offshoring ib research
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8/7/2019 offshoring IB research
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King Faisal UniversitySchool of Business
Global MBA – International BusinessOffshoring
Tuesday, January 18, 2011
Tabel of Contents
1. Introduction.....................................................................................................2
2. What is the Offshoring?...................................................................................2
3. Differences between Global Sourcing, Outsourcing and Offshoring................6
4. Strategic Advantages of Offshoring.................................................................7
5. Risks of Offshoring........................................................................................10
6. Examples.......................................................................................................13
6.1 USA:........................................................................................................13
6.2 Europe:....................................................................................................15
6.3 Saudi Arabia:...........................................................................................15
7. References....................................................................................................18
7.1 Books:.....................................................................................................18
7.2 Websites:................................................................................................19
Websites:
List of Figures
Figure 1 : Offshore Stage Model............................................................................4
Figure 2: AClassfiication of foreign Market Entry Strategies Based on Degree of
Control Afforded to the Focal Firm.........................................................................6
Figure 3: IBM’s early global network of R&D sites, circa 1970.............................13
Figure 3: IBM’s early global network of R&D sites, circa 1970.
List of Tables
Table 1: Differences between Global Sourcing, Outsourcing and Offshoring.........6
Table 2: Selected US firm’s offshore activities.....................................................14
Table 3: Selected Saudis companies offshore activities......................................16
Table 3: Selected Saudis companies offshore activities
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King Faisal UniversitySchool of Business
Global MBA – International BusinessOffshoring
1. Introduction
Global sourcing, Outsourcing and Offshoring, the trends for many
companies to reach globalization, and Offshoring is the most recently
phenomena. the research will explain the meaning of offshoring, the
different between Global sourcing, Outsourcing and Offshoring, then
the research will list the impact of offshoring and finally the research
will provide some example of global and local companies that use
offshoring on their businesses.
2. What is the Offshoring?
Offshoring refers to the relocation of a business process or entire
manufacturing facility to a foreign country (Cavusgi l , Knight , &
Riesenberger , 2008) . The offshoring concept can be explained as
the following example: If you call a company for a loan and get
connected to an operator in a call center located in another country,
then this is a case of offshoring (Gupta, 2008) . Therefore, we can
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conclude that offshoring means having the outsourced business
functions (for goods or services) done in another country.
In the 1990s the global sourcing begin a new phase with the
offshoring, the firms begin to outsource specific value-adding activities
in the services sector to other locations such as India, Philippines, china
and Eastern Europe. Furthermore, the offshoring trends are mainly the
services such as IT services (software, applications and technical
support), customer support or customer services ac activities (technical
support and call centers), Research and development (R&D), and many
other services.
Recently Offshoring become an important phenomena in business
world, the offshoring refers to two
main concepts the first one is
“Offshore in –source” which it
mean when where an organization
moves parts of its operations to
offshore locations, the second
concept is “offshore outsourcing” which it mean where an organization
assigns specific jobs or projects to other offshore companies.
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Figure 1 : Offshore Stage Model
According to Carmel and Tjia (2005), there are four offshoring stage
models that companies tend to move through and they are depicted in
Figure 1. Companies that do not offshore are in Stage 1, “Offshore
Bystander,” in which they metaphorically watch the others. Stage 2,
“Experimental,” is a transition stage in which companies test the
offshoring for a year or more. For large corporations this stage’s
expenditures could be as large as 10–20 million USD per year.
Experimentation is a wise approach for organizational learning and risk
reduction because of the many difficulties in offshoring. Savvy
managers experiment to the point where they see measurable, positive
results, and only then do they grow to the next stage. Some call this
the “Start-Small” strategy and, according to one study, 63% of
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Global MBA – International BusinessOffshoring
companies are using this approach. In Stage 3, “Cost Strategy,”
companies begin to experience significant and consistent cost savings
in their work. By this stage, firms have corrected some early missteps
and have expanded their offshore activity as measured by number of
projects, staff, or budget. There have been hundreds of firms, if not
thousands, large and small, which claim cost savings in their software
related activities driven by the low wages in offshore nations. Various
studies have tried to determine just how much offshoring saves. The
composite of studies indicate that the cost savings ranges from 15% to
40%7 for companies’ offshoring at least a year. Experienced companies
move to Stage 4, the highest stage, where they truly leverage
offshoring. In this stage companies move beyond mere cost savings
derived from wage differentials and benefit from other strategic
advantages. Here, offshoring is used to drive innovation, speed,
flexibility, and new revenues. The Offshore Stage Model is also useful
to measure offshoring diffusion. Since it was introduced in 2002, it has
been used to estimate the ratio of large companies at each stage of
the offshore progression.
