Impact of Technology on the Process of Offshore Outsourcing

7/31/2019 Impact of Technology on the Process of Offshore Outsourcing

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STRAYER UNIVERSITY

A STUDY OF THE IMPACT OF TECHNOLOGY ON THE PROCESS OF

OFFSHORE OUTSOURCING: THE CASE OF DELL INC.

DIRECTED RESEARCH PROJECT SUBMITTED TO THE FACULTY OF THE

GRADUATE SCHOOL OF BUSINESS IN PARTIAL FULFILLMENT OF THE

REQUIREMENT FOR THE DEGREE OF MASTERS OF BUSINESS

ADMINISTRATION

TO:

Dr. JOEL O. NWAGBARAOCHA

BY:

JALIL BENDAOUD

WASHINGTON, DC

JUNE 2005


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ABSTRACT

This exploratory study investigates the impact of technology on the process of

outsourcing using the case of Dell Inc. It draws on a qualitative analysis of data and businesstrends to increase understanding on how technology did influence the rise of outsourcing.The principle research question of the study investigates how technology has affected thebusiness world in terms of the search for cheaper labor in foreign countries to reduceproduction costs. This is accomplished by addressing the following four questions identifiedfor this research study.

The first question explores, from a historical perspective, which factors led to theemergence of outsourcing. It covers the definition of outsourcing and its historicaldevelopment. This section also describes how Dell Inc. has been chosen as the case study ofthis research study. It includes an overview of how Dell Inc. has been successful in one ofthe most competitive industry in our era.

The second question explores the modern evolution of technology. There is no doubtthat technology has played an important part in outsourcing. This section therefore containsrelevant information on why companies started to use foreign labor and services to cope withtechnological innovations and challenges.

The third question discusses the main challenges of outsourcing. It goes over theimpact of outsourcing on the operations of Dell Inc. This sections emphasizes the issues thatcompanies in general face while outsourcing some of production functions to other countries.To further explain the off-shore issues, this section shows how Dell Inc. has coped withoutsourcing.

The fourth and last question of this research study investigates how companies canutilize outsourcing to be successful, while keeping up with the fierce competition that float inour world. Many companies do not approach outsourcing with sufficient due diligence, andthereby endanger the existence of their business. This section is intended to help anycompany who is contemplating outsourcing. It shows all the steps that need to be taken toimplement a good outsourcing technique that could help companies save money and be morecompetitive.

The research methodology employed by this research study is an analysis ofliterature, books, news reports and studies that have been conducted in the past concerningtechnology development and outsourcing. As a result of this study, the link betweentechnology and outsourcing is clearly identified. Analysis of the research demonstrates howtechnology has impacted the use of outsourcing and how both technology and outsourcingwill continue to grow to make our lives more bearable. Although there are challenges toeffectively implementing outsourcing within a company, this phenomenon will continue tobe employed by businesses and will therefore grow in global scale over the coming years.This conclusion of this research study acknowledges the potential problem with the initialimplementation of outsourcing, but at the same time states that outsourcing is a growingtrend. Outsourcing will only continue as an effective practice if organizations are able toincorporate technological development into their off-shore business strategies.


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ACKNOWLEDGMENTS

I would like to thank my guide and Instructor Dr. Joel O. Nwagbaraocha, professor at Strayer

University, Washington, DC Campus, for his continuous guidance and effort, which helped

me to complete this study. His resourceful guidance and advices helped me learn about the

research procedures as well as the contents of the study.

A special thanks to my family members, especially my mother, who encouraged me to

pursue my graduate degree. I also would like to thank my friends and co-workers, without

their help and support, I would not have been able to complete this study successfully. I also

would like to thanks Lisa Manning who reviewed my work and made a few suggestions.

And finally thanks to the music of www.di.com that helped me throughout this process.


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TABLE OF CONTENTS

PageABSTRACT iiACKNOWLEDGEMENT.. iiiLIST OF TABLES AND FIGURES... vi

CHAPTER ONE. INTRODUCTION 1

Context of problem.. 1Statement of problem... 4Specific research question and sub-questions.......................... 7Significance of the study.. 7

Research design and methodology... 8

Organization of the study. 9

CHAPTER TWO. LITERATURE REVIEW.. 11

CHAPTER THREE. WHAT IS THE HISTORICAL BACKGROUND OF OFFSHOREOUTSOURCING IN GENERAL AND AT DELL? .. 35

The origins of outsourcing.... 35Outsourcing yesterday and today.. 37Advantages and disadvantages.. 40Dell Inc. in the computer industry. 42Dell Inc. and outsourcing.. 44

CHAPTER FOUR. WHAT IS THE RELATIONSHIP BETWEEN TECHNOLOGY ANDINTERNATIONAL OUTSOURCING? .................................................................. 46

Technology and outsourcing. 46The reason for outsourcing.... 49Following technology trends.. 52

CHAPTER FIVE. WHAT IS THE IMPACT OF OUTSOURCING ON THE OPERATIONSOF DELL? ........................................................................................................................ 55

Dells venture in India 55Outsourcing to India... 56Dissatisfied customers: Dell Inc.... 58Why customers are unsatisfied with off shore call centers 59Dell Inc.s response to customer feedback 60


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Dell Inc. Numbers.. 62

CHAPTER SIX. WHAT STRATEGIC APPROACHES TO OUTSOURCING INCREASE

EFFICIENCY IN THE BUSINESS WORLD AND AT DELL INC.? . 65

Failures with outsourcing. 65Process for outsourcing 66Identifying the right outsourcing partner. 70Fundamentals of outsourcing implementation. 70

CHAPTER SEVEN. SUMMARY AND CONCLUSIONS 75

Introduction.. 75Summary... 76

Conclusion. 82

BIBLIOGRAPHY. 84


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LISTS OF TABLES AND FIGURES

Figure:

Page

Figure 3-1: News stories on outsourcing 36

Figure 4-1: Initial reasons for outsourcing.. 48

Figure 4-2: Reasons companies choose to outsource.. 49

Figure 6-1: Key criteria that international clients need to consider while outsourcing.. 69

Table:

Table 3-2 Absolute outsourcers of 2002.. 39

Table 5-1: Top 5 Worldwide & US PC Vendors, 2nd

Quarter 2003 vs.

2004... 63

Table 5-2: Top 5 Worldwide & US PC Vendors Market Share, 2nd Quarter 2003 vs.

2004.. 64


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CHAPTER ONE:

INTRODUCTION

Context of the problem

Outsourcing is commonly defined the practice of subcontracting manufacturing

work to outside and especially foreign or nonunion companies.1 The key to outsourcing is

the purchase from outside only those activities that are not key to the companys distinctive

competencies. In the present focus on an international business model, outsourcing is best

understood as the practice of using outside, foreign firms to handle work previously

performed domestically, within a company.

According to an American Management Association survey of member companies,

94 percent of firms in the United States outsource at least one activity. Outsourcing is not

limited to just a few areas. It touches many areas within an organization. A company can

outsource its general and administrative activities, manufacturing, information systems,

human resources, staffing, transportation, marketing, finance accounting and many other

areas. Organizations find it more beneficial to outsource complementary groups of

administrative work, instead of investing large amount of money on the development of

1Merriam-Webster Dictionary, Online ed., s.v. outsourcing, Available on-line fromhttp://www.m-w.com.
http://www.m-w.com/http://www.m-w.com/http://www.m-w.com/http://www.m-w.com/http://www.m-w.com/http://www.m-w.com/


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specific business processes. Such frequently outsourced areas include payroll systems,

payment processing systems, and other relatively standardized functions.2 Nevertheless, not

all companies are satisfied with their outsourcing results, sometimes leading to the

reintegration of the outsourced activity.

In the early 80s, outsourcing referred to a companys expansion of its purchases of

manufactured physical inputs. Outsourcing then became a significant industrial

phenomenon in the 90s. It has spread across industries and national boundaries

(international outsourcing). In 2004, outsourcing took on a new meaning. Outsourcing now

refers to a specific segment of the growing international trade in services. Firms now do

more than just acquiring products from outside vendors, they also purchase services abroad.

