OUTSOURCING and OFFSHORING
| THIRD
PARTY RISKS and THREATS
OUTSOURCING and OFFSHORING |
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| . | This page
used in the following courses taught by Prof. Richardson
.
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| INTRODUCTION | , | "If business
operations are outsourced or conducted in cooperation with a business partner,
valuable information often must reside on networks that lie outside of
[your] organizational control. This creates a situation in which one is
reliant on the efforts of that partner to protect the shared asset"
Volonino & Robinson Principles and Practices of Information Security Chpt 5, p. 71 |
added 2018 March 14th |
Centre for Outsourcing
Research and Education
2021 update the Centre
for Outsourcing Research and Education (Core) voted to dissolve their organization
and merge with Supply Chain Canada.
|
| Definition
of terms  |
, | A January 19th
2013 "Special Report" in "The Economist Magazine" provides 14 pages of
excellent analysis and descriptions of Offshoring and Outsourcing trends
in 2012. www.economist.com/topics/outsourcing
http://www.economist.com/blogs/schumpeter/2013/01 /special-report-outsourcing-and-offshoring Outsourcing in 2012 is typically
associated with moving a call centre to India [actually, when you outsource
outside your country it is called Offshoring], but in reality, outsourcing
has been around for many years.
Outsourcing having some other
person / firm do some activity which is part of your business operations.
Offshoring means moving work and jobs outside the country [offshore] to another location where the costs are much cheaper - "much cheaper" has to take into account that the lower wages must be low enough to counter balance the higher transportation costs for reaching that distance. |
| Variety of locations from which some component parts are sourced for famous branded products | , | Aug 2018 Kelvin
Y. and his classmates in MRK460 did a presentation on Apple, and discussed
the situation of the Foxconn plant in China - but Kelvin's team also noted
the many other locations from which come the parts for the iPhone, and
it serves as a good example of the "diversity" of a famous branded consumer
product.
|
 |
, | some
older examples
1. Pirates of the Caribbean - The East India Company
- founded in 1600, and given a royal charter by the Queen to trade in the
East Indies
In the movie Jack Sparrow (Johnny Depp) once worked for the East India Trading Company and captained the Wicked Wench. When he refused to transport slaves, he was branded a pirate and his ship was ordered sunk by Lord Cutler Beckett, a company agent. - some say this is not far from what really happened in those days"pirate girl" pic supplied by student Z. K. at Seneca |
 |
Contributed by student Shawn
T. at UTSC who obtained this clip from a new TV series in which Outsourcing
is supposed to be discussed in a funny way - however the segment shown
here actually shows how North Americans can be very insensitive to the
"social-cultural environment" in dealing with their Outsourcing partners.
This 4 minute segment illustrates a good example of a condescending and patronizing attitude sometimes communicated in outsourcing situations. |
| Environmental
influences effecting outsourcing |
, | As the global
business community (effected by the rise of the dot.coms) became more intense
in the late 1990's and early years of Y2K, companies are striving in many
different ways to cut expenses.
One of the key consequences of globalization is to make your stuff cheaper than some other company across the ocean that is cutting into your customer base. So companies are seeking every avenue possible to cut
One of the most obvious considerations is that if the provider of this outsourced activity is indeed "doing it cheaper", how are they able to?
|
| Competitive
Environment |
, | The degree to
which the company has intense competition is the prime motivator to outsource.
If the competition is very intense, then the company must carefully attend to all the other influences such as
|
| Technological
Environment |
, | Design costs
are not just for designing a product or service in the very beginning,
but in fact design costs are considered throughout the manufacturing process
as a product is constantly changed and adapted for a global marketplace
and in consideration of increasingly short Product Life Cycles which pressure
companies to constantly innovate and re-design products and services.
More and more companies are outsourcing part, or all, of the design process to companies that have personnel and technology that is too costly, or otherwise not accessible to some manufacturers, particularly small and medium sized enterprises. Sometimes, it is also the case that these special design companies have invested in special technology, such as advanced CAD CAM software, that allows them to create a design more easily, and with less cost, than the client. Additionally, there is the HR considerations. Some design companies have personnel on staff who are very experienced with particular aspects of design and this is a tremendous resource. The technological environment also contributes to outsourcing in the sense that advances in communications technology mean that an outsourcing entity does not have to be in the same "high rent" location as the client. Many outsourcing companies in Bangalore grew on the strength of India's development of fiber optic cable and resulting high speed internet connectivity which allowed companies to be located in Bangalore where labour costs are cheap, but the technology allows the client to be served instantly. |
| Social-Cultural
Environment Language |
, | I wonder how
many people in Canada know that the number of people in India who speak
English, is actually greater than the 34 million we have in Canada. How
many people know that English is the national language of people in Guyana
in South America, or that English is spoken by hundreds of thousands of
people in the Philippines.