India receives the bulk of
advances economics’ relocated
business services. This sector in India
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has grown by as much as 50 percent per year during the 2000s. the
country’s emergence as a major offshoring destination result from its
huge pool of qualified labor who work for wages as little as 25 percent
of combined with the worldwide economic downturn of the early 2000s,
which triggered multinational firms to seek ways to shave cost. But
India is not the only destination of substantial outsourcing work, Firm in
Eastern Europe perform support activities for architectural and
engineering firm Western Europe and the United States of America.
Accountant in the Philippines perform support work for major
accounting firms. Accenture has back-office operations and call centers
in Costa Rica. Many IT support services for customers in Germany are
actually based in the Czech Republic and Romania. Boeing, Motorola
and Nortel do much of their R&D in Russia. South Africa is the base for
technical and user-support services for English, French and German-
speaking customers throughout Europe.
Furthermore, the offshoring can be consider as a forign direct
investement (FDI). Finally, as shown in the following figure, Global
Sourcing (offshoring) is on the low control strategies with minimum
control available to the focal firm over foreign operations, limited
resource commitment, maximimum flexibility And low risk.
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3. Differences between Global Sourcing, Outsourcing
and Offshoring
Outsourcing and offshoring are under the Umbrella of Global
Sourcing, Therefor, Global Sourcing is the wider phenomenon. In
addition, Offshoring is the natural extension of Global Sourcing, the
main deference between them is that Offshoring is relocation of the
business or part of it, while the Global Sourcing and Outsourcing are
not.
Global Sourcing Outsourcing Offshoring
d
ef
in
itio
n
The procurement of
product or services
from independent
suppliers orcompany-owned
subsidiaries located
abroad for
consumption in the
home country or a
third party.
Also called: global
procurement or
The procurement of
selected value-adding
activities, including
production of intermediate goods or
finished products,
from independent
suppliers.
Outsourcing refers to
the phenomenon of
having someone else
do the work for you.
The relocation of
business process or
entire manufacturing
facility to a foreigncountry.
Offshoring refers to
the situation when
such work is
performed in a
different country.
If you call a
Figure 2: AClassfiication of foreign Market Entry Strategies Based on
Degree of Control Afforded to the Focal Firm
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global purchasing.
If you go out to a
restaurant, this is
outsourcing.
restaurant to order
lunch at home, and
the calling center of
this restaurant was
not in your location,
what the restaurant
did is offshoring.
G
o
o
d
s
o
r
S
e
r
vic
e
s
Good and Services. Good and Services. Mainly Services.
A
ct
iv
iti
es
All Value Chain
Activities.
Accounting, HR,
Travel Services, IT
Services, Customer
Services and
technical support.
Banking, software
ode writing, legal
services and
customer-services
activities.
Table 1: Differences between Global Sourcing, Outsourcing and
Offshoring
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4. Strategic Advantages of Offshoring
Before we start listing the strategic advantages of offshoring we
should ask our self the flowing question: why offshoring become an
important trend to companies? After looked in many books and journals
to figure out what is the main motive for companies to go offshore the
answer is: to increase Competitive advantages. Offshoring is becoming
part of the larger context of hyper-competition: companies are swept
into faster and faster cycles of competitive responses and reactions in
order to remain financially viable and cost competitive. Not offshoring
may well become a strategic peril. Such was the case of one of
America’s largest television manufacturers, Zenith Electronics, which
resisted offshoring for decades, while slowly shrinking, before it
disappeared completely. Furthermore, there are many strategic
advantages of offshoring and they are:
I. Reduce the cost s of operations and labors :
Cost reduction is the primary strategic focus of most
companies that are offshoring. The fourth and final stage in the
Offshore Stage Model is labeled “Leveraging Offshore.” According to
many studies there are relatively few companies that have reached
this stage. Those that have progressed to this stage have moved
beyond mere cost reduction and benefit from innovation, speed,
flexibility, and new revenues.
