STRAYER UNIVERSITY

A STUDY OF THE IMPACT OF TECHNOLOGY ON THE PROCESS OF OFFSHORE OUTSOURCING: THE CASE OF DELL INC.

DIRECTED RESEARCH PROJECT SUBMITTED TO THE FACULTY OF THE GRADUATE SCHOOL OF BUSINESS IN PARTIAL FULFILLMENT OF THE REQUIREMENT FOR THE DEGREE OF MASTERS OF BUSINESS ADMINISTRATION

TO: Dr. JOEL O. NWAGBARAOCHA

BY: JALIL BENDAOUD

WASHINGTON, DC JUNE 2005

ABSTRACT

This exploratory study investigates the impact of technology on the process of outsourcing using the case of Dell Inc. It draws on a qualitative analysis of data and business trends to increase understanding on how technology did influence the rise of outsourcing. The principle research question of the study investigates how technology has affected the business world in terms of the search for cheaper labor in foreign countries to reduce production costs. This is accomplished by addressing the following four questions identified for this research study. The first question explores, from a historical perspective, which factors led to the emergence of outsourcing. It covers the definition of outsourcing and its historical development. This section also describes how Dell Inc. has been chosen as the case study of this research study. It includes an overview of how Dell Inc. has been successful in one of the most competitive industry in our era. The second question explores the modern evolution of technology. There is no doubt that technology has played an important part in outsourcing. This section therefore contains relevant information on why companies started to use foreign labor and services to cope with technological innovations and challenges. The third question discusses the main challenges of outsourcing. It goes over the impact of outsourcing on the operations of Dell Inc. This sections emphasizes the issues that companies in general face while outsourcing some of production functions to other countries. To further explain the off-shore issues, this section shows how Dell Inc. has coped with outsourcing. The fourth and last question of this research study investigates how companies can utilize outsourcing to be successful, while keeping up with the fierce competition that float in our world. Many companies do not approach outsourcing with sufficient due diligence, and thereby endanger the existence of their business. This section is intended to help any company who is contemplating outsourcing. It shows all the steps that need to be taken to implement a good outsourcing technique that could help companies save money and be more competitive. The research methodology employed by this research study is an analysis of literature, books, news reports and studies that have been conducted in the past concerning technology development and outsourcing. As a result of this study, the link between technology and outsourcing is clearly identified. Analysis of the research demonstrates how technology has impacted the use of outsourcing and how both technology and outsourcing will continue to grow to make our lives more bearable. Although there are challenges to effectively implementing outsourcing within a company, this phenomenon will continue to be employed by businesses and will therefore grow in global scale over the coming years. This conclusion of this research study acknowledges the potential problem with the initial implementation of outsourcing, but at the same time states that outsourcing is a growing trend. Outsourcing will only continue as an effective practice if organizations are able to incorporate technological development into their off-shore business strategies.

ACKNOWLEDGMENTS

I would like to thank my guide and Instructor Dr. Joel O. Nwagbaraocha, professor at Strayer University, Washington, DC Campus, for his continuous guidance and effort, which helped me to complete this study. His resourceful guidance and advices helped me learn about the research procedures as well as the contents of the study. A special thanks to my family members, especially my mother, who encouraged me to pursue my graduate degree. I also would like to thank my friends and co-workers, without their help and support, I would not have been able to complete this study successfully. I also would like to thanks Lisa Manning who reviewed my work and made a few suggestions. And finally thanks to the music of www.di.com that helped me throughout this process.

TABLE OF CONTENTS

ABSTRACT ACKNOWLEDGEMENT.. LIST OF TABLES AND FIGURES... CHAPTER ONE. INTRODUCTION Context of problem.. Statement of problem... Specific research question and sub-questions.......................... Significance of the study.. Research design and methodology... Organization of the study. CHAPTER TWO. LITERATURE REVIEW..

Page ii iii vi 1 1 4 7 7 8 9 11

CHAPTER THREE. WHAT IS THE HISTORICAL BACKGROUND OF OFFSHORE OUTSOURCING IN GENERAL AND AT DELL? .. 35 The origins of outsourcing.... Outsourcing yesterday and today.. Advantages and disadvantages.. Dell Inc. in the computer industry. Dell Inc. and outsourcing.. 35 37 40 42 44

CHAPTER FOUR. WHAT IS THE RELATIONSHIP BETWEEN TECHNOLOGY AND INTERNATIONAL OUTSOURCING? .................................................................. 46 Technology and outsourcing. The reason for outsourcing.... Following technology trends.. 46 49 52

CHAPTER FIVE. WHAT IS THE IMPACT OF OUTSOURCING ON THE OPERATIONS OF DELL? ........................................................................................................................ 55 Dells venture in India Outsourcing to India... Dissatisfied customers: Dell Inc.... Why customers are unsatisfied with off shore call centers Dell Inc.s response to customer feedback 55 56 58 59 60

5 Dell Inc. Numbers.. 62

CHAPTER SIX. WHAT STRATEGIC APPROACHES TO OUTSOURCING INCREASE EFFICIENCY IN THE BUSINESS WORLD AND AT DELL INC.? . 65 Failures with outsourcing. Process for outsourcing Identifying the right outsourcing partner. Fundamentals of outsourcing implementation. CHAPTER SEVEN. SUMMARY AND CONCLUSIONS Introduction.. Summary... Conclusion. BIBLIOGRAPHY. 65 66 70 70 75 75 76 82 84

LISTS OF TABLES AND FIGURES

Figure: Page Figure 3-1: News stories on outsourcing 36 Figure 4-1: Initial reasons for outsourcing.. 48 Figure 4-2: Reasons companies choose to outsource.. 49 Figure 6-1: Key criteria that international clients need to consider while outsourcing.. 69

Table: Table 3-2 Absolute outsourcers of 2002.. Table 5-1: Top 5 Worldwide & US PC Vendors, 2nd Quarter 2003 vs. 2004... Table 5-2: Top 5 Worldwide & US PC Vendors Market Share, 2nd Quarter 2003 vs. 2004.. 64 63 39

CHAPTER ONE: INTRODUCTION

Context of the problem

Outsourcing is commonly defined the practice of subcontracting manufacturing work to outside and especially foreign or nonunion companies.1 The key to outsourcing is the purchase from outside only those activities that are not key to the companys distinctive competencies. In the present focus on an international business model, outsourcing is best understood as the practice of using outside, foreign firms to handle work previously performed domestically, within a company. According to an American Management Association survey of member companies, 94 percent of firms in the United States outsource at least one activity. Outsourcing is not limited to just a few areas. It touches many areas within an organization. A company can outsource its general and administrative activities, manufacturing, information systems, human resources, staffing, transportation, marketing, finance accounting and many other areas. Organizations find it more beneficial to outsource complementary groups of administrative work, instead of investing large amount of money on the development of

Merriam-Webster Dictionary, Online ed., s.v. outsourcing, Available on-line from http://www.m-

w.com.

8 specific business processes. Such frequently outsourced areas include payroll systems, payment processing systems, and other relatively standardized functions.2 Nevertheless, not all companies are satisfied with their outsourcing results, sometimes leading to the reintegration of the outsourced activity. In the early 80s, outsourcing referred to a companys expansion of its purchases of manufactured physical inputs. Outsourcing then became a significant industrial phenomenon in the 90s. It has spread across industries and national boundaries (international outsourcing). In 2004, outsourcing took on a new meaning. Outsourcing now refers to a specific segment of the growing international trade in services. Firms now do more than just acquiring products from outside vendors, they also purchase services abroad. As a part of this recent trend, outsourcing has become a dominant part of decision-making and an important way to increase efficiency and even quality. It is a value enhancer that helps companies to streamline their core competencies at a significant cost advantage. Trade liberalization or globalization has greatly influenced the development of outsourcing. Managerial practices in the supply chain and improvements in transportation and electronic information and communication technology, have led many firms to move towards outsourcing and reduce transactional costs. Such advances allowed rapid flow of voluminous data across international boundaries. With the increase and improvement in international communication, transaction costs across borders continue to drop. Now companies are not limited by domestic production costs and prohibitively high transaction costs, but may seek abroad alternate service or product providers.

"Men and Machines," The Economist (November 11, 2004): 3.