Because English is spoken by many people in developing countries, it is attractive to set up Call Centres in those countries to serve situations where you need many people to respond to customer inquiries by phone. For simple answers to simple questions, this might not be a problem, but for complicated things, like telling a person how to set up the defaults in his ISP account to create a new user mailbox, it may not be desirable to have the outsourcing company use people who have an accent much different than the customers. Some people reading this segment may have heard that a big part of successful communication is being able to look in the face of the other person and see the body language that accompanies the words. When you are talking by phone, this is not possible - therefore it is even more important to be "crystal clear" in the words you chose to say and the way you say it. English, being a language composed of several other languages, is vulnerable to thousands of slang expressions and phrases which are often only understood well by native speakers in the same country. |
What makes this joke interesting for Canadians is due to the fact that there are thousands of I.T. professionals in Canada with backgrounds in India.
this was first published
by Scott Adams in June 2006
RBC has 57,000 employees
in Canada
| RBC
outsourcing |
In early April
2013 the situation of outsourcing I.T. to India gained wide exposure
in the news when Royal Bank was criticized for outsourcing I.T. jobs to
a firm (iGate) that was then bringing in workers from India to replace
Canadian employees at RBC - what made the situation even more worse was
allegations that the Canadian workers were being asked to train their replacements
!
RBC, which lists its profits as more than $ 1 Billion a quarter (think about it) said that it was taking these steps in order to be more competitive. Newspapers, TV and radio covered the story extensively and the government got involved. "Alyson Queen, a spokesperson
for Human Resources Minister Diane Finley, said Monday (April 8 2013) application
documents submitted by iGate are now being reviewed based on "apparent
discrepancies" between RBC's public statement and information previously
given to the government."
|
| Social-Cultural
Environment Management |
, | The Social-Cultural environment within which the outsourcing company operates can also effect the management practices of the operations and this may have some negative effects on the ability to do things smoothly for the North American or European client. |
| Social-Cultural
Environment Management
Future trends |
, | Things will
settle out in the long run.
"As businesses collaborate,
and as top-down control of work and employees weakens, regional labor markets
will normalize. Workers in one area of the globe will hear about practices
in other parts of the world, raising awareness and intensifying their demands
for equity. Labor forces in relatively disadvantaged economies will lobby
to bring workforce programs into alignment with those of their global peers.
Meanwhile, the values of workers and consumers in wealthier regions will
promulgate globally, creating pressure across markets to adopt safe and
competitive labor practices. In the long term — 10 years or more — the
continuous pressure for equitable practices will normalize work/life programs
and start to narrow the gap among regional labor rates. The gap in rates
between the Western economies and Southeast Asia will remain big, but the
gaps between emerging-market countries in Southeast Asia or other global
regions will narrow."
|
| Political
Environment Host
|
, | There are many
things related to the political environment that would effect an outsourcing
company serving and overseas client.
Rules and regulations related to paying wages and hiring practices may influence how the outsourcer can operate. The jurisdiction within which the outsourcer operates may try to extract a higher corporate tax rate if they think the outsourcer is being paid by a rich company from the U.S. Sometimes, in order for the outsourcing company to operate cheaply, bribes must be paid to local government officials. This may be acceptable or unacceptable to the overseas client, depending on their corporate ethics and depending on how confidential these arrangements can be kept. Such bribes could relate to regulations being broken about underage workers, or the number of hours a week workers work, or sanitary facilities etc. |
| Political
Environment Home
|
, | Politics in
the country which is home to the parent company, can also effect the ability
to conduct outsourcing.
In certain parts of the U.S., legislation is being discussed at the state level and the national level, which may limit the ability of particular companies to outsource "American jobs" to developing countries. This has become a very sensitive issue and senior company executives are finding themselves in the position of having to defend laying off workers in the U.S. and hiring to be replaced by hiring people in India, or Mexico. www.indiatimes.com says "If the US moves legislation on banning outsourcing, US companies are likely to suffer on account of impaired competitiveness. Overall, the US economy is likely to pay a heavy cost for keeping jobs at home and denying the benefits of outsourcing to its economy." |
| Economic
Environment |
, | One of the most
obvious considerations in outsourcing is that the economy in the home country
has a wage structure which makes it comparably expensive to hire full-time
workers and pay them benefits.