As a part of this recent trend, outsourcing has become a dominant part of decision-making

and an important way to increase efficiency and even quality. It is a value enhancer that

helps companies to streamline their core competencies at a significant cost advantage.

Trade liberalization or globalization has greatly influenced the development of

outsourcing. Managerial practices in the supply chain and improvements in transportation

and electronic information and communication technology, have led many firms to move

towards outsourcing and reduce transactional costs. Such advances allowed rapid flow of

voluminous data across international boundaries. With the increase and improvement in

international communication, transaction costs across borders continue to drop. Now

companies are not limited by domestic production costs and prohibitively high transaction

costs, but may seek abroad alternate service or product providers.

2 "Men and Machines," The Economist(November 11, 2004): 3.


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Before 2000, the United States was used to goods being produced abroad but was not

used to services being provided abroad. In the past year, we have become more familiar and

more acceptable of both product and service outsourcing. Many American companies have

moved such key business processes as their customer service call centers to parts of the

country or world where labor costs are relatively low. One current outsourcing move is by

McDonalds, the world's largest fast-food chain, which announced (March 10th, 2005) that it

would be using remote call centers for Drive-Thru service.3

Under the General Agreement on Trade in Services (GATS) outsourcing is

categorized by four different ways in which services can be traded:

Mode 1: Suppliers and buyers remain in their respective locations.

Mode 2: Service providers move the service recipient to the service providers

location.

Mode 3: Service providers establish a presence in another country, requiring direct

foreign investment (e.g. banking and insurance firms)

Mode 4: Service providers more to the location of their client (service buyer).4

Consulting is a part of outsourcing. There are two types of consulting providers:

Individuals who sell their expertise to service buyers.

Service provider companies that sell their expertise to service buyers.

Consulting services are the product of outsourcing. Since companies have access to

external vendors, organizations do not see the need for spending large amounts of money on

3McDonald's may outsource drive-thru orders,MSNBC(March 10, 2005), Available on-line from:http://www.msnbc.msn.com/id/7149812: 1.

4Jagdish Bhagwati, Arvind Panagariya, and T.N.Srinivasan, The Muddles over Outsourcing,Journal of Economic Perspectives 18, no. 4 (Fall 2004): 93-114.
http://www.msnbc.msn.com/id/7149812http://www.msnbc.msn.com/id/7149812http://www.msnbc.msn.com/id/7149812


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hiring and training fees. Instead, they can use vendor employees or consulting firms to

perform tasks costing them less money in the long run. In addition to reducing the cost of a

business process, outsourcing through consulting means that organizations do not have to

waste money on employee benefits, bonuses, and related costs.

Dell Inc. is the worlds leading computer systems company. Headquartered in Texas,

it designs, builds, and customizes products and services to satisfy a range of customer

requirements.5 With manufacturing facilities and sales offices throughout North and South

America, Europe, and Asia, Dell Inc. is able to respond to customers needs wherever they

are. Dell Inc. is not limited to selling only computer systems, servers, and Internet

Infrastructures, the company offers different options that can help customers benefit from

individualized production. In the service sector, Dell provides its customers with training

and certification programs, asset management services, customer financial services for its

business and consumer customers in the United States6.

Statement of the problem

In the past few decades the United States has witnessed a dramatic change in the way

services are provided and goods are manufactured. Firms have started replacing unskilled

workers with other inputs. One of the reasons for such a decline in the use of domestic

5 Dell Inc. Website, Available On-line fromwww.dell.com: Contact Us section.

6 Full Company Description for Dell Inc., Reuters, Available on-line from:http://yahoo.investor.reuters.com/FullDesc.aspx?target=/stocks/quickinfo/companyprofile/fulldescription&ticker=DELL: 1-2.
http://www.dell.com/http://www.dell.com/http://www.dell.com/http://yahoo.investor.reuters.com/FullDesc.aspx?target=/stocks/quickinfo/companyprofile/fulldescription&ticker=DELLhttp://yahoo.investor.reuters.com/FullDesc.aspx?target=/stocks/quickinfo/companyprofile/fulldescription&ticker=DELLhttp://yahoo.investor.reuters.com/FullDesc.aspx?target=/stocks/quickinfo/companyprofile/fulldescription&ticker=DELLhttp://yahoo.investor.reuters.com/FullDesc.aspx?target=/stocks/quickinfo/companyprofile/fulldescription&ticker=DELLhttp://yahoo.investor.reuters.com/FullDesc.aspx?target=/stocks/quickinfo/companyprofile/fulldescription&ticker=DELLhttp://www.dell.com/


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unskilled workers is the practice of outsourcing. Nowadays firms move their production

processes to countries where economic conditions are more advantageous.

Outsourcing does create muddles in our society. Many argue that outsourcing is a

good long term investment and many oppose to this idea. Economists think of outsourcing as

a win-win situation.

While outsourcing helps control Capital Costs and increase efficiency, reduce risk,

and reduce labor costs, it also can have negative effects on firms and countries (e.g. Loss of

jobs in developed countries, huge layoffs by companies, etc). In low cost labor countries

like India and China, information technology activities and skills are growing fast.

Many companies do not thoroughly understand outsourcing. It is true that it can help

firms save money, but this is not the only reason to choose to do it. During the outsourcing

mania of the early 1990s, many firms realized that outsourcing can be a wrong corporate

decision and cost firms money. A company cannot outsource if the outsourced sector is part

of its core competitiveness in the market. The loss of control over a product inherent to

outsourcing creates a high risk of losing market share.

There is much debate over whether outsourcing can benefit developing countries (3rd

world countries) to the detriment of the people in the working classes of developed countries.

Off-shore jobs can create economic crisis in societies by increasing domestic unemployment

rates when companies lay off their employees. Critics of sending jobs off shore cite the

potential for unnecessary delays, lack of coordination, incompatible cultural backgrounds,

and different time zones as the key reasons for retaining domestic employment. Repeated

movement of local jobs abroad can in turn affect buying power and create a negative work


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environment. Employees fear job losses which create stress, lowers motivation level and

also productivity.

Many view outsourcing as a way to cut costs, while this is often the primary

motivation, it does not always occur. This is why companies must weigh their options and

analyze the steps to undertake the outsourcing process. While outsourcing helps organization

become more efficient, outsourcing can also reduce their abilities to learn new skills and

develop new core competencies. Many firms find themselves locked into long-term

contracts with outside vendors that are no longer competitive. This can lead to a loss of

decision making capability to their vendors. Such situations become negative in the long run

because organizations develop a dependence on their vendors.

Over the past decade, software and computer companies like Microsoft, Hewlett-

Packard, International Business Machines (IBM), and Dell, Inc. have increasingly turned to

outsourcing to save costs. Dell Inc. is one of the worlds leading computer manufacturing

companies that embody this trend. As a result, Dell is a relatively new player that has

recorded amazing sales numbers. For example, in 2004, Dell Inc.s net worth reached about

13 billion dollars.7

Dell Inc. led the way among tech companies who moved their call centers to India.

Such a move drastically cut costs for Dell, but created an unexpected level of frustration

among Dell customers. The cultural incompatibility of the American callers and the Indian

customer service representatives strong accents was the main reason for such a failure. The

primary reason for off shoring Dell Inc.s call centers to Mohali in India was to decrease the

labor costs. This managerial tactic was a good way to improve efficiency at Dell Inc. but had

7 Ron Insana, Dell knows his niche and hell stick with it, USA Today (April 4, 2004): 3b.


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a few disadvantages. With so many customer complaints about competency of Dell Inc.

foreign employees, top management had to decide to bring back most of Dell Inc.s call

centers back to the United States.

