Kristen Valla
BBMBA 9111
Case Study 1
Offshoring at Global Information Systems, Inc.
Background/Overview
In 2004, Global Information Systems, Inc. began to put into motion the consideration of offshoring 3,000 jobs from here in the U.S to company locations in China, India and Brazil. These were highly compensated job positions. About half of GIS is separated into a division known as Global Services Divisions. A considerable portion of GSD’s business came from customers outsourcing their business process needs. GSD began to seek ways to cut costs and improve performance by “offshoring” certain activities in order to present the most attractive value proposition to potential customers.
This case examines the issue of offshoring high-tech jobs different perspectives. The topics presented include determining the stock price effects of offshoring, examining the economic consequences of offshore work for both transmitting and receiving countries, when the consequences of non-competitive offshoring, and thinking about the challenge of investing in a career that is vulnerable to future offshoring.
Opportunities/Challenges
GSD has programming centers established in Bangalore, India; Shanghai and Dalian in China as well as Sumare, Brazil. That being said, with profit being a company’s number one concern, GSD could only consider the possibility of replacing jobs here in the United States with jobs offshore. The dollar amount of savings would be staggering. When all is said and done, once outsourcing costs are absorbed, the yearly profit would be $168 million. The case puts forth a calculation that, assuming 70% of all employees who lost their jobs are reemployed, and paid at least 95% of previous pay, values the US labor reemployed at $.47. Although, the statistic may not seem terrible, how about the assumptions being made? Many of the employees, specifically at GSD that would have their jobs outsourced to other countries were highly compensated. To assume that these individuals are paid 95% of what they previously made, seems a bit generous given the economy as well as other companies exploring similar tactics in IT such as offshoring.
Risk/reward
It was clear to management in GSD that although these numbers are very compelling and give the company an opportunity to save a vast amount of money, offshoring would still be a very sensitive decision. Historically, the benefits of free trade had been premised on the logic of comparative advantage. Management at GSD wondered whether the concept of comparative advantage was losing its relevance as an argument in favor of free trade. The question was put forth that, if free trade simply transferred jobs, where would the new jobs come from to utilize the skills of highly trained displaced developed world workers who had grown accustomed to high levels of pay? In 2003, a newspaper article commented on a political debate related to offshoring jobs of radiologists from the hospital of Massachusetts General Hospital. It stated, “The hospital would beam images electronically from some scans to India, to be worked on by radiologists there”. As one would expect, US radiologists were up in arms over this. “Who needs to pay us $350,000 a year if they can get a cheap Indian radiologist for $25,000 a year?” (Who’s Reading Your X-Ray, The New York Times. Nov. 16, 2003). This is the exact view that GSD would not like to portray. Their reputation both internally as viewed by current and future employees, as well as to the general public. Risks in outsourcing can be managed through proper contractual agreement and quality standards. This has been also described in the work of McFarlan and others (McFarlan & Nolan, 1995). In addition, continuous monitoring of projects can also reduce risks. Risk contingency plans could be effective. Broadly, risk is measured on performance metrics over time. Risk factors are weighed to reflect financial implications as well. The metrics to measure the effectiveness of an outsourcing arrangement are checked frequently. If a risk is time bound, risk mitigation plan is created and executed. If there are repeated and multiple failures to meet the Service Level Agreements (SLA) goals, then alternative vendors may be identified for a part or rest of the work. If the business processes and the QA methodology are very robust and well thought of, risks will be reduced in global outsourcing
Conclusion/Recommendation
In many large organizations, IT outsourcing is being considered as a viable cost reduction alternative. Cost reduction is the main driving factor for outsourcing their IT activities. Other than cost reduction, short-term requirement of highly skilled resources is an- other objective for the firms to outsource IT. The top management can be convinced of the benefits of outsourcing and support the outsourcing decisions. For GSD it seems as though the idea of implementing offshoring could be extremely beneficial from a cost beneficial aspect. Although there will be risks associated and perhaps some political sensitivity, it seems as though offshoring these some 3,000 jobs would be the route to take.
Other than effective project management, and participative association of vendors in formulating design specifications, it is very important to have planned and periodic reviews to improve the communication with the team members. The concept of “one-team” should be strengthened. Also quality management pro- grams and metrics should be followed. It is again a good practice to have an out-clause and penalty for not meeting the SLAs.
There are many risks involved in global IT outsourcing. We identified the key risk factors that commonly arise in global IT outsourcing and ways to reduce such risks.