9 Before 2000, the United States was used to goods being produced abroad but was not used to services being provided abroad. In the past year, we have become more familiar and more acceptable of both product and service outsourcing. Many American companies have moved such key business processes as their customer service call centers to parts of the country or world where labor costs are relatively low. One current outsourcing move is by McDonalds, the world's largest fast-food chain, which announced (March 10th, 2005) that it would be using remote call centers for Drive-Thru service.3 Under the General Agreement on Trade in Services (GATS) outsourcing is categorized by four different ways in which services can be traded: Mode 1: Suppliers and buyers remain in their respective locations. Mode 2: Service providers move the service recipient to the service providers location. Mode 3: Service providers establish a presence in another country, requiring direct foreign investment (e.g. banking and insurance firms) Mode 4: Service providers more to the location of their client (service buyer).4

Consulting is a part of outsourcing. There are two types of consulting providers: Individuals who sell their expertise to service buyers. Service provider companies that sell their expertise to service buyers. Consulting services are the product of outsourcing. Since companies have access to external vendors, organizations do not see the need for spending large amounts of money on
McDonald's may outsource drive-thru orders, MSNBC (March 10, 2005), Available on-line from: http://www.msnbc.msn.com/id/7149812: 1. Jagdish Bhagwati, Arvind Panagariya, and T.N.Srinivasan, The Muddles over Outsourcing, Journal of Economic Perspectives 18, no. 4 (Fall 2004): 93-114.
4 3

10 hiring and training fees. Instead, they can use vendor employees or consulting firms to perform tasks costing them less money in the long run. In addition to reducing the cost of a business process, outsourcing through consulting means that organizations do not have to waste money on employee benefits, bonuses, and related costs. Dell Inc. is the worlds leading computer systems company. Headquartered in Texas, it designs, builds, and customizes products and services to satisfy a range of customer requirements.5 With manufacturing facilities and sales offices throughout North and South America, Europe, and Asia, Dell Inc. is able to respond to customers needs wherever they are. Dell Inc. is not limited to selling only computer systems, servers, and Internet Infrastructures, the company offers different options that can help customers benefit from individualized production. In the service sector, Dell provides its customers with training and certification programs, asset management services, customer financial services for its business and consumer customers in the United States6.

Statement of the problem

In the past few decades the United States has witnessed a dramatic change in the way services are provided and goods are manufactured. Firms have started replacing unskilled workers with other inputs. One of the reasons for such a decline in the use of domestic

5 6

Dell Inc. Website, Available On-line from www.dell.com: Contact Us section.

Full Company Description for Dell Inc., Reuters, Available on-line from: http://yahoo.investor.reuters.com/FullDesc.aspx?target=/stocks/quickinfo/companyprofile/fulldescription&ticke r=DELL: 1-2.

11 unskilled workers is the practice of outsourcing. Nowadays firms move their production processes to countries where economic conditions are more advantageous. Outsourcing does create muddles in our society. Many argue that outsourcing is a good long term investment and many oppose to this idea. Economists think of outsourcing as a win-win situation. While outsourcing helps control Capital Costs and increase efficiency, reduce risk, and reduce labor costs, it also can have negative effects on firms and countries (e.g. Loss of jobs in developed countries, huge layoffs by companies, etc). In low cost labor countries like India and China, information technology activities and skills are growing fast. Many companies do not thoroughly understand outsourcing. It is true that it can help firms save money, but this is not the only reason to choose to do it. During the outsourcing mania of the early 1990s, many firms realized that outsourcing can be a wrong corporate decision and cost firms money. A company cannot outsource if the outsourced sector is part of its core competitiveness in the market. The loss of control over a product inherent to outsourcing creates a high risk of losing market share. There is much debate over whether outsourcing can benefit developing countries (3rd world countries) to the detriment of the people in the working classes of developed countries. Off-shore jobs can create economic crisis in societies by increasing domestic unemployment rates when companies lay off their employees. Critics of sending jobs off shore cite the potential for unnecessary delays, lack of coordination, incompatible cultural backgrounds, and different time zones as the key reasons for retaining domestic employment. Repeated movement of local jobs abroad can in turn affect buying power and create a negative work

12 environment. Employees fear job losses which create stress, lowers motivation level and also productivity. Many view outsourcing as a way to cut costs, while this is often the primary motivation, it does not always occur. This is why companies must weigh their options and analyze the steps to undertake the outsourcing process. While outsourcing helps organization become more efficient, outsourcing can also reduce their abilities to learn new skills and develop new core competencies. Many firms find themselves locked into long-term contracts with outside vendors that are no longer competitive. This can lead to a loss of decision making capability to their vendors. Such situations become negative in the long run because organizations develop a dependence on their vendors. Over the past decade, software and computer companies like Microsoft, HewlettPackard, International Business Machines (IBM), and Dell, Inc. have increasingly turned to outsourcing to save costs. Dell Inc. is one of the worlds leading computer manufacturing companies that embody this trend. As a result, Dell is a relatively new player that has recorded amazing sales numbers. For example, in 2004, Dell Inc.s net worth reached about 13 billion dollars.7 Dell Inc. led the way among tech companies who moved their call centers to India. Such a move drastically cut costs for Dell, but created an unexpected level of frustration among Dell customers. The cultural incompatibility of the American callers and the Indian customer service representatives strong accents was the main reason for such a failure. The primary reason for off shoring Dell Inc.s call centers to Mohali in India was to decrease the labor costs. This managerial tactic was a good way to improve efficiency at Dell Inc. but had
7

Ron Insana, Dell knows his niche and hell stick with it, USA Today (April 4, 2004): 3b.

13 a few disadvantages. With so many customer complaints about competency of Dell Inc. foreign employees, top management had to decide to bring back most of Dell Inc.s call centers back to the United States. Dell Inc. has a production or sales presence in many continents across the globe. In March 2005, Dell Inc. decided to build a computer manufacturing facility in China to improve its image and increase sales in Northern Asia.8 With the fierce competition already in the area, can Dell Inc. really achieve this goal? And can this labor delocalization to Asia be the answer?

Specific Research Question and Sub-questions to Address the Problem

Principal Question: What is the impact of technology on the process of outsourcing using the case of Dell Inc.? Sub-Questions: What is the historical background of outsourcing in general and at Dell Inc. ? What is the relationship between technology and international outsourcing? What is the impact of outsourcing on the operations of Dell Inc.? What strategic approaches to outsourcing increase efficiency in the business world and at Dell Inc.?

Dell va construire une nouvelle usine en Chine, (Dell is going to build a new factory in China), Le Figaro Quotidien Paris, (March 25, 2005).

14

Significance of the Study

The purpose of this study is to explain the growing trend of outsourcing. Most products and services in the current marketplace are somehow the result of outsourcing. To combat popular misconceptions about outsourcing (especially in the United States), there is need for an understanding of the benefits and the negative impacts of the trend. As it is relatively a new phenomenon, many companies have yet to see the big picture or global significance behind outsourcing, especially regarding the global market for technology and services. Undertaking this new trend without full consideration of the cost and benefits of moving off-shore can be very detrimental to companies. Many companies have outsourced their products and or services, only to see themselves loosing more money than they were prior to outsourcing some functions of their production line or services. This study is targeted at companies who are thinking of using outside vendors as be their labor force. This study will also benefit organizations who are thinking of reducing their labor costs by changing the way they operate. Due to the fierce competition in the current business world, organization have to change their operations to be able to survive and stay competitive and even to gain market share. This research uses a case study to present facts about and analysis of outsourcing, thereby helping companies make the right business decisions. Organizations must get familiar of the pros and cons before engaging in such a corporate strategy.

15 This research would be capable of directing organizations towards the right path to achieving efficiency with the help of outsourcing and help them from loosing their decision power while using Dell Inc. as an example. Other MBA students from Strayer University or other universities can also use this work to study the outsourcing business model. They could use this work to update the information provided in case there are newer information on the topic.

Research design and methodology

Outsourcing is a very hot topic that somehow affects every one of us. There is a large amount of work to analyze, papers and books to read, articles to analyze. This Directed Research Paper is going to be designed with a qualitative set of mind. A qualitative research paper focuses on understanding phenomena, rather than predicting as in the application of traditional quantitative or statistical research. The reason I chose this topic is to understand the phenomena that creates muddles over outsourcing. Conducting a quantitative or statistical research will not help me achieve my goal. Throughout this research we will find information drawn from secondary sources (which are peoples work): books, research papers, juried articles, magazines and also newspaper articles.

Organization of the study

16 This research study is divided into seven chapters. CHAPTER 1, INTRODUCTION, contains the formulation of the context of the problem and the statement of the problem. This chapter states both the primary research question and the four sub-questions. CHAPTER 2, LITERATURE REVIEW, contains a review and a documentation that was gathered prior to writing this research. It contains the work of other people and states what other think of the topic. Literature review involves the analysis of a variety of sources, in particular: books, websites, and newspaper articles. CHAPTER 3, THE HISTORICAL BACKGROUND OF OFFSHORE OUTSOURCING IN GENERAL AND AT DELL INC. , contains an in depth background on Outsourcing. This chapter is the first part of the core work of this research study. It explains how Outsourcing functions, how it impacts companies in terms of labor organization, cost/benefits and productivity. It explains why and when Outsourcing has started to be the solution for many companies. Finally this chapter goes over how technology led the integration of outsourcing in many businesses. CHAPTER 4, THE RELATIONSHIP BETWEEN TECHNOLOGY AND INTERNATIONAL OUTSOURCING, deals with the impact of technology on firms. This section explains how technology has evolved and has impacted the use of outsourcing while many firms were not familiar with both technology and outsourcing. Chapter four goes over how companies got involved with outsourcing and how they successfully introduced it internally to increase revenues and balance sheets. It also contains information on how firms faced the complexities of technology and outsourcing. CHAPTER 5, THE IMPACT OF OUTSOURCING ON THE OPERATIONS OF DELL INC., deals with the parallel growth of Dell Inc. and competing firms in the same

17 industry. It also deals with the negative and positive impacts that Dell Inc. has encountered when started outsourcing its call centers and its manufacturing processes. This section demonstrates how Dell, one of the leading company in its industry, has resurfaced after experiencing a deterioration of its customer service support. CHAPTER 6, STRATEGIC APPROACHES TO OUTSOURCING INCREASE EFFICIENCY IN THE BUSINESS WORLD AND AT DELL, deals with the approaches and solutions that Dell Inc. needs to undertake to be more efficient and turn outsourcing to its advantage. This section deals with the different steps that can be utilized to help companies avoid making the wrong outsourcing decisions. Chapter six emphasizes on how important it is for companies to spend time and determine all the pros and cons before selecting an outsourcing partner. CHAPTER 7, SUMMARY AND CONCLUSIONS, provides a synopsis and the conclusions of the research study. It contains all the implementation solutions as well as the final thoughts on Outsourcing as a result of the technology boom.