Dell Inc. has a production or sales presence in many continents across the globe. In

March 2005, Dell Inc. decided to build a computer manufacturing facility in China to

improve its image and increase sales in Northern Asia.8 With the fierce competition already

in the area, can Dell Inc. really achieve this goal? And can this labor delocalization to Asia

be the answer?

Specific Research Question and Sub-questions to Address the Problem

Principal Question:

What is the impact of technology on the process of outsourcing using the case of Dell

Inc.?

Sub-Questions:

What is the historical background of outsourcing in general and at Dell Inc. ?

What is the relationship between technology and international outsourcing?

What is the impact of outsourcing on the operations of Dell Inc.?

What strategic approaches to outsourcing increase efficiency in the business world

and at Dell Inc.?

8 Dell va construire une nouvelle usine en Chine, (Dell is going to build a new factory in China), LeFigaro Quotidien Paris, (March 25, 2005).


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Significance of the Study

The purpose of this study is to explain the growing trend of outsourcing. Most

products and services in the current marketplace are somehow the result of outsourcing. To

combat popular misconceptions about outsourcing (especially in the United States), there is

need for an understanding of the benefits and the negative impacts of the trend. As it is

relatively a new phenomenon, many companies have yet to see the big picture or global

significance behind outsourcing, especially regarding the global market for technology and

services.

Undertaking this new trend without full consideration of the cost and benefits of

moving off-shore can be very detrimental to companies. Many companies have outsourced

their products and or services, only to see themselves loosing more money than they were

prior to outsourcing some functions of their production line or services. This study is

targeted at companies who are thinking of using outside vendors as be their labor force. This

study will also benefit organizations who are thinking of reducing their labor costs by

changing the way they operate. Due to the fierce competition in the current business world,

organization have to change their operations to be able to survive and stay competitive and

even to gain market share.

This research uses a case study to present facts about and analysis of outsourcing,

thereby helping companies make the right business decisions. Organizations must get

familiar of the pros and cons before engaging in such a corporate strategy.


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This research would be capable of directing organizations towards the right path to

achieving efficiency with the help of outsourcing and help them from loosing their decision

power while using Dell Inc. as an example. Other MBA students from Strayer University or

other universities can also use this work to study the outsourcing business model. They

could use this work to update the information provided in case there are newer information

on the topic.

Research design and methodology

Outsourcing is a very hot topic that somehow affects every one of us. There is a large

amount of work to analyze, papers and books to read, articles to analyze.

This Directed Research Paper is going to be designed with a qualitative set of mind.

A qualitative research paper focuses on understanding phenomena, rather than predicting as

in the application of traditional quantitative or statistical research.

The reason I chose this topic is to understand the phenomena that creates muddles

over outsourcing. Conducting a quantitative or statistical research will not help me achieve

my goal. Throughout this research we will find information drawn from secondary sources

(which are peoples work): books, research papers, juried articles, magazines and also

newspaper articles.

Organization of the study


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This research study is divided into seven chapters. CHAPTER 1, INTRODUCTION,

contains the formulation of the context of the problem and the statement of the problem.

This chapter states both the primary research question and the four sub-questions.

CHAPTER 2, LITERATURE REVIEW, contains a review and a documentation that

was gathered prior to writing this research. It contains the work of other people and states

what other think of the topic. Literature review involves the analysis of a variety of sources,

in particular: books, websites, and newspaper articles.

CHAPTER 3, THE HISTORICAL BACKGROUND OF OFFSHORE

OUTSOURCING IN GENERAL AND AT DELL INC. , contains an in depth background on

Outsourcing. This chapter is the first part of the core work of this research study. It explains

how Outsourcing functions, how it impacts companies in terms of labor organization,

cost/benefits and productivity. It explains why and when Outsourcing has started to be the

solution for many companies. Finally this chapter goes over how technology led the

integration of outsourcing in many businesses.

CHAPTER 4, THE RELATIONSHIP BETWEEN TECHNOLOGY AND

INTERNATIONAL OUTSOURCING, deals with the impact of technology on firms. This

section explains how technology has evolved and has impacted the use of outsourcing while

many firms were not familiar with both technology and outsourcing. Chapter four goes over

how companies got involved with outsourcing and how they successfully introduced it

internally to increase revenues and balance sheets. It also contains information on how firms

faced the complexities of technology and outsourcing.

CHAPTER 5, THE IMPACT OF OUTSOURCING ON THE OPERATIONS OF

DELL INC., deals with the parallel growth of Dell Inc. and competing firms in the same


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industry. It also deals with the negative and positive impacts that Dell Inc. has encountered

when started outsourcing its call centers and its manufacturing processes. This section

demonstrates how Dell, one of the leading company in its industry, has resurfaced after

experiencing a deterioration of its customer service support.

CHAPTER 6, STRATEGIC APPROACHES TO OUTSOURCING INCREASE

EFFICIENCY IN THE BUSINESS WORLD AND AT DELL,deals with the approaches and

solutions that Dell Inc. needs to undertake to be more efficient and turn outsourcing to its

advantage. This section deals with the different steps that can be utilized to help companies

avoid making the wrong outsourcing decisions. Chapter six emphasizes on how important it

is for companies to spend time and determine all the pros and cons before selecting an

outsourcing partner.

CHAPTER 7, SUMMARY AND CONCLUSIONS, provides a synopsis and the

conclusions of the research study. It contains all the implementation solutions as well as the

final thoughts on Outsourcing as a result of the technology boom.

CHAPTER 2:

LITERATURE REVIEW

Title: Outsourcing and Technological Change

Author: Ann Bartel, Saul Lach and Nachum Sicherman


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In this paper, we argue that an important source of the recent increase in outsourcing

is the computer and information technology revolution, characterized by increased rates of

technological change. Our model shows that an increase in the pace of technological change

increases outsourcing because it allows firms to use technologies. In addition, firms using

more IT- intensive technology face lower outsourcing costs of IT-based services generating a

positive correlation between the IT level of the user and its outsourcing share of IT-bases

services. This implication is verified in the data.

During the 1990s, there was a substantial increase in labor outsourcing among U.S.

manufacturing firms.1 Firms are increasingly purchasing the services of outside providers to

perform tasks that were previously performed by in-house employees or to perform new

tasks. The outside service providers are used to carry out administrative duties or to provide

business support such as security, engineering, maintenance, sales, legal services, accounting

services, food services, data processing, and software development. Another manifestation of

the trend towards outsourcing is the increased use of temporary workers.

In this paper we propose that an important source of the recent increase in outsourcing is the

computer and information technology revolution, characterized by increased rates of

technological change. We present a model that examines the different channels by which

technological change can affect the firms decision to outsource. According to our model, a

firm decides to outsource a service or to produce it in-house depending on which

organizational mode minimizes production costs. The cost of outsourcing is the price of the

service plus an adjustment cost specific to the firm. Since there is a fixed cost in the

production of the service, the economies of scale generated by this fixed cost are exploited by

setting up a firm that sells the service to several users.


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The service provider can then offer the service at a price below the average cost of in-house

production. At this lower price, some firms (those with adjustment costs below a threshold)

will outsource.

Title: Fear of Outsourcing is it justified?

Author: Mary Amiti and Shang- Jin Wei

The recent media and political attention on service outsourcing from developed to

developing countries gives the impression that outsourcing is exploding. As a result, workers

in industrial countries are anxious about job losses. This paper aims to establish what the

hypes are and what the facts are. The results show that although service outsourcing has been

steadily increasing it is still very low and that in the United States and many other industrial

countries insourcing is greater than outsourcing. Using the United Kingdom as a case study,

we find that job growth at a sectoral level is not negatively related to service outsourcing.