Other considerations such as the currency exchange rate also effect the decision to outsource to a company operating in another country. Presently (2006) the national currency in China is still quite low, compared to the U.S. dollar, and the Chinese government, despite urgings by Washington, is reluctant to let the Chinese currency rise much higher. However, despite the enthusiasm of the Chinese leaders to tightly control their economy, market forces may prove more powerful. The simple fact is that tens of thousands of young Chinese business people are growing very rich serving the manufacturing interests of European and North American companies. It is obvious what they will do with this money - buy high priced goods from japan, Europe and North America - which will in turn effect currency exchange rates and lifestyles: - same thing in Indian cities like Bangalore. |
| Geographical
Environment |
, | The Geographical
environment effects outsourcing in a number of ways
|
| Geographical
Environment |
, | Time Zones
One of the reasons some California I.T. companies outsourced functions to companies in India was because the companies in India could be given tasks at the end of the day - work on them overnight while the Californians where sleeping, and email solutions back the next morning. This was particularly common in the late 1990's when many internet start-ups had massive amounts of compute programming to get done in a hurry. |
| Geographical
Environment |
, | Weather Extremes
One of the vulnerabilities companies face in outsourcing is the global phenomenon of floods, hurricanes and typhoons in recent years. These weather extremes are mostly effecting tropical regions, which is the same area of "low wages" that is targeted for outsourcing (nobody is hurrying to set up low-wage call centres in northern Sweden) While the low wages of the tropical regions attract cost savings for outsourcing - at the same time the governments in these regions have proven themselves (in 2004 and 2005) to be ill equipped to deal with major disasters because of the lack of infrastructure such as good roads, a national communication network, and money for disaster recovery activities. The inability of some regions to handle weather extremes and natural disasters like earthquakes suggests a significant vulnerability that should be considered by companies that cannot afford any long period of "down time" while their call center gets rebuilt. |
 |
, | from the January
19th 2013 "Special Report" in "The Economist Magazine" on Offshoring and
Outsourcing trends in 2012. www.economist.com/topics/outsourcing
http://www.economist.com/blogs/schumpeter/2013/01 /special-report-outsourcing-and-offshoring Outsourcing in 2012
|
|
|
, | "Two sets of
strategic problems can arise from offshoring production to another part
of the world, especially if it is poorly thought out"
1. Supply logistics. "The more that firms spread their operations around the globe, the more vulnerable they become to disruption from unexpected events such as natural disasters and political unrest"2. Marketing "... the more a firm offshores and outsources, the worse it will be responding to customers quickly" ... because they have literally lengthened the distance between the customer and customer satisfaction. some comments from the 2013 Economist Report, some comments from WTGR |
|
|
, | Offshoring
manufacturing to China
Demographics - China is beginning to run out of skilled workers to assemble high quality consumer products - though 47 percent of China's population still live in rural areas and could potentially move to the cities if urban infrastructure was able to handle this. Offshoring services to India India suffers challenges from countries like the Philippines where people who work in call centres speak English with less of an accent - which is a big complaint of American customers. As The Economist reports in the Dec 22nd 2012 issue even "cheap household labour is no longer in cheap supply" some comments from the 2013 Economist Report, some comments from WTGR |
 |
, | Offshoring
manufacturing to China - bounce to Mexico 2010 - 2013
David Agren twitter.com/el_reportero a Canadian freelance journalist in Mexico City
Agren explains "Manufacturing activity is mushrooming across Mexico, mirroring an upswing in the overall economy. The country produced more than 2.8 million cars last year" "Manufacturing is now moving back from China—almost as fast as it fled Mexico a dozen years ago—as Asian salaries and shipping costs continue to rise."
"Between 2001 and 2005, Chinese manufacturing exports to the United States expanded at an average annual rate of 24 percent while Mexico's export growth rate decelerated sharply from about 20 percent a year to 3 percent each year." Since 2010, Mexico has increased its share of the export market to the U.S. which has coincided with a decrease in Chinese exports. The biggest areas of business are electronics and automotive asssembly and uato parts. some comments from the 2013 Maclean's magazine issue dated March 25th (article written by David Agren), some comments from WTGR |
| Outsourcing
Fraud |
, |
"Bank Fraud Trail leads to former Outsourcing Help" This story discussed how former workers at EDS stole money from account holders of the CSB Canada Savings Bond program. The story is very upsetting cause usually Canadians think the lowest risk for investing money is Savings Bonds with the government, and it turns out even that is risky because the government sub-contracted aspects of this work to some U.S. firm - and the employees there committed this fraud cause they thought they could get away with it. |
| Outsourcing
Fraud |
, | EDS
is a giant U.S. IT firm that provides outsourcing IT work for many companies
- mostly in the payments processing end of a company's activities.