CHAPTER 2: LITERATURE REVIEW

Title: Outsourcing and Technological Change Author: Ann Bartel, Saul Lach and Nachum Sicherman

18 In this paper, we argue that an important source of the recent increase in outsourcing is the computer and information technology revolution, characterized by increased rates of technological change. Our model shows that an increase in the pace of technological change increases outsourcing because it allows firms to use technologies. In addition, firms using more IT- intensive technology face lower outsourcing costs of IT-based services generating a positive correlation between the IT level of the user and its outsourcing share of IT-bases services. This implication is verified in the data. During the 1990s, there was a substantial increase in labor outsourcing among U.S. manufacturing firms.1 Firms are increasingly purchasing the services of outside providers to perform tasks that were previously performed by in-house employees or to perform new tasks. The outside service providers are used to carry out administrative duties or to provide business support such as security, engineering, maintenance, sales, legal services, accounting services, food services, data processing, and software development. Another manifestation of the trend towards outsourcing is the increased use of temporary workers. In this paper we propose that an important source of the recent increase in outsourcing is the computer and information technology revolution, characterized by increased rates of technological change. We present a model that examines the different channels by which technological change can affect the firms decision to outsource. According to our model, a firm decides to outsource a service or to produce it in-house depending on which organizational mode minimizes production costs. The cost of outsourcing is the price of the service plus an adjustment cost specific to the firm. Since there is a fixed cost in the production of the service, the economies of scale generated by this fixed cost are exploited by setting up a firm that sells the service to several users.

19 The service provider can then offer the service at a price below the average cost of in-house production. At this lower price, some firms (those with adjustment costs below a threshold) will outsource.

Title: Fear of Outsourcing is it justified? Author: Mary Amiti and Shang- Jin Wei

The recent media and political attention on service outsourcing from developed to developing countries gives the impression that outsourcing is exploding. As a result, workers in industrial countries are anxious about job losses. This paper aims to establish what the hypes are and what the facts are. The results show that although service outsourcing has been steadily increasing it is still very low and that in the United States and many other industrial countries insourcing is greater than outsourcing. Using the United Kingdom as a case study, we find that job growth at a sectoral level is not negatively related to service outsourcing. Outsourcing of services has received an enormous amount of attention in the media and political circles in recent times. In just five months, between January and May 2004, there were 2,634 reports in US newspapers on service outsourcing, mostly focusing on the fear of job losses.1 In particular, there have been reports about jobs moving from industrial countries like the United States and the United Kingdom to developing countries such as India. These concerns are not limited to the United States. Similar reports appeared in newspapers in other industrial countries such as the United Kingdom, which had 380 reports on outsourcing in its newspapers during the same period. Newspapers in Australia have also published similar

20 reports. Figure 1 plots a quarterly count of news stories or commentaries in major newspapers and newswire service reports on international service outsourcing from the first quarter of 1991 to the first quarter of 2004 in the United States and the United Kingdom, which we have constructed using an electronic database on newspaper articles (FACTIVA). Both indexes show a clear upward trend in media interest in international outsourcing of services. The main objective of this paper is to investigate and to establish what are the hypes and what are the facts about service outsourcing. First, we develop a set of stylized facts describing the trends in service outsourcing, which we present in Section IV. We focus on business services and the computing and information service trade as these most closely reflect the service categories that are generally thought of as being outsourced.

Title: The Impacts of Technology, Trade and Outsourcing on Employment and Labor Composition Author: Catherine Morrison Paul and Donald Siegel

Since the late 1970s, there has been a shift in the compensation and labor composition in favor of highly educated workers. A number of recent papers have identified trade, technology, and outsourcing as possible causes of these changes. Most of these studies have been based on a simple production or cost function framework and limited information on investment in technology and labor composition. In this paper, we examine the relationship between trade, technology, and outsourcing and shifts in labor demand using

21 dynamic cost function estimation and more comprehensive measures of labor composition and technological advance. Our findings indicate that technological change has had the greatest effect on changes in labor composition. However, the indirect impact of foreign trade on employment patterns augments its direct impact because trade stimulates computerization, which leads to further reductions in the demand for workers without a college degree and increases in the demand for workers with a college degree. Recent studies of shifts in relative wages and labor composition toward more highly educated workers have attributed these changes to rapid technological change or to an increase in the volume of foreign trade. Outsourcing is also hypothesized to have exacerbated these trends. Most of these papers have been based on a simple cost or production function framework and limited information on technological change and composition of the labor force. In this study, we examine the effects of trade, technology, and outsourcing on employment and labor composition using a dynamic cost function model and more detailed measures of labor composition and technical change. This framework provides for a more comprehensive analysis of labor demand because it allows us to incorporate adjustment costs for capital and interaction effects among trade, technology, and outsourcing, which have been ignored in existing studies. Our data also allow us to assess the impact of these factors on the demand for four types of workers, classified by level of education.

Title: A new Push on An Old Fundamental: Understanding the Patterns of Outsourcing Author: Zhihao

22

For what kind of intermediate input/service do firms often go outsourcing? This paper develops a model of two-stage production in which economies of scope are central to the production of both the intermediate and final good. The model is able to explain the patterns of outsourcing from the degree of product differentiation, economies of scope, and economies of scale in production of the intermediate input relative to that of the final good. The recent surge of outsourcing activities is explained by a new push (progress in the general purpose technology, e.g., information technology) on old fundamental (economies of scope in production). Outsourcing is surging in popularity across a wide range of production activities and sectors. In the automobile industry, for instance, we see outsourcing ranging from product designing, data processing, special components, assembly, and minor parts and components, etc.1 Why do firms engage in very different outsourcing business, some require high-skilled labor and are very specialized but others are very simple and minor. For what kind of intermediate input/service do firms often go outsourcing? Can we say anything about the characteristics/attribute of the goods or services in outsourcing? The purpose of this paper is to address these questions and understand the patterns of outsourcing. To answer these questions and explain the recent surge in outsourcing activities, it is important to understand the fundamental economic force behind outsourcing. Although it is true that outsourcing is a means of cutting costs to stay competitive, it is not the underlying economic force. A review of outsourcing activities in the automobile industry will reveal the driving force behind the trend of outsourcing business. In the 1920s when workers in the Ford Motor Company were getting the highest pay (much higher than all others) in the industry, Ford did not seek

23 outsourcing to reduce costs.2 The first sign of outsourcing in the automobile industry, however, came at the beginning of 1920s when the General Motors Company started a major innovation in producing automobiles by focusing on economies of scope, rather than economies of scale, in production. The success of Ford, and its relatively inexpensive automobile, was based on mass production of a single, basically unchanging, product.

Title: Labor Demand Effects of International Outsourcing: Evidence from Pant Level Data Author: Holger Gorg and Aoife Hanley

We examine empirically the effect of international outsourcing on labor demand at the level of the individual plant. We do so by estimating a dynamic model of plant level labor demand, using a Generalized Method of Moment estimator. We use plant level data for Irish Electronic sector, an industry that has expanded rapidly over the last decade and that has witnessed significant off shoring activity. Our result suggest that, in the short run, there are significant reductions in plant level labor demand, which we attribute to the use of international outsourcing. There appear to be stronger negative effects from outsourcing of materials than services outsourcing. The purpose of this paper is to examine empirically the effect of international outsourcing on demand for labor at the level of the individual plant. As pointed out above, workers' concerns about possible job losses are often countered with the argument that off-shoring can increase employment in the country. It is, however, usually not made clear whether these new jobs

24 occur in the same plant in the short-run, or whether jobs are lost in one plant and at some stage in the future other jobs are created in a completely separate plant. Our paper contributes to an existing and growing literature on the employment effects of international outsourcing. The issue that has attracted most attention thus far is whether offshoring has contributed to a shift in labor demand for different types of workers and consequently a change in the wage differential between high and low skill wages.