Outsourcing of services has received an enormous amount of attention in the media and

political circles in recent times. In just five months, between January and May 2004, there

were 2,634 reports in US newspapers on service outsourcing, mostly focusing on the fear of

job losses.1 In particular, there have been reports about jobs moving from industrial countries

like the United States and the United Kingdom to developing countries such as India. These

concerns are not limited to the United States. Similar reports appeared in newspapers in other

industrial countries such as the United Kingdom, which had 380 reports on outsourcing in its

newspapers during the same period. Newspapers in Australia have also published similar


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reports. Figure 1 plots a quarterly count of news stories or commentaries in major

newspapers and newswire service reports on international service outsourcing from the first

quarter of 1991 to the first quarter of 2004 in the United States and the United Kingdom,

which we have constructed using an electronic database on newspaper articles (FACTIVA).

Both indexes show a clear upward trend in media interest in international outsourcing of

services.

The main objective of this paper is to investigate and to establish what are the hypes and

what are the facts about service outsourcing. First, we develop a set of stylized facts

describing the trends in service outsourcing, which we present in Section IV. We focus on

business services and the computing and information service trade as these most closely

reflect the service categories that are generally thought of as being outsourced.

Title: The Impacts of Technology, Trade and Outsourcing on Employment and Labor

Composition

Author: Catherine Morrison Paul and Donald Siegel

Since the late 1970s, there has been a shift in the compensation and labor

composition in favor of highly educated workers. A number of recent papers have identified

trade, technology, and outsourcing as possible causes of these changes. Most of these

studies have been based on a simple production or cost function framework and limited

information on investment in technology and labor composition. In this paper, we examine

the relationship between trade, technology, and outsourcing and shifts in labor demand using


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dynamic cost function estimation and more comprehensive measures of labor composition

and technological advance. Our findings indicate that technological change has had the

greatest effect on changes in labor composition. However, the indirect impact of foreign

trade on employment patterns augments its direct impact because trade stimulates

computerization, which leads to further reductions in the demand for workers without a

college degree and increases in the demand for workers with a college degree.

Recent studies of shifts in relative wages and labor composition toward more highly educated

workers have attributed these changes to rapid technological change or to an increase in the

volume of foreign trade. Outsourcing is also hypothesized to have exacerbated these trends.

Most of these papers have been based on a simple cost or production function framework and

limited information on technological change and composition of the labor force. In this

study, we examine the effects of trade, technology, and outsourcing on employment and

labor composition using a dynamic cost function model and more detailed measures of labor

composition and technical change. This framework provides for a more comprehensive

analysis of labor demand because it allows us to incorporate adjustment costs for capital and

interaction

effects among trade, technology, and outsourcing, which have been ignored in existing

studies. Our data also allow us to assess the impact of these factors on the demand for four

types of workers, classified by level of education.

Title: A new Push on An Old Fundamental: Understanding the Patterns of Outsourcing

Author: Zhihao


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For what kind of intermediate input/service do firms often go outsourcing? This paper

develops a model of two-stage production in which economies of scope are central to the

production of both the intermediate and final good. The model is able to explain the patterns

of outsourcing from the degree of product differentiation, economies of scope, and

economies of scale in production of the intermediate input relative to that of the final good.

The recent surge of outsourcing activities is explained by a new push (progress in the general

purpose technology, e.g., information technology) on old fundamental (economies of scope

in production).

Outsourcing is surging in popularity across a wide range of production activities and

sectors. In the automobile industry, for instance, we see outsourcing ranging from product

designing, data processing, special components, assembly, and minor parts and components,

etc.1 Why do firms engage in very different outsourcing business, some require high-skilled

labor and are very specialized but others are very simple and minor. For what kind of

intermediate input/service do firms often go outsourcing? Can we say anything about the

characteristics/attribute of the goods or services in outsourcing? The purpose of this paper is

to address these questions and understand the patterns of outsourcing. To answer these

questions and explain the recent surge in outsourcing activities, it is important to understand

the fundamental economic force behind outsourcing. Although it is true that outsourcing is a

means of cutting costs to stay competitive, it is not the underlying economic force. A review

of outsourcing activities in the automobile industry will reveal the driving force behind the

trend of outsourcing business. In the 1920s when workers in the Ford Motor Company were

getting the highest pay (much higher than all others) in the industry, Ford did not seek


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outsourcing to reduce costs.2 The first sign of outsourcing in the automobile industry,

however, came at the beginning of 1920s when the General Motors Company started a major

innovation in producing automobiles by focusing on economies of scope, rather than

economies of scale, in production. The success of Ford, and its relatively inexpensive

automobile, was based on mass production of a single, basically unchanging, product.

Title: Labor Demand Effects of International Outsourcing: Evidence from Pant Level Data

Author: Holger Gorg and Aoife Hanley

We examine empirically the effect of international outsourcing on labor demand at

the level of the individual plant. We do so by estimating a dynamic model of plant level labor

demand, using a Generalized Method of Moment estimator. We use plant level data for Irish

Electronic sector, an industry that has expanded rapidly over the last decade and that has

witnessed significant off shoring activity. Our result suggest that, in the short run, there are

significant reductions in plant level labor demand, which we attribute to the use of

international outsourcing. There appear to be stronger negative effects from outsourcing of

materials than services outsourcing.

The purpose of this paper is to examine empirically the effect of international outsourcing on

demand for labor at the level of the individual plant. As pointed out above, workers' concerns

about possible job losses are often countered with the argument that off-shoring can increase

employment in the country. It is, however, usually not made clear whether these new jobs


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occur in the same plant in the short-run, or whether jobs are lost in one plant and at some

stage in the future other jobs are created in a completely separate plant.

Our paper contributes to an existing and growing literature on the employment effects of

international outsourcing. The issue that has attracted most attention thus far is whether off-

shoring has contributed to a shift in labor demand for different types of workers and

consequently a change in the wage differential between high and low skill wages.

Title: Outsourcing, Imports and Labor Demand

Author: Martin Falk

This paper examines the effects of purchased services and imported intermediate

materials on the labor demand for different skills in German manufacturing sectors. We

derive and estimate a factor demand system based on the generalized Box-Cox cost function

nesting both the normalized quadratic and the translog functional form. We find that the

impacts of output and capital growth are more important in explaining the demand for

heterogeneous labor than substitution effects between labor and non labor inputs. Similarly,

the increasing use of both imported material and purchased services is a consequence of

output growth rather than input substitution.

Over the last decades manufacturers outsourced service inputs and shared resources with

competitors. As a result service inputs have been the fastest growing input factor in German

manufacturing, followed by imported materials and highly skilled labor. Based on input-

output tables intermediate services and imported materials both at constant prices rose by 4.7

and 4.2 percent per year between 1978 and 1990. Most of the rise in intermediate services as


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a factor of production in manufacturing can be attributed to the growing importance of

business services representing 45 percent of total intermediate services in 1990 compared to

35 percent in 1978. Within business services temporary personal supply services, consulting,

legal service, accounting seems to be the fastest growing business services. For instance,

between 1978 and 1998 the number of workers in personal supply services increased by 11

percent per year, the highest employment growth rate among all business service industries.

Title: Service outsourcing, Productivity and Employment: Evidence from the US

Author: Mary Amiti and Shang- Jin Wei

This abstract estimated the effects of foreign outsourcing of services and material

inputs on manufacturing employment and productivity in the US between 1992 and 2001.

The results show that service outsourcing has a significant negative effect on employment

using disaggregated industry data (450 industries). Service outsourcing reduced

manufacturing employment somewhere between 0.4 and 0.7 percent per year during the

period 1992 to 2001. However, at a more aggregated level (100 industries) this effect

disappears. These results imply that importing service inputs may lead to a substitution

effect away from labor but increased demand in other industries offsets this effect. We find

that there are benefits of service outsourcing in the form of higher labor productivity.

The outsourcing of services has received a huge amount of attention in the media and

political circles in recent months, largely because media reports seem to equate

outsourcing with job losses. In just five months, between January and May 2004,

there were 2,634 reports in U.S. newspapers on service outsourcing, mostly focusing on


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the fear of job losses. But outsourcing, let alone its consequences, does not appear to be

widely understood. The dictionary defines it as the procuring of services or

products . . . from an outside supplier or manufacturer in order to cut costs. However, it is

not clear what is meant by outside. Some people interpret it to mean outside the firm, and

others outside the country. Media and political attention seems firmly focused on

international outsourcing, even though domestic outsourcing is also common. Firms based in

industrial countries that outsource services have been accused of exporting jobs to

developing countries, with call centers and computing services in India the most frequently

reported examples.