In writing this story, Guzman interviewed Joe Greene, Ottawa-based vice-president of IT security research for IDC Canada. www.idc.ca Greene said "Corporate IT security is not just about protecting against external attacks like worms and viruses, but it's also about recognizing the potential of internal threats... you can have the best firewalls in the world, but if you let your guard down internally, you're still going to get burned" Greene added "I think this is a clue to anybody that is going to be outsourcing that they need to make sure that the people they are outsourcing to are hiring only credible people". Permission to quote ComputerWorld given by Greg Enright, Editor, ComputerWorld Canada, June 14th, 2006. Copies of emails kept in the permissions binder |
| Outsourcing
Sins |
, |
"The Seven Deadly Sins of Outsourcing" 1. Feeble governance
Artunian is a freelance writer in Newport Beach, Calif. jartunian@sbcglobal.net Permission to quote Artunian's piece on Seven Deadly sins of outsourcing given by Greg Enright, Editor, ComputerWorld Canada, June 14th, 2006. Copies of emails kept in the permissions binder |
| Outsourcing
Sins Think ahead |
, | "The
Seven Deadly Sins of Outsourcing"
1. Feeble governance "Before you sign with an outsourcer, nail down an organizational structure, establish methods for keeping tabs on the work being done, and spell out how you will manage the outsourced project on a day-to-day basis. "Your governance system should provide continual feedback to the organization regarding how the relationship is working, what value you are getting, how you are solving problems that have cropped up," says Michael F. Corbett, executive director of the International Association of Outsourcing Professionals in LaGrangeville, N.Y. |
| Outsourcing
Sins Think ahead |
, | "The
Seven Deadly Sins of Outsourcing"
2. Overblown expectations If you're shopping based
on cost, you may have to give a little on service level.
|
| Outsourcing
Sins Make sure there is a "fit" |
, | "The
Seven Deadly Sins of Outsourcing"
3. Blindly banishing projects Don't send outsourcing to companies operating in a country where that type of industry sector is not well understood. Artunian says "Use common sense and send projects offshore only to countries where your industry is mature. India and the Philippines, for example, while good choices for services like health insurance data entry, are poor choices for jobs that require decision-making related to health insurance... That's because in-depth knowledge of the field is still scarce in those areas. "Health insurance wasn't prevalent even 10 years ago in those locations," |
| Outsourcing
Sins Make sure there is a "fit" |
, | "The
Seven Deadly Sins of Outsourcing"
3. Blindly banishing projects Also, don't outsource a function that requires clear communication with your customers, if the people providing that communication are not easily understood by the majority of people you do business with. Artunian explains "..Dell
Inc. outsourced its technical support to offshore providers, the company
was inundated with complaints from U.S.-based customers who reported that
they couldn't understand the service providers because of their accents.
Dell had to move a chunk of its technical support services back home to
Texas."
|
| Outsourcing
Sins Don't Surrender
|
, | "The
Seven Deadly Sins of Outsourcing"
4. Dumbly disowning projects Don't give away so much of the company that your third-party outsourcer ends up knowing how to do things better than you. Artunian says "You've outsourced so much of IT that your outsourcer knows almost as much about your customers, your products and your industry as you do....the IT department of another major automotive manufacturer recently realized that it outsourced too aggressively and is now trying to rehire nearly 150 former employees who went to work for the outsourcer." |
| Outsourcing
Sins Assumptions |
, | "The
Seven Deadly Sins of Outsourcing"
5. Bad assumptions "Technologies change so fast and the needs of clients change so fast, most parties should go into the contract expecting that after the first two years there is a pretty high likelihood that they'll have to renegotiate the contract," says Robert M. Finkel, an attorney at Milbank, Tweed, Hadley & McCloy LLP in New York. |
| Outsourcing
Sins Sloppy Service |
, | "The
Seven Deadly Sins of Outsourcing"
6. Sloppy service levels Artunian advises "Define service levels in the contract and stipulate penalties for missed service levels. "..it's not uncommon for vendors to want to wait until after the contract is signed before agreeing to specific service levels. That takes away your leverage and makes it less likely that you will reach a satisfactory agreement." WTGR adds: most companies, when they are negotiating the level of service they need, seem to spend too much emphasis on negotiating a bottom rate price - which is their main focus, saving money - they should not be blind to the importance of making sure they get a level of service that will be equal to, or at least approach equality with the original service they had before outsourcing - otherwise they will lose customers. |
| Outsourcing
Sins Think ahead |
, | "The
Seven Deadly Sins of Outsourcing"
7. End-game myopia Artunian explains that you have to have a contingency in case
|
| Outsourcing
Yourself ?? |
, | Outsourcing
Yourself ??
Student Radi H., in MGTC46 at UTSC in January 2010 sent a link to a fascinating video on YouTube in which U.S. office workers discuss outsourcing their work to professionals in India and other countries. Radi says
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