Title: Outsourcing, Imports and Labor Demand Author: Martin Falk

This paper examines the effects of purchased services and imported intermediate materials on the labor demand for different skills in German manufacturing sectors. We derive and estimate a factor demand system based on the generalized Box-Cox cost function nesting both the normalized quadratic and the translog functional form. We find that the impacts of output and capital growth are more important in explaining the demand for heterogeneous labor than substitution effects between labor and non labor inputs. Similarly, the increasing use of both imported material and purchased services is a consequence of output growth rather than input substitution. Over the last decades manufacturers outsourced service inputs and shared resources with competitors. As a result service inputs have been the fastest growing input factor in German manufacturing, followed by imported materials and highly skilled labor. Based on inputoutput tables intermediate services and imported materials both at constant prices rose by 4.7 and 4.2 percent per year between 1978 and 1990. Most of the rise in intermediate services as

25 a factor of production in manufacturing can be attributed to the growing importance of business services representing 45 percent of total intermediate services in 1990 compared to 35 percent in 1978. Within business services temporary personal supply services, consulting, legal service, accounting seems to be the fastest growing business services. For instance, between 1978 and 1998 the number of workers in personal supply services increased by 11 percent per year, the highest employment growth rate among all business service industries.

Title: Service outsourcing, Productivity and Employment: Evidence from the US Author: Mary Amiti and Shang- Jin Wei

This abstract estimated the effects of foreign outsourcing of services and material inputs on manufacturing employment and productivity in the US between 1992 and 2001. The results show that service outsourcing has a significant negative effect on employment using disaggregated industry data (450 industries). Service outsourcing reduced manufacturing employment somewhere between 0.4 and 0.7 percent per year during the period 1992 to 2001. However, at a more aggregated level (100 industries) this effect disappears. These results imply that importing service inputs may lead to a substitution effect away from labor but increased demand in other industries offsets this effect. We find that there are benefits of service outsourcing in the form of higher labor productivity. The outsourcing of services has received a huge amount of attention in the media and political circles in recent months, largely because media reports seem to equate outsourcing with job losses. In just five months, between January and May 2004, there were 2,634 reports in U.S. newspapers on service outsourcing, mostly focusing on

26 the fear of job losses. But outsourcing, let alone its consequences, does not appear to be widely understood. The dictionary defines it as the procuring of services or products . . . from an outside supplier or manufacturer in order to cut costs. However, it is not clear what is meant by outside. Some people interpret it to mean outside the firm, and others outside the country. Media and political attention seems firmly focused on international outsourcing, even though domestic outsourcing is also common. Firms based in industrial countries that outsource services have been accused of exporting jobs to developing countries, with call centers and computing services in India the most frequently reported examples.

Title: Sectoral Adjustment of Employment: the Impact of Outsourcing and Trade at the Micro Level Author: Peter Egger, Michael Pfaffermayr, Andrea Webber

This paper analyses the effects of trade and outsourcing probabilities of employment between sectors, using a dynamic multinomial logit framework with fixed effects. The data contain individual Austrian make workers over the period 1988-2001. Our results strongly support the view that international economic forces are important determinants of labor market turnover. Increase in imports, terms of trade and, especially, in the outsourcing share negatively affect the probability of staying in or changing in to the manufacturing sector, even more so for industries with a comparative disadvantage.

27 In recent publications it has been argued that the change of the skill structure of industrial employment is caused by biased technical progress rather than by increasing international trade with low wage countries. However, in linking prices for final goods with prices of primary factors, most empirical studies have only dealt with international trade in final goods and have thereby neglected the impact of international outsourcing. In this paper it is argued that outsourcing can be understood as a substitution of imported intermediate inputs for domestic value added, and that such substitution may have an impact on the skill structure of domestic employment in favor of skilled labor. The empirical evidence for German manufacturing industries supports this hypothesis. Over the past two decades, unskilled workers in high-income countries have incurred losses in their economic fortunes relative to skilled workers, either in terms of wages or in terms of employment. The traditional neoclassical trade theory offers two conflicting hypotheses which could explain this development: increasing trade with low wage countries (Stolper-Samuelson effect) or exogenous technical progress biased against unskilled labor. The majority of recent empirical studies on this subject has argued that biased technical progress rather than international trade per se is the main factor. To substantiate this conclusion, perhaps the most often used approach is a regression of goods prices on factor income shares ("Baldwin-Cain approach"). This approach is based on the familiar 2x2x2 Heckscher-Ohlin model with zero-profit conditions and makes it possible to calculate those (hypothetical) relative factor price changes mandated by world market price changes that are consistent with full employment.

28

Title: Making The Most Of Opportunities by Challenger, John A. A speech Author: John A. Challenger

CEO of Challenger, Gray & Christmas Inc., delivered at the Kelly Services Executive Forum in Detroit, Michigan on September 17, 2004. Discussion on the issue of outsourcing jobs in the global economy; Use of computer technology to import services from the U.S. to other countries; Information on job shifts in a free-market economy. You can't get very far in talking about a global economy without addressing the issue of outsourcing jobs. Outsourcing is a highly-charged and frequently-covered topic of the media and of politicians. And sometimes it's difficult to separate the wheat from the chaff the reality from the hype. So I'll try my hand at that. And along the way, I'll dispel a few popular myths about outsourcing. As we see the sails of the global economy on the horizon, will we screen out what we don't understand, or accept, and just go about our business? Or will we anticipate what's happening and adapt ourselves to a world that is changing right before our eyes? The answer will make all the difference in making the most of the opportunities that lie ahead. Countries like India and China have vast pools of skilled and well-educated workers available to U.S. and other countries. The first trend is for U.S. companies to source jobs abroad rather than at home. The second trend is companies taking advantage of advanced computer technology to import services from other countries, like having radiologists in Bangalore read X-rays taken in Boston.

29 Companies using outsourcing will be more attractive to venture capital firms because these firms will see a faster return on their investment. If a company can bring its products to market faster and cheaper through outsourcing, it will increase its chances to win the competition for limited funding dollars. One group estimates that the value of business process outsourcing will rise to $243 billion by 2007, up from $1.3 billion in 2002 an astonishing increase. Forrester Research estimates that 830,000 service sector jobs will move offshore by 2005. And by 2015, the number of jobs relocating offshore is expected to reach 3.4 million. But this is only a small percentage of the total number of jobs constantly being created and destroyed within the American economy. We are expected to create about 33 million jobs in the U.S. in the next seven years. And we're worried about 3.4 million jobs that others have gained and we haven't.

Title: Dell's Hiring BingeAbroad Author: Park, Andrew

Reveals that in the annual report of Dell Computer Corp. filed with the U.S. Securities & Exchange Commission on April 12, 2004, the company disclosed that for the first time it has more employees overseas than in the U.S. Number of workers stationed in other countries as of January 30, 2004; Percentage growth in the sales of personal computers in the fourth quarter in China; Disparity between Dell's workforce in the U.S. and abroad. Of 7,000 jobs it added in 2003, only 1,000 were in the U.S. The PC giant now employees more workers overseas than at home. The disparity between Dell's workforce in the U.S. and abroad is likely to keep widening. The PC business'

30 ruthless economics will force it to continue outsourcing as a way of lowering costs. And Dell has set its sights on increasing its worldwide PC market share to 30% or 40% over the next few years, from 16% today. Much of that growth will have to come in foreign markets.

Title: Jobfull Recovery Author: Wesbury, Brian S

If you read closely, those who fear outsourcing base their concerns on a zero sum model of growth. These worry warts act as if the U.S. is the only consumer of goods and services in the world. Therefore, anything that is produced overseas is a dead weight loss for America. Chinese and Indian workers want to watch U.S. movies, talk on cell phones made by Motorola, surf the web, and play video games. While a global world economy is tough to get our arms around, demand follows supply as sure as night follows day. As living standards rise in China and India, the U.S. does not lose--it wins. Free and open trade is a win-win proposition. Most importantly, U.S. providers of goods and services keep prices down for consumers and increase profits for shareholders by sourcing products from overseas. These "saved" resources are then used to produce new goods and services and develop new technologies to benefit U.S. citizens. That's the way markets work.

