A CRITICAL ANALYSIS OF GLOBAL SOFTWARE OUTSOURCING: GLOBSHOP-INDO-SYSTEM SOLUTIONS (ISS)By Christopher Davies, The University of Manchester, Case Studies in Digital Transformation.

Keywords: Offshore, Outsourcing, GSO, Risk, GlobShop, ISS, Journal.

Abstract: This paper reviews current offshore outsourcing literature in order to develop a model that can evaluate the venture between GlobShop and Indo-System Solutions (ISS). In doing so we find that failures to unify company objectives and successfully plan for future events cause the failure of the project, and an inability to prepare for future black swan events or the economic development of India. Through this a business process outsourcing project or merger becomes a more suggestable option.

Introduction

This paper is going to evaluate the overall success of an offshore outsourcing project between GlobShop and Indo-System Solutions (ISS). The paper will thus proceed as follows: Section I looks to define offshore outsourcing and introduce GlobShop, Section II introduces a model by which can gauge the success of the venture, Section III then evaluates the model in relation to GlobShop, Section IV will then test the ability of GlobShop to then overcome future challenges and finally Section V concludes the papers key arguments to suggest a means of future progression. Through this study we find that mismanagements by GlobShop cripple the success of the outsourcing project, making them ill-prepared for the future challenges that lie ahead. Out of this we find a business process outsourcing/merger strategy to be more feasible.

Section I

We define offshore outsourcing as the allocating projects to a client outside of one’s domestic region (Lacity 2009). Driven by globalisation this internationalisation is what necessitates for cost reduction measures and innovation in order to protect against the strains of globalisation (Carmel 2001). Here Global Software Outsourcing (GSO) is used, primarily, as noted by Strassman (1995) for companies experiencing financial difficulty. GSO can help to alleviate problems associated cost with India being popular destination given the cheap nature of labour and capital markets there (Carmel and Nicholson 2005).

This understanding of GSO allows us to analyse a case study focused on GlobShop, a multinational global retail-travel company based in Boston that specialises in Duty Free shopping. Despite being a multinational company, its financials are very much dependent on demand fluctuations in the highly volatile tourism market. This dependency makes GlobShop very susceptible to shocks such as in the Asian Economic Crisis or the Gulf War which meant that after the 2000 takeover by a luxury retailer called Lux, GlobShop’s top level management looked at ways to improve business performance and financial sustainability. Research revealed that many of GlobShop’s functions remained highly decentralised and wasteful. It was estimated that around $60 million was being spent on IT per year, and that centralising the function could save over a third of that, thus achieving the goals set out by management. It was with this that cost reduction efforts were started, whereby GSO was

1

identified as a suitable mode of action. GSO began in 2000 when GlobShop signed an initial agreement with Indo-Systems Solutions (ISS), an Indian based IT vendor, that GlobShop would outsource small scale maintenance projects in order to test the waters of GSO (Ranganathan 2007). However the 9/11 attacks reemphasised GlobShop’s need to further cut costs, which led to an exponential amount of work being outsourced to ISS. As such responsibilities progressed, so did the objectives of management, looking to turn GSO into a means to improve overall business performance, rather than to just reduce cost and become more sustainable. This progression is what needs to be studied in order to understand whether or not GlobShop was successful in using GSO.

Section II

We consider a successful GSO venture to be one that minimises the adopted risks summarised by Carmel (2007) as being country risk, intellectual property risk, loss of knowledge, data security, corruption, and system security, legal, infrastructural and societal risks. To do so GSO must build congruent relationships between the client and vendor in a way that allows for challenges to be overcome and developments made. For this we agree with Heeks (2001) that uses the COCPIT model to understand congruence in the context of “synching”, however we then look to expand on this model to incorporate factors, such as the introduction of next steps mechanisms. For this we use the COIN model (Table 1) whereby two companies can successfully create congruence through satisfying each aspect of COIN.

