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Knowledge Functions Outsourcing Decision Factors

 

Every business is essentially in some way an information business. A manufacturer of automobiles must be aware of demand and supply patterns, technology developments, changes in sources of supply for inputs, inventory levels, trends among its loyal customers, and its after-sales service record. According to Evans and Wurster, information is what makes value chains and supply chains work. By extension, they argued that it is entirely possible to separate information from the physical aspects of the manufacturing process. For example, although an inventory of raw materials encompasses a range of goods that have monetary value, the process of inventory management relies on information about that inventory rather than the physical inventory itself. Thus, it is possible to manage and control inventory from a distant location using personnel who may never see the goods themselves. Similarly, at the customer end, market research, customer demographics, and customer support are all examples of processes that are rich with an information component.
Separating the physical component from the information component allows organizations to rethink, reengineer, and reconfigure their value chains to maximize added value. For example, in Britain, the Association of Train Operating Companies has contracted with British Telecom and its partners Ventura and Client Logic to handle customers’ rail inquiries. The information line is one of the most widely used by the traveling public to access information about train departures, arrivals, and routing. Ventura, based in India, will deploy its call-center operations in Mumbai (Bombay), India, and Yorkshire, in the United Kingdom, to handle the contract. Client Logic will use its centers in New Delhi, India, and Derby, United Kingdom, to do the same. This is a classic illustration of an organization’s ability to separate the information aspects of its business from its core processes.

Knowledge Functions Can Be Outsourced?
The migration of jobs with a strong service or knowledge component is quite consistent with the progress of globalization and the disaggregation of value chains.
Decentralization decisions that involve knowledge-based resources or the intellectual capital of the company are often extremely difficult to make. They are inextricably linked with strategic, operational, political, legal, social, and financial considerations. They transcend the simple logic of monetary gains and differential cost advantages. Since intellectual capital is the lifeblood of all organizations, these decisions have to take into account issues such as privacy, security, potential loss of vital competitive information, political hazards, and infrastructure-related risks that routine manufacturing outsourcing decisions may not entail. Beyond the typical considerations of cost, quality, and ability to deliver, the outsourcing decision will be impacted by the need for secrecy and limited access in order to avoid leakage of competitive information, infrastructure reliability, exposure to political hazards, and legal considerations. The characteristics of the process to be migrated, such as transferability, criticality of the business function, extent of client contact entailed, and need to maintain competitive control all impact knowledge-offshoring decisions. Table 6.2 offers an example of the types of decision parameters involved in crafting an offshore strategy. For ease of illustration, the dimensions have been divided into external and internal parameters. External parameters relate to location-specific aspects and, hence, are largely beyond the domain of influence of an individual company, while internal factors relate to parameters that are controllable by the company.

Determinants of the Ideal Processes and Functions That May Be Offshored
There are several process- and function-related parameters that must be weighed in determining the optimal mix of activities that can be decentralized. Although there is a wide array of services that can be obtained through arms-length relationships with service providers in low-wage countries, it is imperative that the decentralization decision be driven by sound business logic. Typically such an analysis will encompass the following dimensions:
1. Criticality of the business process or function to overall value creation
2. Extent of direct client contact that the function entails
3. Frequency of transactions
4. Extent of managerial intervention required by the process or function
5. Extent of competitive control that is required over the process
6. Ease of transferability of the function or process

The criticality of a business function refers to the extent to which the function plays a central role in an organization’s day-to-day decision making. In a manufacturing firm, functions such as inventory management and production scheduling are critical functions that have a crucial bearing on the implementation of operational strategies. Thus, such functions might inherently be difficult to process at distant satellite locations, cost benefits notwithstanding. On the other hand, industries such as consumer electronics and telecommunications equipment have largely outsourced their manufacturing activities to companies such as Flextronics and Solectron. When this process began, many observers doubted the wisdom of outsourcing manufacturing, since it was believed that manufacturing was a core activity. Now, some years later, it is widely accepted within these industries that manufacturing activities remain critical but can be adequately performed by contract manufacturers.

The extent to which a function closely depends on direct client contact is also an important factor driving the decentralization decision. Functions and processes that require frequent client contact, such as many marketing and salesrelated processes, typically will not lend themselves to offshoring. In many of these functions, it is feasible to identify processes that do not require intensive client interface; for example, processes related to customer relationship management entailing the analysis of data could easily be outsourced while the actual customer interface cannot.

The frequency of the transaction is a crucial determinant of the economic benefits of offshore processing. In organizations such as airline companies, financial services companies, or banking institutions, there are many highfrequency business process transactions that are quite routine, such as processing airline tickets and reconciling corporate accounts. These routine transactions require very little managerial intervention, thus such functions often benefit from the significant cost savings that arise from offshore processing. Once the basic processes and control systems are in place, the actual country site where the processing takes place is fairly inconsequential. Thus, almost all the major airline companies have significant back-office operations in countries such as India, where routine functions are handled cost-effectively.
In addition, some airlines like British Airways have set up independent processing companies that offer services to other airlines.

Competitive control is another primary determinant of the potential for offshore success. Since many offshore ventures are structured as arms-length or contractual partnerships, they carry all the complexities of traditional firm relationships, including the risk of loss of competitive information. The incidence of information leakage is accentuated by the context within which offshoring is pursued. Typically, the countries where much of this work takes place lack adequate legal infrastructures, raising significant questions about the protection of intellectual property and data privacy. In circumventing this potential risk, some firms have sought to establish wholly owned subsidiaries to undertake offshore functions like back-office operations. However, this decision is one that obviously has significant economic implications, calling for a disciplined cost versus benefits analysis.

Decision Parameters in Creating an Offshore Strategy
External Decision Parameters
• Country location—access, time zone
• Nature of host government policies toward businesses
• Stability of host government
• Corporate tax laws and the legal institutional framework
• Patent protection and enforcement
• Hiring and firing practices—incidence of labor unions
• Infrastructure—transportation, communications, accessibility
• Labor pool characteristics including cost, education level, skill level, trainability, availability, and size of the pool
• Language proficiency—level of familiarity with the dominant language that will be used to transact business
• Cultural compatibility in terms of social characteristics as well as work behaviors
• Level of familiarity with professional management approaches

Internal Decision Parameters
• Business function characteristics such as criticality of the function, frequency of the process, and need for competitive control
• Ability to manage the public relations issues that accompany large-scale job transfers to other countries
• Previous experience with foreign ventures especially from a project management perspective
• Prior experience with vendor selection and management in foreign locations
• Availability of managerial manpower internally to spearhead the move to offshore
• Commitment of senior management to an offshore strategy
• Ability to implement organizational structures and reporting relationships to maximize the benefits of an offshore strategy ranging from knowledge acquisition and learning to cost containment and quality enhancement

 

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