Title: And Away They Go

31
Author: Stokes,

Bruce

Discusses the offshore outsourcing of U.S. jobs overseas which concerns the government and the business community. Benefit of outsourcing to the U.S. economy; Increase in unemployment in the U.S. due to the outsourcing of jobs overseas; Economic debate on offshore outsourcing; Criticisms on the theories of economists on free trade; Forecasts on offshore outsourcing of U.S. jobs; Factors which may affect the increase in offshore outsourcing of U.S. jobs. In the span of mere weeks, the issue of companies' moving U.S. jobs overseas particularly white-collar, service-sector jobs has become a political and policy tempest, catching Washington unsuspecting and unprepared. After slowly gaining energy in the doldrums of America's jobless economic recovery, "Off-shoring" was then whipped into a storm by the heated rhetoric of the Democratic presidential primaries. And now the issue has fanned protectionist flames on Capitol Hill, whipped up hyperbolic press attention, and sparked transparently self-interested bluster from the business community, the economics fraternity, and organized labor. Anchored in a wider campaign dialogue about the health of the economy, offshoring--particularly the movement overseas of such service jobs as computer programming, call-center staffing, and X-ray reading--has become a national worry. But the "facts" about off-shoring are highly speculative, based on admittedly imprecise projections of poorly documented recent trends. The issue is acutely technical, and, above all, emotionally and politically charged. Off-shoring has indeed been going on for some time. American Express first moved some of its business-processing

32 operations to India in 1993. General Electric began to offshore some service jobs in 1998. Other corporations soon followed the trend, as the widespread availability of low-cost computers, combined with companies' adoption of standard software packages, effectively turned business processes into digital commodities that could be moved anywhere in the world. The advent of the Internet, a hundredfold increase in telecommunications bandwidth capacity, and telephone deregulation in the United States combined to lower the communication costs of offshore outsourcing. And, of course, labor costs at the other end are just so much cheaper. Hungarian computer programmers start at $4,800 a year; American programmers start at $60,000.

Title: A not so simple path

Author: Teicher,

Stacy A

Sending tech jobs overseas hasn't been as easy as some firms believed. But they persevere. It seems inevitable: American service and technology jobs are going the way of manufacturing jobs - that is, they're being sent far, far away. But it's not happening as massively or as quickly as the hype might make you believe. About 1 in 20 Fortune 1000 companies already spends half its IT budgets abroad, according to a new report by Forrester Research in Cambridge, Mass. And programmers in India can be hired at one-tenth the salary of programmers here. Yet labor-cost savings aren't the only factor firms need to consider before jumping on the outsourcing bandwagon. And many still wonder if the benefits surpass the risks. Some Americans complain that too many foreigners are let in on special visas and

33 that after they gain experience, they might set up services in their home countries and offer labor rates that Americans can't compete with. But others counter that without these immigrants, many start-ups that have created jobs here wouldn't exist.

Title: U-turn: Users in control

Author: Lundquist,

Eric

Dell Corp. has redirected some of its customer support lines from India back to the United States at the instigation of customers. Large technology users, such as Wal-Mart, that survived and thrived through the downturn now find themselves in a position of strength at the bargaining table. While the economy is rebounding, the memories of costly unused technology products linger. The news that Dell is rerouting some service calls back to the United States from India following customer complaints garnered a lot of attention. The outsourcing option is stronger now than in the past. Many tech staffers have seen the ranks of their colleagues decimated. Knowing that making a poor vendor choice could give rise to their own job being outsourced, customers are exerting greater caution in their buying decisions. The news that Dell is rerouting some service calls back to the United States from India following customer complaints garnered a lot of attention. A week earlier at Comdex, Dell held a press conference at which company officials talked about their commitment to corporate customer service. Dell's continued growth in the corporate market depends mightily on its ability to bring the same efficiencies to service that it brought to computer manufacturing and distribution. The move back onshore from offshore could spur other companies to re-evaluate exactly what they gave up

34 when they sent operations offshore. Dell did the right thing in paying attention to complaints instead of trying to fault customers.

The news that Dell is rerouting some service calls back to the United States from India following customer complaints garnered a lot of attention. A week earlier at Comdex, Dell held a press conference at which company officials talked about their commitment to corporate customer service. Dell's continued growth in the corporate market depends mightily on its ability to bring the same efficiencies to service that it brought to computer manufacturing and distribution. The move back onshore from offshore could spur other companies to re-evaluate exactly what they gave up when they sent operations offshore. Dell did the right thing in paying attention to complaints instead of trying to fault customers.

Title: The new geography of the IT industry

Author: The Economist

Consider three snapshots of the information technology (IT) industry today. First, look at the center of the business at the turn of the century--Silicon Valley. Parts of this high-tech region to the south of San Francisco, which were buzzing with activity only three years ago, are coming to resemble an industrial wasteland. Then move north to Redmond, near Seattle, the home of Microsoft. The giant software firm appears to be defying gravity--because it controls two monopolies, Windows and Office, each generating some $10 billion in annual revenues, with operating margins of more than 80%. But the company seems to be running out of bright ideas

35 about where to invest its money. Microsoft has almost $50 billion of cash in the bank. In January, it announced plans to pay a first-ever dividend of $870m this year, a figure that many now expect to be raised, with some talking of amounts as big as $10 billion. For a third snapshot, turn to Electronics City, near Bangalore in India, home of the development centre of Wipro Technologies, an Indian IT services giant. Welcome to the new geography of the IT industry, one that is no longer centered on Silicon Valley. It is the result of two distinct shifts that are reshaping the business. For some time, its center of gravity has been moving away from the Valley to places such as Redmond, Austin, Armonk and Walldorf (in Germany), where four industry leaders--Microsoft, Dell, IBM and SAP, respectively--are based. Using offshore workers helps companies to remain competitive and focus on what they are really good at. Having development centers in India and China allows them to maintain margins and so create new jobs (in the Valley or elsewhere), says Alfred Chuang, chief executive of BEA, another Silicon Valley software firm. Today, the IT industry is no longer dominated by start-ups, innovation and high-end equipment. Customers are more interested in consolidation, integration and execution than in the next big thing. And here the Valley's rivals have a competitive edge. SAP offers goodenough CRM programs as part of its suite of business software. Dell, boasting a superefficient supply chain and increasingly powerful machines built with commodity parts, has become the downturn's hardware star. More recently, the bigger firms have started to move offshore in a significant way. In June, SAP announced that it would double its workforce in India to 2,000 within three years. Last week Oracle, a Silicon Valley software firm that aspires to be bigger than Microsoft, announced that it is soon to double (to about 6,000) the

36 workforce at its two Indian research centres, one of them in Bangalore. Microsoft too recently announced plans to expand its IT operations in India. Not surprisingly, the main reason for this shift offshore is cost control. With business slow and prices under pressure, firms are looking for ways to produce their wares more cheaply. Developing countries such as India offer plenty of opportunities to do just that. A programmer in, say, Bangalore costs an American firm about one-quarter of what it would pay for comparable skills at home. Add in the extra infrastructure and telecoms costs, and the savings are still in excess of 30%. Technology also plays a part. High-speed data connections and software tools have made it cheaper and easier for geographically dispersed teams to collaborate.

Title: Trends Now Shaping the Future

Author: Cetron,

Marvin J. and Davies, Owen

Discusses trends in the future of science and technology around the world. Impact of new technologies on U.S. job creation from 2002 to 2004; Increase in the total U.S. federal outlays on research and development; Advantage of the advances in transportation technology to travel and shipping; Role of genetic research in accelerating advances in medicine and in the growth of medical knowledge. the impact of new technologies breakthroughs and their unexpected consequences continue to play a major role in shaping the way we work and manage our institutions. New technologies are surpassing the previous state of the art in all fields, and technological obsolescence is accelerating. Computers are fast becoming part of

37 our environment and dominating the economy and society in the process.

Title: Outsourcing, firm size, and product complexity: Evidence from credit unions Author: Yukako Ono and Victor Stango

Outsourcing involves firms' choosing to procure goods or services from other firms rather than producing them internally. Outsourcing has become increasingly global in scope, meaning that firms that outsource are often moving production and jobs across international borders. Firm size may be important because it affects the scale at which a firm can produce internally if it chooses not to outsource. Scale economies are widely held to influence firms outsourcing decisions, particularly for functions that have relatively high fixed costs. Many technology-based functions, such as data processing, fall into this category because they impose significant fixed hardware, software development, and training costs.

Title: Outsourcing A CIOs Perspective Author: Oakie Williams

As global competition grows fiercer; companies continue to look for ways to increase their competitive edge without jeopardizing their profit margins. Today, corporations, large and small, are starting to realize the competitive advantage that information technology can bring to a company. These companies are also realizing

38 that to stay current with technologies requires a great deal of effort, risk, and expenses. This is one of the primary reasons why Chief Executive Officers and Chief Information Officers are considering outsourcing as an attractive alternative. Regardless of all the positive reports you may hear about outsourcing, it is not for everyone. Companies that view Information Technology sot of strategic function, or that have annual Information Technology cost if less than 1% of sales, or are not willing to engage in a long term partnership agreement will most likely not be successful in securing a profitable and manageable outsourcing agreement. For companies that do not fir these criteria, it is most likely that an outsourcing agreement could be viable alternative for their strategic direction. There are many reasons you may want to outsource. The reasons vary from one company to the next, but the majority of companies that already have outsourced see the major benefits of an outsourcing agreement as: Reduction of risk, Center of expertise, Resource availability, Cost savings. While these are just a few benefits of outsourcing, they are the areas in which any Board of Directors would be most interested. This book identifies key elements that can be used to assess the feasibility of securing a successful, profitable, and manageable outsourcing agreement. It provides a convincing case that even of the final decision is not to outsource, the result of the process will identify potential business improvement opportunities.