C Costs minimisation

O Objectives alignment

I Information asymmetry

N Next Steps

We agree with Heeks (2001) in that a congruent relationship allows companies to move up the value chain reap the rewards of increased benefits, therefore we look to apply this model to the GlobShop case study in order to judge their management of the GSO process, and how this will impact them in the future.

Section III

We will now look to analyse whether GlobShop succeeded in satisfying each aspect of COIN. However before we do so we must expand on the fact that strong communication is a prerequisite for the completion of COIN, as without it none of the factors would function. Poor communication can cause conflict that leads to absolute failure, something that was accounted for by GlobShop. We saw through the creation of Information centres, 90 day contracts, meetings during the contractual stages, as well as the intention to become more partner than client like that communication flows were possible between the two parties (Ranganathan 2007).

i) Minimisation of Costs.

Lacity (2008) points out the importance of cost minimisation to protect against poor financial performance, emphasised by Rottman (2008) confirming the desire to cut IT costs as being important as a decision node behind GSO. This is recognisable with GlobShop who looked to cut costs after the events of 9/11 through centralising their IT function and engaging in GSO. Intuitively therefore in order for the first aspect of COIN to be satisfied it must be that costs

2

Table 1: Coin Model

were reduced as a result of GSO. Efforts were made initially to remove the inefficiencies identified within the IT function that was centralised in a way that lends itself better to GSO. Once such measures were taken and the GSO contracts were organised, we began to see the efficiency gains of GSO. The follow the sun model that essentially took advantage of the time zone differences to bring high efficiency was a huge selling point, which was aided through the creation of 2 IT centres to push for a more global presence (Ranganathan 2007). This then allowed for greater gains with regards to the advantages of labour/capital cost differences in India allowed for significant gains whereby it was estimated that after the first 18 months of the agreement costs had fallen by 35%. An important tactic of GlobShop was that they reinvested these savings back into the agreement in order to facilitate greater savings as well as instil greater trust in ISS to help build the relationship, as well as help to build the relationship through constant meetings and staff rotations by ISS to overcome initial teething issues that dampened cost reduction efforts.

i) Objective compatibility/knowledge.

Given that GlobShop are looking to form a partnership with ISS their GSO venture needs to go beyond that of just a cost minimization scheme. For this to happen objectives at all stages of the agreement need to be fully known and understood by both parties in order to prevent misunderstandings leading to project failure (Finders 2011). If we first look at the relationship between ISS and GlobShop during the agreement we can see that measures were taken to incorporate each company’s interests into a single unit. The creations of “communities of practice” (COPS) as well as the inclusion of ISS staff in board meetings and the use of diversity experts essentially saw GlobShop set up an environment by which the requirements of both companies could be voiced and developed (Ranganathan 2007). This would therefore allow progression within the GSO agreement to be done congruently. However if we change the emphasis to the objectives before the GSO agreement was launched we begin to encounter issues. Initially the objectives of GlobShop were to find a medium sized partner for their IT function to essentially mitigate risk levels as they could dominate their interests. However ISS’ objectives were to arguably look for opportunities of growth. We saw these conflicts of interests towards the end of the agreement, whereby ISS had expanded and was rotating its best staff away from GlobShop to higher profile clients. These differences in initial objectives thus led to contradictions further down the line which led to problems in terms of relationship creation as essentially staff kept being rotated, removing consistency and ultimately congruence.

i) Information Asymmetry.