Title: Sectoral Adjustment of Employment: the Impact of Outsourcing and Trade at the

Micro

Level

Author: Peter Egger, Michael Pfaffermayr, Andrea Webber

This paper analyses the effects of trade and outsourcing probabilities of employment

between sectors, using a dynamic multinomial logit framework with fixed effects. The data

contain individual Austrian make workers over the period 1988-2001. Our results strongly

support the view that international economic forces are important determinants of labor

market turnover. Increase in imports, terms of trade and, especially, in the outsourcing share

negatively affect the probability of staying in or changing in to the manufacturing sector,

even more so for industries with a comparative disadvantage.


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In recent publications it has been argued that the change of the skill structure of

industrial employment is caused by biased technical progress rather than by

increasing international trade with low wage countries. However, in linking

prices for final goods with prices of primary factors, most empirical studies have

only dealt with international trade in final goods and have thereby neglected the

impact of international outsourcing. In this paper it is argued that outsourcing

can be understood as a substitution of imported intermediate inputs for domestic

value added, and that such substitution may have an impact on the skill structure

of domestic employment in favor of skilled labor. The empirical evidence for

German manufacturing industries supports this hypothesis.

Over the past two decades, unskilled workers in high-income countries have

incurred losses in their economic fortunes relative to skilled workers, either in

terms of wages or in terms of employment. The traditional neoclassical trade

theory offers two conflicting hypotheses which could explain this development:

increasing trade with low wage countries (Stolper-Samuelson effect) or

exogenous technical progress biased against unskilled labor. The majority of

recent empirical studies on this subject has argued that biased technical progress

rather than international trade per se is the main factor. To substantiate this

conclusion, perhaps the most often used approach is a regression of goods prices

on factor income shares ("Baldwin-Cain approach"). This approach is based on

the familiar 2x2x2 Heckscher-Ohlin model with zero-profit conditions and makes

it possible to calculate those (hypothetical) relative factor price changes mandated

by world market price changes that are consistent with full employment.


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Title: Making The Most Of Opportunities by Challenger, John A. A speech

Author: John A. Challenger

CEO of Challenger, Gray & Christmas Inc., delivered at the Kelly Services Executive

Forum in Detroit, Michigan on September 17, 2004. Discussion on the issue of outsourcing

jobs in the global economy; Use of computer technology to import services from the U.S. to

other countries; Information on job shifts in a free-market economy.

You can't get very far in talking about a global economy without addressing the issue of

outsourcing jobs. Outsourcing is a highly-charged and frequently-covered topic of the media

and of politicians. And sometimes it's difficult to separate the wheat from the chaff the reality

from the hype. So I'll try my hand at that. And along the way, I'll dispel a few popular myths

about outsourcing. As we see the sails of the global economy on the horizon, will we screen

out what we don't understand, or accept, and just go about our business? Or will we

anticipate what's happening and adapt ourselves to a world that is changing right before our

eyes? The answer will make all the difference in making the most of the opportunities that lie

ahead. Countries like India and China have vast pools of skilled and well-educated workers

available to U.S. and other countries. The first trend is for U.S. companies to source jobs

abroad rather than at home. The second trend is companies taking advantage of advanced

computer technology to import services from other countries, like having radiologists in

Bangalore read X-rays taken in Boston.


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Companies using outsourcing will be more attractive to venture capital firms because these

firms will see a faster return on their investment. If a company can bring its products to

market faster and cheaper through outsourcing, it will increase its chances to win the

competition for limited funding dollars. One group estimates that the value of business

process outsourcing will rise to $243 billion by 2007, up from $1.3 billion in 2002 an

astonishing increase. Forrester Research estimates that 830,000 service sector jobs will move

offshore by 2005. And by 2015, the number of jobs relocating offshore is expected to reach

3.4 million. But this is only a small percentage of the total number of jobs constantly being

created and destroyed within the American economy. We are expected to create about 33

million jobs in the U.S. in the next seven years. And we're worried about 3.4 million jobs that

others have gained and we haven't.

Title: Dell's Hiring BingeAbroad

Author: Park, Andrew

Reveals that in the annual report of DellComputer Corp. filed with the U.S.

Securities & Exchange Commission on April 12, 2004, the company disclosed that

for the first time it has more employees overseas than in the U.S. Number of workers

stationed in other countries as of January 30, 2004; Percentage growth in the sales

of personal computers in the fourth quarter in China; Disparity between Dell's

workforce in the U.S. and abroad. Of 7,000 jobs it added in 2003, only 1,000 were in the

U.S. The PC giant now employees more workers overseas than at home. The disparity

between Dell's workforce in the U.S. and abroad is likely to keep widening. The PC business'


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ruthless economics will force it to continue outsourcing as a way of lowering costs. And Dell

has set its sights on increasing its worldwide PC market share to 30% or 40% over the next

few years, from 16% today. Much of that growth will have to come in foreign markets.

Title: Jobfull Recovery

Author: Wesbury, Brian S

If you read closely, those who fear outsourcing base their concerns on a zero sum

model of growth. These worry warts act as if the U.S. is the only consumer of goods and

services in the world. Therefore, anything that is produced overseas is a dead weight loss for

America. Chinese and Indian workers want to watch U.S. movies, talk on cell phones made

by Motorola, surf the web, and play video games. While a global world economy is tough to

get our arms around, demand follows supply as sure as night follows day.

As living standards rise in China and India, the U.S. does not lose--it wins. Free and open

trade is a win-win proposition. Most importantly, U.S. providers of goods and services keep

prices down for consumers and increase profits for shareholders by sourcing products from

overseas. These "saved" resources are then used to produce new goods and services and

develop new technologies to benefit U.S. citizens. That's the way markets work.

Title: And Away They Go


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Author: Stokes, Bruce

Discusses the offshore outsourcing of U.S. jobs overseas which concerns the

government and the business community. Benefit of outsourcing to the U.S.

economy; Increase in unemployment in the U.S. due to the outsourcing of jobs

overseas; Economic debate on offshore outsourcing; Criticisms on the theories of

economists on free trade; Forecasts on offshore outsourcing of U.S. jobs; Factors

which may affect the increase in offshore outsourcing of U.S. jobs.

In the span of mere weeks, the issue of companies' moving U.S. jobs overseas

particularly white-collar, service-sector jobs has become a political and policy

tempest, catching Washington unsuspecting and unprepared. After slowly gaining

energy in the doldrums of America's jobless economic recovery, "Off-shoring" was

then whipped into a storm by the heated rhetoric of the Democratic presidential

primaries. And now the issue has fanned protectionist flames on Capitol Hill,

whipped up hyperbolic press attention, and sparked transparently self-interested

bluster from the business community, the economics fraternity, and organized labor.

Anchored in a wider campaign dialogue about the health of the economy, off-

shoring--particularly the movement overseas of such service jobs as computer

programming, call-center staffing, and X-ray reading--has become a national worry.

But the "facts" about off-shoring are highly speculative, based on admittedly

imprecise projections of poorly documented recent trends. The issue is acutely

technical, and, above all, emotionally and politically charged. Off-shoring has indeed

been going on for some time. American Express first moved some of its business-processing


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operations to India in 1993. General Electric began to offshore some service jobs in 1998.

Other corporations soon followed the trend, as the widespread availability of low-cost

computers, combined with companies' adoption of standard software packages, effectively

turned business processes into digital commodities that could be moved anywhere in the

world. The advent of the Internet, a hundredfold increase in telecommunications bandwidth

capacity, and telephone deregulation in the United States combined to lower the

communication costs of offshore outsourcing. And, of course, labor costs at the other end are

just so much cheaper. Hungarian computer programmers start at $4,800 a year; American

programmers start at $60,000.

