AMITY -Global Delivery Modle

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    Out sourcing decisiona

    strategic frame work

    AMITY

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    Out sourcing decisiona strategic

    frame work

    The nature of out sourcing is divers from:

    Core production activities.

    In-boundout bound logistics.

    Secondary value chain activities. IT, accounting, distribution,HR R&D.

    Goal:

    Maximizing the net benefits versus in-house provision of

    value chain activities.

    Risk:

    Placing part of its destiny in the hands of others.

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    Frame work for assessing benefits

    of outsourcing

    Cost from the firms perspective:

    Specific governance costs associated with

    outsourcing:

    Three major determents of outsourcing:1. Costs.

    2. Product/activity complexity.

    3. Contestability and assets specificity.

    Set Standards for each potential outsourcing

    situations:

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    The benefits from outsourcing:

    Objective: Create value for share holders.

    Lower the purchase price of some inputs taking

    advantage of external suppliers lower cost.

    Improve the quality of some inputs by purchasing

    superior capabilities from an external supplier.

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    Cost reducing rationales from

    outsourcing

    Compare cost with internal production of

    activities.

    Too low,

    inefficient,

    large fixed capital costs into variable costs,

    New product generations happens quickly atlow cost and greater capacity utilization.

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    Cost reducing rationales from

    outsourcing

    Organizational cost factors:

    Large multiunits organizations-internal units

    are often price in-efficient.

    Govt. laws and regulations.

    Agreements with unions.

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    Cost reducing rationales from

    outsourcing

    Firms capabilities that are difficult to imitate

    are the key to sustainable competitive

    advantage.

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    Cost reducing rationales from

    outsourcing Direct purchase cost savings or superior

    resources may be off-set in increase in

    governance costs.(Any cost other than

    production & purchase costs).

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    Two distinctive type of

    governance costs:Bargaining costs.

    Contract negotiation costs,

    Post contract negotiation costs,

    Contract monitoring costs,

    Disputes costs.

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    Two distinctive type of

    governance costs:

    Opportunism costs:

    Change the agreed terms of a transaction,

    (one party acts self-interestingly but in badfaith)

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    PRODUCT/ACTIVITY COMPLEXITY:

    Complex goods involved uncertainty about the

    nature and cost of production process itself.

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    ASSETS SPECIFICITY:

    Specific asset is one that has much lower value

    in any alternative use.

    Physical assets ,

    Location,

    Human assets specificity,

    Dedicated assets.

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    OUTSOURCING SITUATONS

    Outsourcing situations and some possible

    strategies:

    Action:

    Address bargaining and opportunism (during

    or post contracting) costs at contracting stage.

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    OUTSOURCING SITUATIONS

    Various combinations of product complexity:

    Low product/activity complexity and low asset

    specificity:

    This combination provides clearest case of outsourcing. It encompasses many standard products, services and activities required

    by the firm.

    The outsourcing firm has or easily acquire sufficient knowledge and

    information to specify contract terms precisely (as there is low uncertainty

    about priceperformance characteristics) with low asset specificity(andresulting high contestability) inefficient and opportunistic external

    suppliers can be quickly replaced.

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    OUTSOURCING CITUATIONS

    Low product/activity complexity and high asset specificity:

    Given low complexity ,problems associated with high assets specificity

    almost certainly involves high temporal or location specificity.

    There are likely to be few efficiency cost arising from high physical assets

    specifically when the outsourcing firm makes the specific investmentsitself, as given this ownership it is not costly to replace the external

    suppler (given high contestability)

    One way of avoiding these problem is for the outsourcing firm to Own

    the specific asset and to rent it or lease it to the external firm.

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    OUTSOURCING SITUATIONS

    High product/activity complexity and low asset

    specificity:

    This configuration perhaps best characterizes

    the supply of wide range of services or

    activities that are potentially outsourcable to

    professionals.

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    OUTSOUCING SITUATIONS

    High product/activity complexity and high asset

    specificity:

    The important different between this situation and the

    second case discussed above is that Reliance on arbitration orthird party contract enforcement procedure is more

    problematic, because it is more difficult for a judging third

    party to identify whether contract breach has occurred.

    Solution: Outsourcing firm provides external suppliers with higher than

    normal profit that they can expect to earn indefinitely in the

    absence of a verified contract breach

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    Overall frame work emphasize the

    following steps: Formulate consistent expectations about the uncertainties

    surrounding the potential transactions at all stages of contract

    formulation and implementation.

    Identify the potential opportunism at different stages of

    contract formulation.

    Identify contract provisions to attenuate opportunism and

    assess the consequences of the preferred strategies for the

    overall efficiency of outsourcing versus internal production.

    Implement the relevant strategies prior to initiation of

    outsourcing.

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    Ranking of cities

    The annual survey conducted by the

    Datamonitor Group:

    Asked 3,100 corporate development leaders,

    including more than 400 outsourcing

    customers, to indicate their company's

    inclination to consider specific offshore

    locations for outsourcing (including IToutsourcing and BPO).

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    Ranking of cities

    The ranking of cities on various perceived threatsand weaknesses, including :

    Geopolitical risk,

    Terrorist threats, Climate concerns,

    legal maturity,

    environmental waste and pollution, IT and telecom infrastructure security,

    Crime rates.

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    Ranking of cities

    The 25 Riskiest Cities for Offshore Outsourcing in 2010

    1. Karachi, Pakistan

    2. Medellin, Colombia

    3. Juarez, Mexico 4. Cali, Columbia

    5. Tijuana, Mexico

    6. Lahore, Pakistan

    7. Jakarta, Indonesia 8. Lagos, Nigeria

    9. Dhaka, Bangladesh

    10. Chittagong, Bangladesh

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    Ranking of cities

    11. Amman, Jordan

    12. Khulna, Bangladesh

    13. Faisalabad, Pakistan

    14. Rawalpindi, Pakistan

    15. Port-au-Prince Haiti

    16. Managua, Nicaragua

    17. Chihuahua, Mexico

    18. Ljubljana, Slovenia

    19. Tashkent, Uzbekistan

    20. Bandung, Indonesia

    21. Kingston, Jamaica

    22. Tel Aviv, Israel 23. Colombo, Sri Lanka

    24. Johannesburg, South Africa

    25. Accra, Ghana

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    Ranking of cities

    The 25 Safest Cities for Offshore Outsourcing in 2010

    1. Prague, Czech Republic

    2. Warsaw, Poland

    3. Brno, Czech Republic

    4. Krakow, Poland

    5. Toronto, Canada

    6. Halifax, Canada

    7. Singapore, Singapore 8. Dublin, Ireland

    9. Kiev, Ukraine

    10. Chennai, India

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    Ranking of cities

    11. Pune, India

    12. Wuxi, China

    13. Monterrey, Mexico

    14. Sao Paolo, Brazil

    15. Bangalore, India

    16. Beijing, China

    17. Santiago, Chile

    18. Brasilia, Brazil

    19. Mumbai, India

    20. Dalian, China

    21. Chandigarh, India

    22. Rio de Janeiro, Brazil 23. Cebu City, Philippines

    24. Kuala Lumpur, Malaysia

    25. Kolkata, India

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    Outsourcinglessons from

    regulators The provision of outsourced business services is not, of course, a regulated

    industry.

    But many clients of outsourcing service providers are themselves in

    regulated industries ind