Product manufacturers across sectors have been facing a classic decision point for generations: "MAKE or BUY?" This decision is almost always based on the cost-benefit considerations of whether making it in-house would be a faster & cheaper way of manufacturing with better quality than what is available for direct purchase in the market. The decision also hinges on whether the item under consideration is core and critical to the business and a part of the company’s key competitive differentiator. This would mean that getting it made from the outside could dilute the company’s competitive advantage.

Answering this question right is crucial to the very core competitiveness of the company.

The question, though largely initiated in the product manufacturing space, is equally relevant to most in-house business processes and services provided by organizations to external customers. It is all about cost, quality, customer satisfaction, competitive differentiation and strategic gains for the company. In ITO & BPO parlance this leads to terms such as local sourcing, near-shoring, offshore sourcing, in-sourcing, captive facilities, outsourcing, offshore outsourcing, global sourcing and so on.

Listed below are the pros & cons of captive versus outsourcing of IT & BPO services in any organization:

Captive Sourcing

Benefits:

• Total control over the cost and quality of services and all elements of the process.
• All information handled in-house with direct responsibility and control over security and privacy of information.
• Talent and process knowledge remains within the company.

Challenges:

• Dependence on skills and expertise of in-house resources that may not be aware of global best practices in running the process or implementing the technology.
• Increasing “fixed cost” spending on non-core resources.
• Hidden costs may creep into cost centers unless internal processes are properly mapped against global best practices.
• Retention of talent in a non-core function is a challenge and at times expensive.
• Requirement of dedicated and hence often sub-optimal investments in technology and concepts since in-house consumption scale doesn’t offer economies of scale.
• Cost of technology obsolescence has to be borne by the organization.
• Need to invest in over-capacities to plan for rapid scale-up scenarios.

Outsourcing

Benefits:

• Better visibility of all cost elements that may otherwise be hidden in a captive set-up (may even result in substantial cost savings through cost arbitrage, economies of scale by leveraging resources across multiple clients and improved process).
• Outsourcing to experts enables easier access to global best practices resulting in better quality of processes, possibly with accompanying cost savings.
• Conversion of fixed cost/capital expenditure to variable cost/operational expenditure for the process being outsourced.
• Ability to add new service lines enabled by new technologies without having to make large up-front investments in technology.
• Ability to address new market segments.
• Reduced demands on management time from the process and hence ability to focus on the core business.

Challenges:

• Possibility of overt or covert resistance from staff who are likely to be affected by the outsourcing decision.
• Risk involved in sharing confidential information with external service provider.
• Possible loss of control over quality and cost of the process being outsourced if the relationship is not managed well.
• Managing the complex interchange of information on need-to-know basis versus free-flowing information within the captive department as a part of the organization.
• Integration of technology and business culture between the client and service provider.
• Setting, communicating and managing realistic expectations between the client and the service provider.
• Intellectual property and knowledge gained in the process of optimizing and running the process remains with the service provider.
• Some talented resources are also lost in the process of transitioning the process to the external service provider.
• For the outsourcing company, it is important to ascertain that the service provider has staff with process expertise relevant to the unique domain requirements.

For more insights on outsourcing, offshoring, BOT, global sourcing and other such jargon, visit:

http://www.patni.com/global-sourcing/global-sourcing.html

- Ravi

The globe is shrinking. Politico-economic and cultural boundaries are breaking. We are living in unprecedented times, witnessing profound changes in business, regulatory and personal lives all across the planet, driven by a never-before spread of technology, information, and information technology, at epidemic proportions. By themselves, technologies related to data/information processing and audio, visual and data communication have enough potential to dramatically change the way we live and work. Advances in data processing technologies and telemetry helped develop solutions for industrial automation, thereby improving productivity and allowing more to be done with less. Advancements in communication technologies have driven most of the planet into a state of ubiquitous connectivity ensuring high availability of communication channels from anywhere to anywhere at costs affordable even to populations of developing nations. Advancements in technologies have opened up multiple channels of communication between individuals and corporations, culminating in a huge, resilient, multi-modal network of connectivity encompassing the Internet, the wired communication network for public telephony and the wireless networks of cellular and satellite connectivity. Technology has had a huge impact on the way content is created, distributed and accessed too.

All of these technologies are converging rapidly into an inter-operable global system wherein, for example, it is possible to get connected to the Internet with the cell phone as the interface device, control and monitor business parameters remotely and reach out to millions of customers and prospects across the planet in a matter of seconds with personalized, customized messages unique to the individual's specific requirements. You can be at 30,000 ft above the surface of our planet and still be monitoring in real-time the progress of a crucial project in some remote corner of the globe.

This unprecedented availability of inexpensive (or rather cost effective) real-time, multi-modal connectivity has opened up immense opportunities for large corporations and also for small businesses. Though written off as an enthusiastic over-reaction to technology possibilities, the dot-com boom and doom towards the end of the last century certainly opened up huge possibilities of leveraging the power of round-the-clock, real-time connectivity. Despite all the back-lash and apparent writing off of the dot-com model, almost every organization worth its name has a website now, and a web-marketing strategy, which proves the inevitability of the internet as an indispensable medium. Use it wisely and there is billions of dollars worth of untapped opportunity.