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II. Building global networks for knowledge sharing :
Successful companies encourage their various local and
offshore centers to connect and share in all kinds of ways. These
locations collaborate, share knowledge, offer ideas to each other,
learn from practices in other countries, and solicit small problem
solving solutions from each other
III. Diversification :
Large firms can diversify their portfolio more effectively when
they spread their R&D facilities globally. Granstrand and colleagues
studied global technology firms and found that the companies that
attain long-run competitive advantage are those that have
expanded to many foreign locations and, in the process, achieved
technological diversification. These corporations are leveraging their
offshore units to attain strategic diversification. Companies need to
have a diversified set of technological competencies not only in the
firms’ distinctive core competencies – those that outsiders are likely
to recognize – but in three others. The first of these competencies is
in “niche” areas, which are intrinsically small, and are those in
which the firm has less expertise, a lower profile, and fewer
resources. The second competency is in background areas, dealing
with processes and coordination, allowing firms to benefit from
technical change. For example, the emergence of India as a global
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center for applying mature quality processes in software
development is a strategic “background competency” for some
companies. Third, companies may also retain competencies in some
marginal areas in which they have no distinct advantages, although
these generally tend to be outsourced.
IV. New revenue generation:
Since the offshore markets are growing much faster than
those in industrialized nations, a company that is offshoring its
functions have greater opportunities to generate new revenue and
new value from these operations. The path that many companies
have taken is to spin off their offshore center, create an
independent offshore unit that can sell services or products to third
parties. A number of firms have gone beyond that point. Offshoring
has given creative players greater opportunities to capture value
from their operations, particularly in India, by selling assets at a
multiple of their original investment. One offshore expert
summarized it this way: “You take a look at your assets, polish them
in India where it is cheap, and sell them dear.”
V. Achieve superior benefit of value chain:
The value chain concept, published by Michael Porter in the
1980s, divides all company activities necessary to produce and sell
goods into single activities. These activities can broadly be grouped
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into two main categories, primary and secondary activities (Porter,
1980) Theoretically, these activities can be located at a single
location, at several locations, between several companies at one
location, or between several companies at several locations
(Kutschker & Schmid, 2004, pp. 321–331; Porter, 1986, pp. 17–68)
By applying the offshoring concept, companies have the possibility
to transfer parts of their production to those locations which are
most appropriate according to organizational goals. This can be
done within the company as well as through the integration of third
party offshoring vendors. Apart from the production of goods, an
increasing proportion of value added currently originates from
services as well.
1. Risks of Offshoring
I. S ecurity risk:
Increased attention to privacy concerns –specially in IT sector-
regarding personal, individual data began first with the European
Union (stemming from its 1998 Directive) and more recently in the
US. The IT community will likely need to 47 offshore economics and
offshore risks devote greater attention to this topic, particularly for
IT-enabled services. In one case a Pakistani subcontract worker
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threatened to post US patient medical data on the Internet if his
financial claims were not met.
II. Corruption risk:
This includes both grand and petty corruption. This risk
applies to offshore subsidiaries, while firms outsourcing offshore are
largely immune to this risk because the cost is absorbed by the
offshore provider.
III. Contractual risks:
These are greater when offshoring, particularly when
outsourcing. Adverse outcomes appear when there is a dispute
between the parties which the parties cannot resolve. Foreign legal
disputes may take longer to resolve, may be subject to corruption,
or favor the local company over the foreign company.
IV. Infrastructure risk :
The dependability of the communications infrastructure is
lower in some offshore destinations. While the probability of failure
may be higher, the severity is unlikely to be great. Companies
mitigate this risk by securing multiple communication links to the
offshore unit or provider.