Given that A GSO venture sees companies transfer information from themselves to their vendor, the flows of information need to be efficient enough to ensure that both parties are well informed about all processes that are taking pace within the venture. Here these information flows have several stages, starting from extraction of information, through to importation. Therefore GlobShop would have needed to set up methodologies to ensure all aspects of these flows were done correctly. For the extraction of knowledge from existing employees, strong compensation/reward packages were set up to account for the investable redundancies associated with GSO, but to also incentivise efficient flow of information (Ranganathan 2007). Once such information had been correctly extracted the multi-location information centres were used for training purposes, and GlobShop were open to allow ISS staff to spend large period of time onsite to learn the necessary information. In doing so meaningful collaboration created consistency that in turn allowed one company’s operations to fit more easily into the others (Conchuier 2009). Thus one could argue that information was extracted relatively well, and the use of information centres, strong communication and

3

efficient training meant that ISS staff could grow accustomed quicker to GlobShop’s processes. It were these provisions that meant after the initial efficiency losses, ISS staff were projected to be more productive than their US counterparts per working hour, demonstrating the successful information flows. Such results then led to an expansion of the GSO agreement whereby ISS developed a knowledge management system further improving communication/information sharing abilities.

ii) Next steps.

In order for GSO agreements to be successful their needs to be a “Next Steps” mechanism implemented into the original agreement that essentially sets out future plans for processes once the contract ends. This prevents a lack of forward thinking in the planning and execution of GSO which removes the uncertainties associated with mistrust and lack of direction. This is a necessary requirement to overcome the associated risks of GSO failure (Whitfield 2008). The reason for this is that GSO agreements need to be re-evaluated on a rolling basis, not just at the end or start of the agreement, thus provisions need to be in place to ensure that can happen. The problem with GlobShop was that they embarked on what could described as “panic” GSO, by which the strains of 9/11 necessitated drastic cost reduction measures. Therefore the nature of the dramatic increase in responsibility given to ISS after 9/11 meant there was little time to define an appropriate next steps mechanism. This lack of provision then created 2 issues:

1. Uncertainty: After the agreement ended it was unsure as to whether the GSO agreement should be continued due to the misalignment of objectives discussed earlier, that could have been removed through a next steps policy,

2. Over-reliance: Upscaling after 9/11 meant that GlobShop became highly dependent on ISS. Larry Katz from GlobShop went so far as to even claim that the they couldn’t live without ISS anymore, which creates problems in itself as it could be seen as GlobShop putting all their eggs in one basket, rather than diversifying to mitigate risk.

If this outcome of dependence had been planned for then measures could have been taken to prevent such actions damaging GlobShop thus removing uncertainty in the process. However now GlobShop are in a more complex (Whitfield 2008) position by which continuation of the agreement is questionable.

Section IV.

Table 2 summarises our evaluation of each aspect of COIN which now allows us to conduct a more macro analysis about future of the venture and possible challenges.

Table 2: Evaluation of COIN

C Cost Minimisation √ Costs were successfully minimised.

O Objective Alignment X Initial objectives were not aligned, worsened through economic opportunity.

I Information Asymmetry √ Information flows were well connected despite difficulties in creating informal relationships.

N Next Steps. X Next steps were not

4

implemented at the start of the policy.

In our above analysis we saw that not all aspects of COIN have been satisfied, as essentially objectives were not perfectly aligned, nor were next steps policies created despite costs being reduced and information flows strong. Thus purely on the basis of COIN it is arguable that the management of GSO my GlobShop was not strong, which is then visible through the results as they didn’t mitigate against the risk of unforeseen events, and that they didn’t seem to create a strong partnership with ISS. What this therefore means is that looking forward, it appears GlobShop are ill prepared to face the future challenges that are associable with outsourcing, and that are specific to GlobShop as a company. It should be noted that whilst there are many likely challenges would affect GlobShop in the future i.e. vendor selection/relationships, further costs and innovation development, we have only identified two of them for further analysis, as they are highly important in effecting the decision making processes for GlobShop with regards to GSO. These challenges are “Black Swan” events, and the economic development of India.

i) ‘Black Swan’ Events.