The death of distance and round-the clock high-availability with rapidly dropping costs of connectivity have resulted in the collapse of the traditional entry barriers of size and scale that kept large corporations insulated from serious competition from smaller competitors. Entire industries such as BPO and Offshore IT services were spawned in fewer than two decades, bringing the hitherto developing economy of India into the limelight of the global politico-economic considerations - so much so that effect of "Offshoring" became one of the key electoral planks in the presidential elections of the world's largest economy just a few years ago.

Today, even a small manufacturer from a remote corner of, say, China or India can successfully compete and take away business from a well established, large manufacturer in one of the largest, western cities. That is the crumbling of entry barriers that I am referring to. It is important for business managers to understand the implications of technology developments and convergence on the way they conduct business, internally to the organization and externally with clients and prospects and industry influencers. They need to be aware of the potential threats too, to protect their self interests and those of their employees, clients and prospects.

Convergence of technologies is a force that is rapidly democratizing and homogenizing the planet, while adjusting to the unique language, cultural and political differences. If harnessed rightly, it has the potential to drive even small businesses with innovative ideas at exponential speeds to global successes. Large businesses with their deeper pockets and large work-forces can work wonders at much larger scales.

Time to put on your thinking caps to see how!

-- Ravi

The "offshore" wave that started in a real sense towards the end of the 20th century has now become a globally accepted reality. The question now is not whether but how to incorporate global sourcing (a wider cousin of offshore sourcing) in your business model. This is especially true of large MNCs having global presence. However, for some strange reason, global sourcing and offshore sourcing have remained restricted in large measure to the "Fortune" listed companies though the spread has grown to Fortune 1000 now. The small and medium enterprise (SME) sector has largely remained away from the offshore/global sourcing activity so far.

Now that the first (low-cost labor business) and second (cost-focused technology services) waves of offshore/global sourcing have stabilized significantly, it is a good time for SMEs to consider adopting this model. Rather, with their large competitors adopting this model in a big way, it has become imperative for the SME sector to go the offshoring way, as a matter of survival. While SMEs may argue that the cost benefits that accrue to larger corporations by virtue of their huge volumes may not be so great for SMEs due to their relatively tiny volumes of work, there are other strategic and tactical benefits of offshoring that they must consider. A detailed discussion on the various strategic and tactical benefits of outsourcing and offshoring can be found in "Outsourcing for Strategic & Tactical Objectives" at the following URL:
http://www.patni.com/global-sourcing/global-sourcing.html.

The above Web page also has some other thought papers to help decision makers understand the concept better and also the process. "Demystifying Global Sourcing" helps navigate through the maze of confusing jargon around the concept, while "Guidelines for Planning on Offshore Outsourcing" helps understand the process well. As mentioned earlier, the concept of offshore/global sourcing has matured significantly and SMEs can leap-frog the learning curve followed by the early adopters, bringing about a strategic shift in business through "transformational outsourcing" that looks beyond offshore cost leverage. "Increasing Shareholder Value Through Transformational Outsourcing" describes the strategic benefits of going down this path while "Transformational Offshoring: Why & How?" helps build realistic expectations and also shows the way to achieve these.

While the offshore sourcing wave started predominantly as a cost saving measure, SMEs can take a certain level of offshore leveraged cost savings for granted while focusing on harnessing the immense talent pool for activities such as R&D, product co-development, product testing, analytics and back-office work, business processes and also in some cases, everything other than their core business. Large global MNCs have gone down that path successfully. The hurdles they faced and the way these were overcome is a good source of learning for these followers to help them move forward much faster.

It is not an option anymore but an imperative for SMEs in mature economies to start global sourcing to survive and thrive in the increasingly integrated and highly competitive global markets. Do it now before it's too late.

-- Ravi

Ravindra Datar (Ravi) is a Senior Manager (Corporate Marketing) at Patni Computer Systems Ltd. Patni is one of India’s largest IT services companies providing IT and BPO services to 239 clients across 15 countries on a mature global delivery model, with a track record of three decades. At Patni, Ravi is responsible for managing relationships with analysts, media and industry associations, while also helping Patni’s industry-focused business units in developing their go-to-market strategies. He has over 10 years of industry experience, including 7 years (1998-2005) at Gartner and 2 years (1996-1998) in the Business & Industrial Research Advisory Division of the Indian Market Research Bureau.

Prior to joining Patni in August 2005, Ravi was Principal Analyst (IT Services and BPO), at Gartner, responsible for studying buyer behavior and understanding vendor strategies to identify market forces driving IT services and BPO industries and markets across 11 countries in the Asia Pacific region. During his 7 years at Gartner, Ravi has advised several of Gartner’s clients in their offshore sourcing decisions as well as service providers in their strategies regarding selling into the Asia Pacific markets and leveraging the Asia Pacific region in their global delivery infrastructure. He has authored and co-authored several industry reports and has been interviewed by the global electronic and print media on key issues pertaining to the global and Asia Pacific IT Services and BPO markets and industries on several occasions.

During his two years as a consultant at the Indian Market Research Bureau, Ravi was responsible for managing all stages of research-based advisory services assignments for clients across multiple industries on business decision parameters such as concept testing, market potential estimation and forecast, competitive scenario analysis, customer satisfaction, price elasticity, etc. to help make decisions regarding market entry, positioning and growth strategies.

He can be reached at rsdatar@gmail.com. Patni is located online at http://www.patni.com.