Title: Shaping the IT Organization Author: Ian Gouge

39

More and more, the shape of IT organization is critical to business systems delivery, yet all too often this definition is approached in a haphazard fashion- often based on old theory and out-dated experiences rather than being moulded to the realities of the world in which we work. Shaping the IT Organization considers how one should go about the moulding of an IT function to ensure effective output from the resources within that organization. It focuses on understanding precisely the elements and challenges within such a definition. This book allows IT professionals and others to think about change/ choice in a thoughtful, structured way. It contains the essence of what IT is about in an organization.

Title: Information Technology and Industrial Competitiveness: How IT Shapes Competition Author: Chris F. Kemerer

Information Technology (IT)the field that links computer and communications equipment and software is transforming the way modern business is done. Examples of factors leading these changes are rapidly decreasing costs of computer hardware, government de-regulation, and the knowledge to how to employ Information Technology successfully. These have all led to the increase of ITs effects on existing markets, and, in the process, are creating entirely new markets. This book explores a variety of advances in IT by a group of researchers who are at the cutting edge of this research. Moreover, the book examines these innovative

40 developments in terms of the Information Technology field and its effects on modern business. It is becoming increasingly apparent that IT is critical to success in todays competitive marketplace. As a result, this book examines a host of emerging a host of emerging effects at work in these developments and seeks to make sense out of these counter-acting, sometimes multiplicative, effects which can become obstacles for managers who whish to develop competitive applications of IT.

Title: Business Models: A Strategic Management Approach Author: Allan Afuah

Most firms are in business to make money, and business models are about making money. It is therefore no surprise that one of the most common phrases in the vocabulary of executives, entrepreneurs, consultants, venture capitalists, analysts, individual investors, and scholars of management is business models. It is also no surprise that in the functional areas of business schools from accounting to finance, from entrepreneurships to marketing, from management information systems to strategy, from organizational behavior to operations management the phrase business models is also common. Yet, until now, there ha been no textbook that is dedicated to business models. Business models: A Strategic Management Approach focuses on business models. In it, I draw research on research in strategic management to provide an integrative framework for exploring how to formulate and execute profitable business models.

41 Existing strategy textbook lack two essential ingredients for serving as texts for business models. First their focus is on broad strategy concepts, and they do not give the money making aspects of strategy and profitability. Second they do not explore some key factors that play a critical role in firm profitability. Dr Afuahs research focuses on understanding the determinants of firm performance in the race of disruptive technological changes, such as the internet. In contrast to typical business technology research endeavors, Dr Afuah works to delineate how, when and why a technological change in a firms supplier, customers, complementers and related institutions erodes or reinforces the firms competitive advantages, rather than exploring the direct impact of the technology on the firm itself.

Title: Beyond The Information Systems Outsourcing Bandwagon Author: Mary Cecelia Lacity

As the information systems fields mature, there is an increased need to carry the results of its growing body of research into practice. The present volume is the second books by Mary Cecelia reporting on an extensive and careful series of field studies into the reality of the information services outsourcing experience. In this volume, the author first reviews the lessons learned from their studies on information system outsourcing and then present the other face of this important management decision, insourcing. The author does so through six case studies of companies who chose their internal bid for information system services and succeeded in achieving significant savings. These are important lessons to be learned from these successful

42 insourcing decisions, not the least of which is the need to consider the information system sourcing decision from broader organizational perspective of selective sourcing. Selective sourcing is a process of considering multiple stakeholders, strategies and competencies that combine to make for the successful sourcing on information services. Lacity presents a phased methodology for selective sourcing that encompasses the entire process and locates it in ongoing management practice. This book will prove invaluable to managers responsible for information services as well as those responsible for and concerned about future of their firm more generally.

CHAPTER THREE WHAT IS THE HISTORICAL BACKGROUND OF OFFSHORE OUTSOURCING IN GENERAL AND AT DELL INC.?

The origins of outsourcing

43

Although the concept of outsourcing has developed over the last century, according to the Oxford English Dictionary the earliest use of the verb to outsource appeared in the Journal of Royal Society of Arts as recently as 1979. An article about the British auto industry contracting out engineering design work to Germany stated: We are so short of professional engineers in the motor industry that we are having to outsource work to Germany.9 The earliest use of the word outsourcing in the United States was traced electronically to the Harvard Business Review in 1980.10 When one talks about outsourcing, insourcing and Offshoring comes to mind. Offshoring is only another word used to refer to outsourcing, according to Oxford English Dictionary, offshores first uses can be traced to 1895 and it only means moving away from the shore. Insourcing is what most people refer to the opposite direction of outsourcing. Since 1979 outsourcing has retained its basic definition, but has evolved to encompass a greater array of services. The most recent significant change came in at the beginning of the twenty first century. In just five months, between January and May 2004, the media has drawn an enormous amount of attention on outsourcing of services. In the United States only, over 2,630 articles were published focusing on the fear of job losses because of outsourcing. This

Oxford English Dictionary, Online ed., s.v. to outsource, Available on-line from http://dictionary.oed.com. Mary Amiti and Shang-Jin Wei, Fear of Outsourcing: Is it justified?. (London: Centre for Economic Policy Research, International Trade Program, October 2004), no. 4719: 4.
10

44 fear was not limited to the United States only. In the United Kingdom, over 350 reports on outsourcing appeared on its newspapers.11 The figure below plots a quarterly count of news stories on international outsourcing from the first quarter of 1991 to the first quarter of 2004.12

Figure 3-1. News stories on outsourcing.

Source: Fear of Outsourcing: Is it Justified? Mari Amiti

Outsourcing yesterday and today

11 12

ibid., 2. ibid., 30.

45 Offshore outsourcing is one of the most complex business practices in our era. The popular view of offshore outsourcing tends to think of it as a way of paying lower wages at lower quality work. Businesses which choose to offshore outsource think of this phenomenon as a way to get better quality, in shorter times, at lower costs.13 As competition continues to grow stronger between labor sources in developed and developing countries, the search for quality work at lower prices remains the main goal behind outsourcing decisions. The business media has recently devoted substantial coverage to understand why the topic of outsourcing is making noise not only in corporate America, but also amongst the general public. CIO Insight, a sister publication of eWeek, has just completed an outsourcing survey. The results reveal that only 20 percent of companies that outsource claim to use outsourcing to gain competitive edge, while 68 percent do it to save money.14 This survey proves that even though views on the subject differ, one must remember that in business the end result is what counts. Economic, political, and technological factors shape the business world and therefore compel organizations to find solutions to reduce their costs in terms of labor, speed, and production.15 Offshore outsourcing is categorized as a powerful means to a more powerful end. Successful firms are always searching, identifying and driving business process improvement through the application of new sources like, innovation, quality, speed, all at a reasonable prices. If efficiency is achieved whether in the United States, Asia, or South

Bob Evans, Business Technology Offshore Outsourcing: A Means to An End, Information Week (July 28, 2003), Available online from: www.informationweek.com/949/evans.htm: 1.
14 15

13

Stan Gibson, Outsourcing grows up, Eweek (March 21, 2005): 37. ibid.: 37.

46 America, the location is not that important. Being able to answer customers demand at competitive prices is the bottom line. While this is not totally true; media reports may give us the idea that outsourcing is about industrialized countries like the United States contracting out services from developing countries like India. The table below lists the value of imports for both Computer Information Services and Business services (any service that is not computer or information related) for 2002, as it is the latest year where data was collected. Its purpose in this section is to show that not only large industrialized countries outsource more than other economies. The top outsourcers for business services in dollar amounts are the United States ($41 Billion), Germany ($39 Billion), followed by a group of countries where the trade is averaging the same number. As seen on the table, India appears in as one of the active outsourcers totaling almost $12 billion, even though it is seen as the host country. For computer and information services, the top five outsourcers are Germany, United Kingdom, Japan, Netherlands, Spain.

47 Table 3-2 Absolute outsourcers of 200216

Source: IMF, Balance of Payments Statistics Yearbook.

To be able to host and answer the requirements of outsourcing, cheap labor countries have to acquire higher level of education, training and more to be technologically competitive. In 2001, with a budget of about $60 billion, China had taken third place in the worlds Research and Development after the United States with a budget totaling $282 billion, and Japan with a budget totaling $104 billion17. These figures will continue to grow in developing countries, as technology becomes a hosting requirement for offshore outsourcing. Even though organizations in Japan, the United States, and Germany are investing billions of dollars on Research and Development, they have started to shift their production models to countries where wages are more attractive. To many businesses this concept is

16 17

International Monetary Fund, Balance of Payments Statistics Yearbook (2003).

Marvin J. Cetron and Owen Davies, Trends Now Shaping the Future: Technological, Workplace, Management, and Institutional Trends, The Futurist (May-June 2005): 38.