9/11 essentially defines a Black Swan event whereby the event was unforeseeable, highly unlikely, and economically detrimental (Taleb, 2010). 9/11 was such an event that dramatically damaged the economic performance of GlobShop, which necessitated cost/risk reduction efforts. Whilst it would be naïve to suggest that the GSO venture should allow GlobShop to protect fully against such an event, it should nonetheless have given them greater protection. However as we previously established, GlobShop’s IT function had become greatly dependent on ISS, which means they are now susceptible to shocks in the Indian economy, which is dangerous given India is still a developing country. This emphasises the common risks associated with currency fluctuations, regulation and social/political norms that effect GSO, which can thus be considered a highly negative aspect of the venture. The problem here is that this means GlobShop don’t seem to have created sustainability through their GSO venture despite the reductions in costs. Given this if we consider a black swan event as a potential challenge that needs to be overcome in the future., GlobShop seem to be just a susceptible to economic damage as before, and thus not likely to be able to overcome such a challenge. This could dramatically influence their decision making processes when looking to renew the partnership with ISS, as whilst some recognise that diversifying across countries is costly, and reduces economies of scale, it is now apparent that the risks with not doing so are also very great, and therefore must be accounted for when judging the success of the venture (Ranganathan 2007).

i) India’s Economic Development.

Consulting Outsourcing2India (2013) gives one an insight into current macro trends in India, whereby economic development as well as GSO development has overstrained urban areas, as well as drive up factor prices. These increases in price have meant companies looking to outsource now target lesser developed areas, which in turn means that we will see similar growth in those areas. Eventually this will translate into a smaller cost advantage for the Indian economy with regards to GSO and a heavier emphasis on technological and business process advantages instead. These economic advancements need to be considered by GlobShop, as essentially a reduction in cost advantages may discourage the overall GSO venture given the cost reduction emphasis. Furthering this, economic development and interest further strains the underdeveloped infrastructure in India, whereby western companies already complain of power outages and poor capital road/transport link qualities

5

(Whitfield 2008). Thus this furthers the country risk associated with GSO and needs to be accounted for by GlobShop. Such developments when coupled with the advancements of other South East Asian countries with regards to GSO may in turn make India a less favourable option for GlobShop, influencing their decision to discontinue the venture as a result. The problem is that that dependence that has been developed over the course of the venture, coupled with the lack of next steps means that GlobShop are insufficiently prepared to tackle this growing concern in the long run.

Section V: Concluding Remarks.

Given these arguments it is conclusive to say that GlobShop’s GSO venture was unsuccessful. Despite Heeks (2001) claiming that a GSO venture can still be successful without satisfying all aspects of COCPIT and therefore COIN, we find that the overall failings to align objectives and plan for the future outweigh the benefits of cost reduction and good communication. This is reflected by the fact that GlobShop failed to find greater sustainability or farm an effective “partnership” with ISS. Given the insight developed through our analysis of future challenges is it suggestable that a different approach may better suit GlobShop and the volatilities associated with the tourism market. Adopting a business process outsourcing approach (BPO), or even partaking in a merger with a smaller IT vendor gives GlobShop more manoeuvrability and connectivity to inspire innovation (Lacity 2009). Essentially closer control and flexibility removes the problems of over-dependence, and therefore allows for GlobShop to protect themselves better against the risks of associating themselves with foreign entities. It is arguable that mergers and BPO present significantly higher risks and costs due to the scale of the operation, however given the fact that GlobShop’s GSO operations have failed, and that it is of high importance to bring greater financial sustainability, we conclude that such risk taking and higher investment are required in order for GlobShop to bring about future gains and develop up the value chain (Rottman 2008).

References:

Aron, R., Singh, J., (2005), ‘Getting offshoring right’. Harvard Business Review, 83, pp. 135-147.

Carmel, E, And Agarwal, R, (2001) ‘Tactical Approaches For Alleviating Distance In Global Software Development IEEE Software Special Issue On Global Software Development’, Vol 18 No 2 pp22-29

Carmel, E & Nicholson, B 2005, ‘Small Firms and Offshore Software Outsourcing: High Transaction Costs and Their Mitigation’, Journal of Global Information Management, vol.13, no. 3, pp.33-54.  Retrieved May 4, 2011, from ABI/INFORM Global. (Document ID: 852458751).

