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





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





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.





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





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





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.





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





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





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.





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





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





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





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





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.





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.





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

Google

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.





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.





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:





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.





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.





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.





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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