48 very attractive. It allows them to shift wasted energy on what is essential to the company and pay more attention to the business of the enterprise itself18. The quest for cheaper labor and production costs has led many companies to offshore some or most of parts of their production to more economical labor markets. High demand in technologically-educated workers has created a flux between cheap labor countries and developed countries. International students graduating from American schools are perceived as taking away jobs from local American graduates or else as bringing cheaper labor in the United States and benefiting the countrys economy.19 In the past, few of theses American-educated foreign students would return to their countries, creating a brain drain out of the developing world. With the rise of outsourcing, however, these students can return home with the latest cutting edge skills and find employment in the offshore market.

Advantages and disadvantages

Outsourcing has identified several potential benefits. By outsourcing to developing countries like India and China, companies in developed countries can benefit from the low wages and infrastructure facilities available in those lands to reduce operational costs and capital expenditure. Outsourcing gives a chance to companies to utilize skilled and trained manpower without incurring training and hiring costs. Another positive effect of outsourcing

Mylott III, Thomas R., Computer Outsourcing: Managing the Transfer of Information Systems, (New Jersey: Prentice Hall, 1995): 26.
19

18

Cetron and Davies, 39.

49 is the access to developed technologies available in offshore destinations. Small, medium and or large companies can use those technologies at very affordable prices, helping them progress at a rapid speed. Companies can benefit from an increased productivity due to the big amount of offshore employees at lower costs. Outsourcing can help a company gain market share and increase its customers satisfaction levels. Outsourcing in this case can help the company maintain lower prices with better service, helping them stay abreast from competition20. Companies who outsource can save up on taxes by selecting the right business partner destination. Outsourcing also comes with negative effects and they are bound to increase in the future. Those drawbacks are still not clear as of now, but rest assured they will emerge eventually as time goes by. Offshoring jobs to developing countries create instability within the first world nations. Employees in developed countries are less productive as they feel threatened by loosing their jobs. Those employees can present a major threat to the company they work for. They can threaten to sell confidential information to the competitor or sell their labor service to the company who is willing to pay more or offer better job stability.21 Many outsourcing contracts are structured for long periods. In a world that is categorized by a fast moving technical and business change, long term contract may not be the appropriate solution. A contract that made sense three years ago may be obsolete in the future.

Outsourcing Advantages, Available on-line from: http://www.bizbrim.com/outsourcing/outsourcingadvantages.htm.

21

20

ibid.

50 A companys biggest fear is to loose its competitive advantages to other companies in the same industry. Outsourcing does not guaranty that security. It is a big concern for many companies to have a situation where the business vendor they have selected to collaborate with competitors or set up its individual branches with better services. There are other drawbacks that can hurt a business while using outsourcing. Loss in the product/service competitiveness increased spending, and emergence of competitors.22 When a company decides to outsource a function or a product, some other costs may emerge without its knowledge (e.g. training costs, travel expenses, etc). While having someone produces its products, a company may loose its competitive ability. Also there are many business partners and outsourcing companies helping new business gain market share, many firms can start fearing new companies entering the industry.

Dell Inc. in the computer industry

These new technology trends have created a new type of business. Service firms were expanding and were satisfying a new type of demand. One clear example of this trend is Dell, Inc. Dell Inc.s mission statement: to be the most successful computer company in the world at delivering the best customer experience in markets we serve. Through effective and strategic community partnerships, Dell supports educational and literacy services programs that address the critical and most basic educational needs of its neighbors in

22

ibid.

51 Central Texas and Middle Tennessee - prerequisites to success in the digital world23. Like Microsoft, Dell Inc. believes that everyone should have the ability to access, use and understand technology. Dell Inc. was founded by Michael Dell in 1984 on a simple concept: selling directly to customers by eliminating the middleman or intermediate outsourcing, dell focused outsourcing on production of goods and aftermarket services more so than its competitors. This is what makes Dell different than its competitors and the reason why I chose to use Dell Inc. as the case study. Dell Inc. conducts operations worldwide and is managed in three geographic areas: the Americas, Europe, and Asia Pacific-Japan regions. Few people can disagree with the statement that Dell Inc. was the fastest growing computer company in America even during the time where sales in the PC industry was low. While Dell Inc. was still growing strong during those though times, its competitors were forced to cut down on Research and Development budgets in order to compete and enter a price war, thus significantly slowing down the industrys pace for improvement24. The price was has somehow benefited the market. Struggling companies in the same industry were forced to exit the market and make room for bigger and competent competitors. Dell Inc. is an impressive competitor to other market giants, IBM and HP, not only in Personal Computers, but also increasingly in other areas including televisions and computer peripherals (e.g. printers, handhelds, and digital cameras). Dell Inc. differentiation is based on a superior design, quality, service and functionality. In cost leadership, Dell Inc. distinguishes itself to be the best low cost producer in its industry, offering quality home
Mission Statement of Dell, Inc., Available on-line from: http://www1.us.dell.com/content/topics/global.aspx/corp/foundation/en/literate_comm?c=us&l=en&s=corp.
24 23

Robert Paul Leitao, Double Take on Dell, The Mac Observer (October 1, 2002).

52 computers for as low as $300. Dell Inc. is able to use economies of scale that companies around the world are struggling to reach to be able to grow and have better operational margins. Customers can benefit from such low prices because Dell Inc. does not have retailers, resellers, middlemen, or intermediaries that increase the costs and the delays of equipments. Dell Inc. describes itself as a personal technology company providing a combination of the latest computer hardware, communication, applications, training, and service. Dell Inc.s business practices are different than their competitors. Dell Inc.s direct sales model focuses on low margins and high turnover25. Dell Inc. is one of the few companies in the world that can customize computers to its customers needs in a very competitive speed. The company can best understand customers needs, and provide them with the most effective computing solutions to meet those needs. Dell Inc. emphasizes lowcost production through a direct sales model. Dell Inc. was the proud company to be the first in the industry to sell personal computer built to order directly to customers without incurring inventory costs by applying the efficiencies of the Internet to its entire business. Known to be one of the more active outsourcing companies around, Dell Inc. is always looking for more efficient means for building, distributing and servicing its growing product line.

Dell Inc. and outsourcing

Andrea Hass, John Meyer, Steve Sanders, and Bryan Watts. Gateway Computer: The Cows Come Home, Available online from: http://webuser.bus.umich.edu/Lundholm/mywebs/valuedog/ Gateway%20Final%20Report%20Final.doc: 2.

25

53

While Dell Inc. added 7000 jobs in 2003, it had only 1000 jobs in the United States. Dell Inc. currently employs more than 7000 people in India. Dell has one call center in Hyderabad, another one in Indias technology capital, Bangalore, and the latest one in the northern state of Punjab; providing Dell Inc. with customer care, technical support and application development. Outsourcing jobs to India does help Dell Inc. save between 40 to 50 percent on costs.26 Dell Inc. employs 6,600 people in the Asia Pacific region, 6,900 in the in the Americas outside the US (Mexico, etc), 10,300 in the Europe Middle East Africa region.27 In quest for lower costs, Dell Inc.s disparity between its workforce in the United States and abroad will continue to increase. Dell Inc. is looking forward to increase its worldwide PC market share to about 35% over the next few years compared to a 16 % market share for 2004. Dell Inc. is convinced this increase will come from its foreign markets.28

Dell to step up India hires, plans E.Europe plant, India Daily (March 21, 2005), Available on-line from: http://www.indiadaily.com/breaking_news/28846.asp: 1.
27 28

26

Andrew Park, Dells Hiring BingeAbroad, Business Week Online (April 14, 2004): 2. ibid., 2

54

CHAPTER FOUR WHAT IS THE RELATIONSHIP BETWEEN TECHNOLOGY AND INTERNATIONAL OUTSOURCING?

Technology and Outsourcing

55 The first person to become a billionaire because of outsourcing was the owner of Electronic Data Systems (EDS), a technology company.29 Although outsourcing has become preeminent in recent years, the practice got its start when the computer still had vacuum tubes and could only fit in a couple of floors in a building. Since then, technology and outsourcing have entered into a symbiotic relationship each improving the other. It is clear that outsourcings most powerful ally is technology. By the end of the twentieth century, technology engendered a complete change of business practices in the course of several decades. In the 1940s, product life cycle could last up to 40 years. In todays world, the average product hardly lasts a few years before a new revolutionary technology takes its place.30 The reason for this shift in product longevity and many other business factors is what is often referred to as the computer and information technology revolution. Computers are fast becoming integrated into all aspects of the corporate environment, rather than just existing as tools we use for specific tasks.31 The rise of the internet represents the most radical change to current business models. The internet not only has caused a communications revolution, but has also helped many organizations establish new businesses and products which answer customers demand in short time periods and at very competitive prices. Internet businesses require less capital then concrete firms because of the savings on infrastructure. The internet advancement also allowed less tech savvy entrepreneurs to create start up companies and reach a larger

29 30 31

Mylott III, 12. Cetron and Davies, 38. ibid., 38.