V. Culture :
A representative example: although English is one official
language in India, pronunciation and accents can vary
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tremendously. Many vendors put call center employees through
accent training. In addition, cultural differences include religions,
modes of dress, social activities, and even the way a question is
answered. Most leading vendors have cultural education programs,
but executives should not assume that cultural alignment will be
insignificant or trivial.
VI. Turnover of key personnel
Rapid growth among outsourcing vendors has created a
dynamic labor market, especially in Bangalore, India. Key personnel
are usually in demand for new, high-profile projects, or even at risk
of being recruited by other offshore vendors. While offshore vendors
will often quote overall turnover statistics that appear relatively low,
the more important statistic to manage is the turnover of key
personnel on an account. Common turnover levels are in the 15%-
20% range, and creating contractual terms around those levels is a
reasonable request. Indeed, META Group has seen recent contracts
that place a "liability" on the vendor for any personnel that must be
replaced. The impact of high turnover has an indirect cost on the IT
organization, which must increase time spend on knowledge
transfer and training new individuals.
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1. Examples
1.1 USA:
The largest market for offshoring is the US. The leader
corporation of offshoring is IBM. In the 1960s and 1970s, IBM -the
most powerful computer firm in the world and always among the top
10 largest US corporations- had R&D centers in three countries with
development centers in some additional European nations (see
Figure 2). No company came close to this global network for many
decades. In 2003, global sourcing of computer software and services
was estimated at 10 billion USD, which represents but a small
portion of total US corporate spending on IT. Of the 10 billion USD in
global sourcing, the US purchases have generally represented two-
thirds.
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Moreover, here are selected US firm’s offshore activities:
Cadenc
e
Cadence is the largest semiconductor design software firm.
The firm opened an India R&D center in 1987 where its staff
reached 300 developers by 2004. It also had development
centers in Taiwan, China, and Russia
In 2004, search engine company Google was viewed as one
of the most innovative American tech firms and its public
offering of stock was closely watched. Google stated that itcould afford to hire the best developers in the US, but chose
to open an R&D center in India to attract creative talent
I2
I2 develops logistics software for business customers. In
2004 the firm had 1400 engineers outside the US, mostly in
India, representing about half of the firm’s global
employees. The Indian staff included about 180 staffers of
Indian origin who were previously working in the US and
volunteered to go back to India
Figure 3: IBM’s early global network of R&D sites, circa 1970.
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Microso
ft
Microsoft has traditionally been cautious about dispersion of
its R&D, with nearly all activities at its Redmond
headquarters. Its four foreign centers, India, China, and
England, were set up in 1990s. Growth since 2000 has been
primarily in India and China. The firm had roughly 300
employees in its Hyderabad (India) locations scheduled to
double within 2 years
Oracle
Oracle began offshoring in 1990. By 2003, its Indian centersgrew to 3000 developers with a stated goal of doubling to
6000. Oracle also performs offshore R&D in Ireland and
China
Table 2: Selected US firm’s offshore activities
1.2 Europe:
Britain is the exception and is the European leader in offshoring.
British firms are the preferred partners for English-speaking offshore
countries, and especially for its former colonies (e.g. India, Pakistan,
Bangladesh, and Sri Lanka). Ninety-five percent of all UK offshore
work is from India, estimated at 1.2 billion USD in 2003. Although
the UK IT services market share in Western Europe is 21%,25 it is
responsible for 59% of the Indian software exports to Europe. Indian
software giant Tata Consultancy Services (TCS) set up operations in
the UK way back in 1975, a time when the word offshoring had yet
to be coined. It’s first client was CMIG, an insurance company. By
2004, TCS had 3700 professionals working for British clients, of
which 1600 were working onsite.
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1.3 Saudi Arabia:
Saudi Aracmo is the biggest oil and gas companies and one of the
biggest offshoring companies in Saudi Arabia. Saudi Aramco's extensive
domestic and international operations rely on a global network of wholly
owned subsidiaries. Some of these subsidiaries provide crude-oil and
products customers with transportation and marketing support, while
others assist Saudi Aramco with critical technical, training, project
management and logistical services, here are some offsore companies
owned by Saudi Aramco:
1- Aramco Overseas Company B.V. (AOC): this company Provides
materials support services and administers International Exchange
Visitor Program. There offices located in: Tokyo, Japan; Hong Kong
and Shanghai, China; Dalmine, Italy; Kuala Lumpur, Malaysia; and
London, United Kingdom.