Title: A not so simple path

Author: Teicher, Stacy A

Sending tech jobs overseas hasn't been as easy as some firms believed. But they

persevere. It seems inevitable: American service and technology jobs are going the way of

manufacturing jobs - that is, they're being sent far, far away. But it's not happening as

massively or as quickly as the hype might make you believe. About 1 in 20 Fortune 1000

companies already spends half its IT budgets abroad, according to a new report by Forrester

Research in Cambridge, Mass. And programmers in India can be hired at one-tenth the salary

of programmers here. Yet labor-cost savings aren't the only factor firms need to consider

before jumping on the outsourcing bandwagon. And many still wonder if the benefits surpass

the risks. Some Americans complain that too many foreigners are let in on special visas and


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that after they gain experience, they might set up services in their home countries and offer

labor rates that Americans can't compete with. But others counter that without these

immigrants, many start-ups that have created jobs here wouldn't exist.

Title: U-turn: Users in control

Author: Lundquist, Eric

Dell Corp. has redirected some of its customer support lines from India back

to the United States at the instigation of customers. Large technology users, such as

Wal-Mart, that survived and thrived through the downturn now find themselves in a

position of strength at the bargaining table. While the economy is rebounding, the

memories of costly unused technology products linger. The news that Dell is

rerouting some service calls back to the United States from India following customer

complaints garnered a lot of attention. The outsourcing option is stronger now than in

the past. Many tech staffers have seen the ranks of their colleagues decimated. Knowing that

making a poor vendor choice could give rise to their own job being outsourced, customers

are exerting greater caution in their buying decisions. The news that Dell is rerouting some

service calls back to the United States from India following customer complaints garnered a

lot of attention. A week earlier at Comdex, Dell held a press conference at which company

officials talked about their commitment to corporate customer service. Dell's continued

growth in the corporate market depends mightily on its ability to bring the same efficiencies

to service that it brought to computer manufacturing and distribution. The move back

onshore from offshore could spur other companies to re-evaluate exactly what they gave up


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when they sent operations offshore. Dell did the right thing in paying attention to complaints

instead of trying to fault customers.

The news that Dell is rerouting some service calls back to the United States from

India following customer complaints garnered a lot of attention. A week earlier at

Comdex, Dell held a press conference at which company officials talked about their

commitment to corporate customer service. Dell's continued growth in the corporate

market depends mightily on its ability to bring the same efficiencies to service that it

brought to computer manufacturing and distribution. The move back onshore from

offshore could spur other companies to re-evaluate exactly what they gave up when

they sent operations offshore. Dell did the right thing in paying attention to

complaints instead of trying to fault customers.

Title: The new geography of the IT industry

Author: The Economist

Consider three snapshots of the information technology (IT) industry today.

First, look at the center of the business at the turn of the century--Silicon Valley.

Parts of this high-tech region to the south of San Francisco, which were buzzing with

activity only three years ago, are coming to resemble an industrial wasteland. Then

move north to Redmond, near Seattle, the home of Microsoft. The giant software

firm appears to be defying gravity--because it controls two monopolies, Windows

and Office, each generating some $10 billion in annual revenues, with operating

margins of more than 80%. But the company seems to be running out of bright ideas


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about where to invest its money. Microsoft has almost $50 billion of cash in the

bank. In January, it announced plans to pay a first-ever dividend of $870m this year,

a figure that many now expect to be raised, with some talking of amounts as big as

$10 billion. For a third snapshot, turn to Electronics City, near Bangalore in India,

home of the development centre of Wipro Technologies, an Indian IT services giant.

Welcome to the new geography of the IT industry, one that is no longer centered on

Silicon Valley. It is the result of two distinct shifts that are reshaping the business.

For some time, its center of gravity has been moving away from the Valley to places

such as Redmond, Austin, Armonk and Walldorf (in Germany), where four industry

leaders--Microsoft, Dell, IBM and SAP, respectively--are based. Using offshore

workers helps companies to remain competitive and focus on what they are really

good at. Having development centers in India and China allows them to maintain

margins and so create new jobs (in the Valley or elsewhere), says Alfred Chuang,

chief executive of BEA, another Silicon Valley software firm.

Today, the IT industry is no longer dominated by start-ups, innovation and high-end

equipment. Customers are more interested in consolidation, integration and execution than in

the next big thing. And here the Valley's rivals have a competitive edge. SAP offers good-

enough CRM programs as part of its suite of business software. Dell, boasting a super-

efficient supply chain and increasingly powerful machines built with commodity parts, has

become the downturn's hardware star. More recently, the bigger firms have started to move

offshore in a significant way. In June, SAP announced that it would double its workforce in

India to 2,000 within three years. Last week Oracle, a Silicon Valley software firm that

aspires to be bigger than Microsoft, announced that it is soon to double (to about 6,000) the


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workforce at its two Indian research centres, one of them in Bangalore. Microsoft too

recently announced plans to expand its IT operations in India. Not surprisingly, the main

reason for this shift offshore is cost control. With business slow and prices under pressure,

firms are looking for ways to produce their wares more cheaply. Developing countries such

as India offer plenty of opportunities to do just that. A programmer in, say, Bangalore costs

an American firm about one-quarter of what it would pay for comparable skills at home. Add

in the extra infrastructure and telecoms costs, and the savings are still in excess of 30%.

Technology also plays a part. High-speed data connections and software tools have made it

cheaper and easier for geographically dispersed teams to collaborate.

Title: Trends Now Shaping the Future

Author: Cetron, Marvin J. and Davies, Owen

Discusses trends in the future of science and technology around the world.

Impact of new technologies on U.S. job creation from 2002 to 2004; Increase in the

total U.S. federal outlays on research and development; Advantage of the advances

in transportation technology to travel and shipping; Role of genetic research in

accelerating advances in medicine and in the growth of medical knowledge. the

impact of new technologies breakthroughs and their unexpected consequences

continue to play a major role in shaping the way we work and manage our

institutions.

New technologies are surpassing the previous state of the art in all fields, and

technological obsolescence is accelerating. Computers are fast becoming part of


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our environment and dominating the economy and society in the process.

Title:Outsourcing, firm size, and product complexity: Evidence from credit unions

Author: Yukako Ono and Victor Stango

Outsourcing involves firms' choosing to procure goods or services from other

firms rather than producing them internally. Outsourcing has become increasingly

global in scope, meaning that firms that outsource are often moving production and

jobs across international borders. Firm size may be important because it affects the

scale at which a firm can produce internally if it chooses not to outsource. Scale

economies are widely held to influence firms outsourcing decisions, particularly for

functions that have relatively high fixed costs. Many technology-based functions,

such as data processing, fall into this category because they impose significant fixed

hardware, software development, and training costs.

Title:Outsourcing A CIOs Perspective

Author: Oakie Williams

As global competition grows fiercer; companies continue to look for ways to

increase their competitive edge without jeopardizing their profit margins. Today,

corporations, large and small, are starting to realize the competitive advantage that

information technology can bring to a company. These companies are also realizing


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that to stay current with technologies requires a great deal of effort, risk, and

expenses. This is one of the primary reasons why Chief Executive Officers and Chief

Information Officers are considering outsourcing as an attractive alternative.

Regardless of all the positive reports you may hear about outsourcing, it is not for

everyone. Companies that view Information Technology sot of strategic function, or

that have annual Information Technology cost if less than 1% of sales, or are not

willing to engage in a long term partnership agreement will most likely not be

successful in securing a profitable and manageable outsourcing agreement.

For companies that do not fir these criteria, it is most likely that an outsourcing

agreement could be viable alternative for their strategic direction. There are many

reasons you may want to outsource. The reasons vary from one company to the

next, but the majority of companies that already have outsourced see the major

benefits of an outsourcing agreement as: Reduction of risk, Center of expertise,

Resource availability, Cost savings. While these are just a few benefits of

outsourcing, they are the areas in which any Board of Directors would be most

interested.

