson, “Swansea IT Workers Lose Outsourcing Fight,” ComputerWeekly,

14 April 2005. 54 Bill Goodwin, “Swansea and Capgemini Outsourcing Deal Delayed,” ComputerWeekly,

1 November 2005. 55 Patrick Thibodeau, “GM Awards IT Outsourcing Contracts Worth $7B,” Computerworld,

2 February 2006. 56 Susannah Patton, “Cutting Costs with Multiple Outsourcers,” CIO, 16 January 2007. 57 John Moore, “Accenture,” www.eweek.com/article2/0,1759,1254083,00.asp, 7 May 2001.

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58 Linda Tucci, “IT happens: The ‘Big Bang’ at DuPont and its aftermath,” CIO News, http:// searchcio.techtarget.com/originalContent/0,289142,sid19_gci1180320,00.html, 20 April 2006.

59 Ibid. 60 Christine Ferrusi Ross, John C. McCarthy, Carey Schwaber, “Accenture’s Growth Strategy:

Mostly On The Right Track,” Forrester, www.forrester.com/ER/Research/Brief/Excerpt/ 0,1317,32680,00.html, 30 September 2003.

61 Accenture annual report, www.accenture.com/Global/About_Accenture/Investor_Relations/ Annual_Report/AnnualRep06Overview.htm, 2006.

62 “Accenture to Expand Management Consulting Capabilities in India,” Accenture Newsroom, http://newsroom.accenture.com/article_display.cfm?article_id=4525, 20 March 2007.

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