2- Saudi Petroleum International Inc. (SPII): this company Provides
marketing and ocean transport support services for North and South
America and the Caribbean and it is located in New York, Unated
State.
3- Aramco Services Company (ASC): this company is located in
Houston and it is opertions are:
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a. Technical Services Department: Includes Engineering,
Computer and Communications, and Operations divisions.
b. Procurement and Logistics Department: Includes Purchasing,
P&T Services, Marine Traffic and Air Traffic divisions.
c. Industrial Relations Department: Includes Career
Development, Staffing Services, Employee Relations, Facilities
and Administrative Services and Security and Safety divisions.
d. Finance Department: Includes investment, banking, credit and
insurance.
e. Law Department: Includes all legal affairs of ASC and
subsidiaries.
f. Public Affairs Department: Includes media relations, public
relations and visa request processing for travelers to Saudi
Arabia.
Moreover, here are some examples of Saudis Companies affshore
their activities.
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Table 3: Selected Saudis companies offshore activities
SABIC
In 2007, SABIC opened two offices in China; in Beijing and
Shenzhen. In combination with SABIC’s existing offices in
Shanghai and Hong Kong, SABIC has strengthened its
position in the world’s most important and fastest growingpolymers market and can now provide even stronger
support locally to its customers in China.
Al
Zamil
Holding
compan
y
In 1977, Al Zamil Holding company - Zamil Steel opened
new manufactory in Egypt.
Superio
r
Superior company which found in 2006, it is a new
Information Technology serives Saudi company, which
located in Khobar-Saudi Arbia. - some of their programmer
are located in Pakistan.
AlRajhi
Bank
Al Rajhi Bank the Islamic bank operating in Saudi Arabia.
In 2006, Al Rajhi Bank established branch in Malaysia.
Riyad
Bank
Riyadh Bank has established offices in London (branch) in
1984, in Houston (agency)in 1990 and Singapore
(representative office)in 1997. The prime objective of these
offices is to serve Riyad Bank customers with offshore
banking needs and international corporates with Saudi and
Gulf business links.
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1. References
1.1 Books:
Carmel, Erran, & T j ia , Paul . (2005) . Offshor ing
Information Technology . New York: Cambr idge Univers ity
Press.
Porter , M. (1980) . Competi t ive strategy: Techniques for
Analyzing Industr ies and Competi tors . New York: Free
Press.
Cavusgi l , S . Tamer, Knight , Gary, & Riesenberger , John R.
(2008) . Internat ional Business . New Jersey: Pearson.
Gupta, Amar. (2008) . Outsourc ing and Offshor ing of
Profess ional Services: Business Opt imizat ion in a Global
Economy . New York: Informat ion Science Reference.
Kutschker , M. , & Schmid, S. (2004) . Internat ionales
Management (3rd ed.) . Munich: Oldenbourg.
Welfens, Paul , Ryan, C i l l ian, Chirathivat , Suthiphand, &
Knipping, Franz. (2009) . EU - ASEAN: Fac ing Economic
Global isat ion . Germany: Spr inger Ver lag.
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1.2 Websites:
http://www.sourcingmag.com/content/offshore_outsourcing_china.asp
http://searchcio.techtarget.com/news/950602/Top-10-risks-of-offshore-
outsourcing
http://www.ibm.com/us/en/sandbox/ver2/
http://www.cadence.com/us/pages/default.aspx
http://www.i2group.com/us
http://www.microsoft.com/en/us/default.aspx
http://www.google.com/corporate/
http://www.oracle.com/index.html
http://www.gulfoilandgas.com/
http://www.saipem.com/site/Home.html
http://www.saudiaramco.com/irj/portal/anonymous
http://www.superior-sa.com/index.php
http://www.alrajhibank.com.sa/pages/default.aspx
http://www.riyadbank.com/index_en.html
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