This book identifies key elements that can be used to assess the feasibility of

securing a successful, profitable, and manageable outsourcing agreement. It

provides a convincing case that even of the final decision is not to outsource, the

result of the process will identify potential business improvement opportunities.

Title: Shaping the IT Organization

Author: Ian Gouge


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More and more, the shape of IT organization is critical to business systems

delivery, yet all too often this definition is approached in a haphazard fashion- often

based on old theory and out-dated experiences rather than being moulded to the

realities of the world in which we work. Shaping the IT Organization considers how

one should go about the moulding of an IT function to ensure effective output from

the resources within that organization. It focuses on understanding precisely the

elements and challenges within such a definition. This book allows IT professionals

and others to think about change/ choice in a thoughtful, structured way. It contains

the essence of what IT is about in an organization.

Title: Information Technology and Industrial Competitiveness: How IT Shapes

Competition

Author:

Chris F. Kemerer

Information Technology (IT)the field that links computer and

communications equipment and software is transforming the way modern business

is done. Examples of factors leading these changes are rapidly decreasing costs of

computer hardware, government de-regulation, and the knowledge to how to employ

Information Technology successfully. These have all led to the increase of ITs

effects on existing markets, and, in the process, are creating entirely new markets.

This book explores a variety of advances in IT by a group of researchers who are at

the cutting edge of this research. Moreover, the book examines these innovative


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developments in terms of the Information Technology field and its effects on modern

business. It is becoming increasingly apparent that IT is critical to success in todays

competitive marketplace.

As a result, this book examines a host of emerging a host of emerging effects at

work in these developments and seeks to make sense out of these counter-acting,

sometimes multiplicative, effects which can become obstacles for managers who

whish to develop competitive applications of IT.

Title: Business Models: A Strategic Management Approach

Author: Allan Afuah

Most firms are in business to make money, and business models are about

making money. It is therefore no surprise that one of the most common phrases in

the vocabulary of executives, entrepreneurs, consultants, venture capitalists,

analysts, individual investors, and scholars of management is business models. It is

also no surprise that in the functional areas of business schools from accounting to

finance, from entrepreneurships to marketing, from management information

systems to strategy, from organizational behavior to operations management the

phrase business models is also common. Yet, until now, there ha been no textbook

that is dedicated to business models.

Business models: A Strategic Management Approach focuses on business models.

In it, I draw research on research in strategic management to provide an integrative

framework for exploring how to formulate and execute profitable business models.


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Existing strategy textbook lack two essential ingredients for serving as texts for

business models. First their focus is on broad strategy concepts, and they do not

give the money making aspects of strategy and profitability. Second they do not

explore some key factors that play a critical role in firm profitability. Dr Afuahs

research focuses on understanding the determinants of firm performance in the race

of disruptive technological changes, such as the internet. In contrast to typical

business technology research endeavors, Dr Afuah works to delineate how, when

and why a technological change in a firms supplier, customers, complementers and

related institutions erodes or reinforces the firms competitive advantages, rather

than exploring the direct impact of the technology on the firm itself.

Title: Beyond The Information Systems Outsourcing Bandwagon

Author: Mary Cecelia Lacity

As the information systems fields mature, there is an increased need to carry

the results of its growing body of research into practice. The present volume is the

second books by Mary Cecelia reporting on an extensive and careful series of field

studies into the reality of the information services outsourcing experience. In this

volume, the author first reviews the lessons learned from their studies on information

system outsourcing and then present the other face of this important management

decision, insourcing. The author does so through six case studies of companies who

chose their internal bid for information system services and succeeded in achieving

significant savings. These are important lessons to be learned from these successful


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insourcing decisions, not the least of which is the need to consider the information

system sourcing decision from broader organizational perspective of selective

sourcing. Selective sourcing is a process of considering multiple stakeholders,

strategies and competencies that combine to make for the successful sourcing on

information services. Lacity presents a phased methodology for selective sourcing

that encompasses the entire process and locates it in ongoing management

practice. This book will prove invaluable to managers responsible for information

services as well as those responsible for and concerned about future of their firm

more generally.

CHAPTER THREE

WHAT IS THE HISTORICAL BACKGROUND OF OFFSHORE OUTSOURCING

IN GENERAL AND AT DELL INC.?

The origins of outsourcing


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Although the concept of outsourcing has developed over the last century, according to

the Oxford English Dictionary the earliest use of the verb to outsource appeared in the

Journal of Royal Society of Arts as recently as 1979. An article about the British auto

industry contracting out engineering design work to Germany stated: We are so short of

professional engineers in the motor industry that we are having to outsource work to

Germany.9 The earliest use of the word outsourcing in the United States was traced

electronically to the Harvard Business Review in 1980.10

When one talks about outsourcing, insourcing and Offshoring comes to mind.

Offshoring is only another word used to refer to outsourcing, according to Oxford English

Dictionary, offshores first uses can be traced to 1895 and it only means moving away from

the shore. Insourcing is what most people refer to the opposite direction of outsourcing.

Since 1979 outsourcing has retained its basic definition, but has evolved to

encompass a greater array of services. The most recent significant change came in at the

beginning of the twenty first century.

In just five months, between January and May 2004, the media has drawn an

enormous amount of attention on outsourcing of services. In the United States only, over

2,630 articles were published focusing on the fear of job losses because of outsourcing. This

9Oxford English Dictionary, Online ed., s.v. to outsource, Available on-line fromhttp://dictionary.oed.com.

10 Mary Amiti and Shang-Jin Wei, Fear of Outsourcing: Is it justified?. (London: Centre forEconomic Policy Research, International Trade Program, October 2004), no. 4719: 4.


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fear was not limited to the United States only. In the United Kingdom, over 350 reports on

outsourcing appeared on its newspapers.11

The figure below plots a quarterly count of news stories on international outsourcing

from the first quarter of 1991 to the first quarter of 2004.12

Figure 3-1. News stories on outsourcing.

Source: Fear of Outsourcing: Is it Justified? Mari Amiti

Outsourcing yesterday and today

11ibid., 2.

12ibid., 30.


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Offshore outsourcing is one of the most complex business practices in our era. The

popular view of offshore outsourcing tends to think of it as a way of paying lower wages at

lower quality work. Businesses which choose to offshore outsource think of this

phenomenon as a way to get better quality, in shorter times, at lower costs.13 As competition

continues to grow stronger between labor sources in developed and developing countries, the

search for quality work at lower prices remains the main goal behind outsourcing decisions.

The business media has recently devoted substantial coverage to understand why the

topic of outsourcing is making noise not only in corporate America, but also amongst the

general public. CIO Insight, a sister publication of eWeek, has just completed an outsourcing

survey. The results reveal that only 20 percent of companies that outsource claim to use

outsourcing to gain competitive edge, while 68 percent do it to save money.14 This survey

proves that even though views on the subject differ, one must remember that in business the

end result is what counts.

Economic, political, and technological factors shape the business world and therefore

compel organizations to find solutions to reduce their costs in terms of labor, speed, and

production.15 Offshore outsourcing is categorized as a powerful means to a more powerful

end. Successful firms are always searching, identifying and driving business process

improvement through the application of new sources like, innovation, quality, speed, all at a

reasonable prices. If efficiency is achieved whether in the United States, Asia, or South

13Bob Evans, Business Technology Offshore Outsourcing: A Means to An End,Information Week(July 28, 2003), Available online from:www.informationweek.com/949/evans.htm: 1.

14Stan Gibson, Outsourcing grows up,Eweek(March 21, 2005): 37.

15ibid.: 37.
http://www.informationweek.com/949/evans.htmhttp://www.informationweek.com/949/evans.htmhttp://www.informationweek.com/949/evans.htmhttp://www.informationweek.com/949/evans.htm


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America, the location is not that important. Being able to answer customers demand at

competitive prices is the bottom line.