Carmel E and Tija P (2006) ‘Offshoring information technology’, Cambridge.

Carmel, E and Abbott, P (2007), ‘Why nearshore means that distance matters’, Communications of the ACM 50 (10) 40-46.

Conchuier, E, Agarwal, P, Olsson, H, & Fitzgerald, B (2009), ‘Global Software Development: Where are the Benefits?’, Communications of the ACM, vol. 52, no.8, pp. 127-131, Business Source Complete, EBSCOhost, viewed 4 May 2011.

Farrell, D (2006) ‘Smarter offshoring’ Harvard Business Review 84 (6) 85-92.

6

Feeny, M. Lacity and L, Willcocks (2005), ‘Taking the measure of outsourcing providers’, Sloan Management Review (3) , pp. 41–48.

Flinders, K (2011), ‘Outsourcers can innovate to boost your bottom line – if you let them’, Computer Weekly, April 5, 8.  http://www.proquest.com/ (accessed May 4, 2011).

Heeks, R, Krishna, S, Nicholson, B, and Sahay, S (2001) ‘Synching Or Sinking: Trajectories and Strategies In Global Software Outsourcing Relationships’ IEEE Software 18 (2) pp54-61

Kern, T., Willcocks, L.P., and van Heck, E. (2002) "The Winner's Curse in IT Outsourcing: Strategies for Avoiding Relational Trauma," California Management Review (44:2) pp 47-69.

Kotlarsky, J. and Oshri, I. (2008) ‘Country Attractiveness for Offshoring and Offshore-Outsourcing:Additional Considerations’ Journal of Information Technology, 23, 4, pp. 228–31

Lacity, M Khan, S Willcocks L (2009) A review of the IT outsourcing literature: Insights for practice Journal of Strategic Information Systems 18 130–146

Lewin, A.Y. and C, Peeters (2006) ‘Offshoring Work: Business Hype or the Onset of Fundamental Transformation?’ Long Range Planning, 39, 3, pp. 221–39

Mani, D., Barua, A. and A.B. Whinston (2006), “Successfully Governing Business Process Outsourcing Relationships,” MIS Quarterly Executive, 5 (1)

Oshri, I Kotlarsky, J and Willcocks L (2009) “The handbook of global outsourcing and offshoring”, Palgrave.

Ranganathan, C., Balaji, S., (2007). “Critical capabilities for offshore outsourcing of IS”. MIS Quarterly Executive 6 (3), 147–164.

Rottman, J., and Lacity, M., (2006) "Proven Practices for Effectively Offshoring IT Work," Sloan Management Review, Vol. 47, 3, Spring, pp. 56-63

Rottman, J., and Lacity, M. (2008),“A US Client’s Learning from Outsourcing IT Work Offshore,”Information Systems Frontiers,Vol. 10, No. 2, pp. 259-275

Taleb, N. (2010). “The black swan: The impact of the highly improbable.” Random House Inc.

“The Future of Outsourcing”, http://www.outsource2india.com/trends/future_outsourcing.asp (2001)

Vitasek, K; Manrodt, K (2012) vested outsourcing: “a flexible framework for collaborative outsourcing”. Strategic Outsourcing: an International Journal 5 (1) 4-14.

Whitten and Leidner, (2006) “ Bringing back IT: an analysis of the decision to backsource or switch vendors”, Decision Sciences (4) , pp. 605–621

Willcocks, L., and Lacity, M.(2006), “Global Sourcing of Business and IT Services”, Palgrave, United Kingdom.

Willcocks, L., and Lacity, M (2009), “The practice of outsourcing: from information systems to BPO and offshoring”, Palgrave.

7

Whitfield, M, & VanHorssen, N (2008), “Critical Issues in Offshore Outsourcing”, Vol 5, No.2, Executive Counsel Journals, haynesboone.

8