While this is not totally true; media reports may give us the idea that outsourcing is

about industrialized countries like the United States contracting out services from developing

countries like India.

The table below lists the value of imports for both Computer Information Services

and Business services (any service that is not computer or information related) for 2002, as it

is the latest year where data was collected. Its purpose in this section is to show that not only

large industrialized countries outsource more than other economies.

The top outsourcers for business services in dollar amounts are the United States ($41

Billion), Germany ($39 Billion), followed by a group of countries where the trade is

averaging the same number. As seen on the table, India appears in as one of the active

outsourcers totaling almost $12 billion, even though it is seen as the host country.

For computer and information services, the top five outsourcers are Germany, United

Kingdom, Japan, Netherlands, Spain.


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Table 3-2 Absolute outsourcers of 200216

Source: IMF, Balance of Payments Statistics Yearbook.

To be able to host and answer the requirements of outsourcing, cheap labor countries

have to acquire higher level of education, training and more to be technologically

competitive.

In 2001, with a budget of about $60 billion, China had taken third place in the worlds

Research and Development after the United States with a budget totaling $282 billion, and

Japan with a budget totaling $104 billion17. These figures will continue to grow in developing

countries, as technology becomes a hosting requirement for offshore outsourcing.

Even though organizations in Japan, the United States, and Germany are investing

billions of dollars on Research and Development, they have started to shift their production

models to countries where wages are more attractive. To many businesses this concept is

16 International Monetary Fund,Balance of Payments Statistics Yearbook(2003).

17Marvin J. Cetron and Owen Davies, Trends Now Shaping the Future: Technological, Workplace,Management, and Institutional Trends, The Futurist(May-June 2005): 38.


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very attractive. It allows them to shift wasted energy on what is essential to the company and

pay more attention to the business of the enterprise itself18.

The quest for cheaper labor and production costs has led many companies to offshore

some or most of parts of their production to more economical labor markets. High demand in

technologically-educated workers has created a flux between cheap labor countries and

developed countries. International students graduating from American schools are perceived

as taking away jobs from local American graduates or else as bringing cheaper labor in the

United States and benefiting the countrys economy.19

In the past, few of theses American-educated foreign students would return to their

countries, creating a brain drain out of the developing world. With the rise of outsourcing,

however, these students can return home with the latest cutting edge skills and find

employment in the offshore market.

Advantages and disadvantages

Outsourcing has identified several potential benefits. By outsourcing to developing

countries like India and China, companies in developed countries can benefit from the low

wages and infrastructure facilities available in those lands to reduce operational costs and

capital expenditure. Outsourcing gives a chance to companies to utilize skilled and trained

manpower without incurring training and hiring costs. Another positive effect of outsourcing

18 Mylott III, Thomas R., Computer Outsourcing: Managing the Transfer of InformationSystems, (New Jersey: Prentice Hall, 1995): 26.

19 Cetron and Davies, 39.


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is the access to developed technologies available in offshore destinations. Small, medium and

or large companies can use those technologies at very affordable prices, helping them

progress at a rapid speed. Companies can benefit from an increased productivity due to the

big amount of offshore employees at lower costs. Outsourcing can help a company gain

market share and increase its customers satisfaction levels. Outsourcing in this case can help

the company maintain lower prices with better service, helping them stay abreast from

competition20. Companies who outsource can save up on taxes by selecting the right business

partner destination.

Outsourcing also comes with negative effects and they are bound to increase in the

future. Those drawbacks are still not clear as of now, but rest assured they will emerge

eventually as time goes by.

Offshoring jobs to developing countries create instability within the first world

nations. Employees in developed countries are less productive as they feel threatened by

loosing their jobs. Those employees can present a major threat to the company they work for.

They can threaten to sell confidential information to the competitor or sell their labor service

to the company who is willing to pay more or offer better job stability.21

Many outsourcing contracts are structured for long periods. In a world that is

categorized by a fast moving technical and business change, long term contract may not be

the appropriate solution. A contract that made sense three years ago may be obsolete in the

future.

20Outsourcing Advantages, Available on-line from:http://www.bizbrim.com/outsourcing/outsourcing-advantages.htm.

21ibid.
http://www.bizbrim.com/outsourcing/outsourcing-advantages.htmhttp://www.bizbrim.com/outsourcing/outsourcing-advantages.htmhttp://www.bizbrim.com/outsourcing/outsourcing-advantages.htmhttp://www.bizbrim.com/outsourcing/outsourcing-advantages.htmhttp://www.bizbrim.com/outsourcing/outsourcing-advantages.htmhttp://www.bizbrim.com/outsourcing/outsourcing-advantages.htm


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A companys biggest fear is to loose its competitive advantages to other companies in

the same industry. Outsourcing does not guaranty that security. It is a big concern for many

companies to have a situation where the business vendor they have selected to collaborate

with competitors or set up its individual branches with better services.

There are other drawbacks that can hurt a business while using outsourcing. Loss in

the product/service competitiveness increased spending, and emergence of competitors.22

When a company decides to outsource a function or a product, some other costs may emerge

without its knowledge (e.g. training costs, travel expenses, etc). While having someone

produces its products, a company may loose its competitive ability. Also there are many

business partners and outsourcing companies helping new business gain market share, many

firms can start fearing new companies entering the industry.

Dell Inc. in the computer industry

These new technology trends have created a new type of business. Service firms

were expanding and were satisfying a new type of demand. One clear example of this trend

is Dell, Inc. Dell Inc.s mission statement: to be the most successful computer company in

the world at delivering the best customer experience in markets we serve. Through effective

and strategic community partnerships, Dell supports educational and literacy services

programs that address the critical and most basic educational needs of its neighbors in

22ibid.


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Central Texas and Middle Tennessee - prerequisites to success in the digital world23. Like

Microsoft, Dell Inc. believes that everyone should have the ability to access, use and

understand technology.

Dell Inc. was founded by Michael Dell in 1984 on a simple concept: selling directly

to customers by eliminating the middleman or intermediate outsourcing, dell focused

outsourcing on production of goods and aftermarket services more so than its competitors.

This is what makes Dell different than its competitors and the reason why I chose to use Dell

Inc. as the case study. Dell Inc. conducts operations worldwide and is managed in three

geographic areas: the Americas, Europe, and Asia Pacific-Japan regions.

Few people can disagree with the statement that Dell Inc. was the fastest growing

computer company in America even during the time where sales in the PC industry was low.

While Dell Inc. was still growing strong during those though times, its competitors were

forced to cut down on Research and Development budgets in order to compete and enter a

price war, thus significantly slowing down the industrys pace for improvement24. The price

was has somehow benefited the market. Struggling companies in the same industry were

forced to exit the market and make room for bigger and competent competitors.

Dell Inc. is an impressive competitor to other market giants, IBM and HP, not only in

Personal Computers, but also increasingly in other areas including televisions and computer

peripherals (e.g. printers, handhelds, and digital cameras). Dell Inc. differentiation is based

on a superior design, quality, service and functionality. In cost leadership, Dell Inc.

distinguishes itself to be the best low cost producer in its industry, offering quality home

23Mission Statement of Dell, Inc., Available on-line from:http://www1.us.dell.com/content/topics/global.aspx/corp/foundation/en/literate_comm?c=us&l=en&s=corp.

24 Robert Paul Leitao, Double Take on Dell, The Mac Observer(October 1, 2002).
http://www1.us.dell.com/content/topics/global.aspx/corp/foundation/en/literate_comm?c=us&l=en&s=corphttp://www1.us.dell.com/content/topics/global.aspx/corp/foundation/en/literate_comm?c=us&l=en&s=corphttp://www1.us.dell.com/content/topics/global.aspx/corp/foundation/en/literate_comm?c=us&l=en&s=corp


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computers for as low as $300. Dell Inc. is able to use economies of scale that companies

around the world are struggling to

Documents

Impact of Technology on the Process of Offshore Outsourcing