56 audience in equal or less time than a more sophisticated competitor.32 The realization of this potential led to the creation of many internet companies during the technological boom that was led by the popularity of the internet in the mid and late 1990s. Prior to the computer and internet technology revolution, the computer hardware industry had grown at 15% annually. In the late 1990s, computer growth accelerated well beyond that level due to the internet boom and later, due to the Y2K upgrades.33 As it made an improvement in the communication technology, the internet allowed services to travel by cyberspace and avoid physical, political, and often cultural borders. The Y2K scare was one of the less obvious, but important reasons why technological changes were so frequent in the 1990s. Information Technology (IT) companies were forced to become more innovative then ever, and created an amazing demand on IT products and services. Worried about the possibility of a global computer collapse that some systems may have encountered after the date change on January 1, 2000, IT companies invested large amounts of money on Research and Development to solve the problem. Having to spend so much money on IT innovations, firms then focused on labor cost reduction in all sectors. Developing countries like India and China emerged as two of the few countries where labor costs were advantageous and output was of a suitable quality. This is why most growth in outsourcing has occurred from the late 1990s onward. The IDC, one of the premier global market intelligence and advisory firms in the information technology and telecommunications industries, recently conducted an extensive

32 33

The New Geography of the IT industry, The Economist (July 19, 2003), 47. Hass et al., 3.

57 survey on the benefits of outsourcing,34 the survey focused on how customer needs for outsourcing have changed over the past few years. The figure below shows that in the past companies chose to outsource for lower IT cost reasons, followed by lack of staff, improvement in quality, and finally for faster time-to-market.

Figure 4-1.Initial reasons for outsourcing35

Source: Managing successful outsourcing relationships, IDC, www.stylusinc.com

According to the IDC survey, those trends have recently changed. Companies still highly value the lower IT costs of outsourcing, but now choose to outsource firstly because of the increased quality of outsourcing applications. The improved quality of applications, low IT costs, fast time-to-market, and reduction of headcount, strong continuity, and improved security are now all part of the decisions companies choose to outsource.

Managing successful outsourcing relationships, IDC, Available on-line from: http://stylusinc.com/Common/Concerns/Outsource.php,1. 35 ibid., 2.

34

58 Figure 4-2. Reasons companies choose to outsource36

Source: Managing successful outsourcing relationships, IDC, www.stylusinc.com

The reason for outsourcing

Computers have spread from government use to private industry, and are now increasingly considered a household item. A few years ago, companies were limited in computer acquisition because of the high costs of the machines themselves, as well as the tech staff and maintenance requirements. At the outset, areas such as the bank transactions of check and credit card processing fit well into the initial use of outsourcing. A single outsourcer who previously invested in and acquired a specific, expensive technology could utilize the same technology (software and hardware) to process the transactions of multiple banks. Whereas, the acquisition and use of the technology by a single company for its sole usage would have proven unprofitable, if not completely unaffordable. While an increasing number of computers are in use in corporate America, the reluctance to outsource means continued inefficiencies with in-house technology. Just as
36

ibid., 2.

59 was illustrated in the early failures of banks to self-process transactions by computer, companies continue to find that acquiring and implementing technology is not as easy as they predicted. Many companies make the mistake of only budgeting for the cost of software and hardware, and are not prepared for major failures, frequent problems and maintenance costs. While thinking they would save money by acquiring computers, companies can easily spend more money in fixing source problems and computer failures rather than making money out of technological investments. The acquisition of computer technology needs other investments to keep the actual machines running properly -- primarily software and hardware maintenance and proper user training. Regular training and employee evaluation in accordance with the rapid growth of the computer technology field has led many companies to rely on outside help to minimize the maintenance costs of technology. In buying computer services, companies can also avoid the expansive price for obtaining computer systems, computer software, computer professionals, and other related services or goods. In this manner, technology made the first move from the outsourcing of goods into using similar practices for services. Even though the cost of computer equipment has dropped significantly for the past few years, the demand for information system services like computer power and storage has increased sharply. Many companies that now operate with in-house hardware have been forced to outsource their computer services to improve their balance sheets. As information technology budgets expand and increase at an unpredictable rate, many companies struggle to project information technology processing costs from one year to the next. Top corporations employ smartest people to work for them and have the latest technology. Computer technology is volatile, and the way to keep up with this volatility is to

60 prioritize staying current with computer technology development.37 Companies with outdated skills risk several key business difficulties. First, there is the risk of increased costs. Old technology (software and hardware) is hard to maintain. Keeping an old system running can be more expensive than installing a new one. The second risk is defections of staff from the information systems department. If a business fails to keep computer expertise current, information systems professionals fail to reach full efficiency and often seek more dynamic environments. Therefore they are the first employees to leave the company for jobs which invest in state of the art computer systems and related training.38 Technology outsourcing has helped many companies be technologically competitive. Outsourcing customers are now capable of acquiring computer services rather than acquiring entire Information Systems departments, which are expensive to maintain in the long run. If companies already have Information System departments, they are now able to eliminate them or shrink them and invest the freed resources elsewhere in the organization. While thousand of small and medium companies were benefiting from outsourcing, large corporations were reluctant to outsource until the Rochester Quake; which is the period where Kodak, one of the biggest company in America, started using outsourcing. In the 1980s, Kodak did not have much use for information technology. Therefore it did not have a substantial IT reputation. In 1989, Kodak signed a contract with an IBM subsidiary to outsource a computer center; thus helping Kodak reduce its data processing cost by fifty percent. Many argued that Kodaks move was not going to benefit technologically advanced

37 38

Mylott III, 25. ibid., 26.

61 companies. Not long after, other companies noticed Kodaks strategic deal and the outsourcing trend started.39 In 1994, Xerox, one of the worlds leading IT companies, signed a 3.2 billion dollar outsourcing deal. This contract broke all the previous outsourcing barriers, and thus triggered a series of outsourcing deals by Xeroxs competitors. Following the initial Xerox deal, one IT or IS company announced a new outsourcing deal almost every week, each deal bigger and bigger than the previous one by other firms.

Following technology trends

As previously explained, computers and information technology are characterized by a high rate of technological change. Individual companies often have difficulty following this rapid pace of technological change. Many companies see outsourcing as the answer to stay competitive, so that they cannot follow technology innovations. Outsourcing allows companies to use the latest technologies without having to incur sunk costs on acquiring leading edge technologies, and improve quality and processing time service levels.40 While the outsourcing of products and services helps firms focus more on their core business and improve efficiencies while reducing costs, organizations are often faced with a fear of loss of control. Allowing third party companies to produce their products can drive parent companies to loose their competitive edge. This concern can be reduced or eliminated with proper planning and management of the outsourcing process.
39 40

ibid., 14.

Ann Bartel, Saul Lach, and Nachum Sicherman, Outsourcing and Technological Change, (Cambridge: National Bureau of Economic Research, February 2005), no. 11158: 2.

62 When a function is outsourced, there may be a risk that the outsourcing company may not maintain the same level of quality as previously done by the company itself. Since the company is shifting its production to an outside firm, the parent company has less control on the quality of the work performed by the outsourcing company. The latter may fail to duplicate the same quality as it was once done by the parent company. Outsourcing comes with other risks. When a function is outsourced to another agency, there may be a risk that the heritage institution will become too dependent on that agency; this is where the parent company starts loosing competitive edge. It is also important to look at the amount of control lost when deciding to outsource. When outsourcing loss of control is evident but if your company is not willing to let go of some control then you stand to have a lot of problems with outsourcing, which could be reason enough to decide not to outsource. Another problem with outsourcing is that it tends to increase the amount of employee turnover and the quality of work becomes more variable. The reason for theses occurrences is that contract employees are less company oriented and they are not as incentivized to work toward the overall success of the company. Successful outsourcing depends on careful planning and attention to detail, such as how the quality of the level of service is to be maintained or enhanced. As it is a big concern to parent companies to loose customers, companies like IBM and Sun Microsystems offer flexible multisourcing models41 to accommodate companies they work with. While having many solutions to choose from, companies considering outsourcing have now the option to choose from a variety of services that can better fit their needs.

41

Sun Microsystems Website, Available on-line from: http://www.sun.com/products.

63 Technology does affect labor composition. As computers become present in all aspects of business and around the globe, there is a higher demand for educated workers. Companies are investing more money on computers and Research and Development. As the world is becoming technologically structured, firms have a need for skilled workers with college and advanced degrees.42 To respond to this demand on skilled workers, schools offer new degrees or certificates to accommodate the increased number of people with the desire to get tech jobs. When a new innovation occurs, a firm has three approaches to choose from, depending on its managerial strategy and position in the market. First, the firm can continue producing in-house with the old technology. Doing so can set the company behind its competitors and loose market power within the next following months or years depending on the degree of the innovation. Second, the firm can adopt the new technology and continue to produce in-house. The latter can be costly in the long run because the company would need to adopt the new innovation every time there is a cutting edge development. Third, the company can outsource the service. The organization would then have the latest technology available to it without having to incur purchase and maintenance costs. The last option helps a company not only save money on acquisition costs, but also helps them save money on labor costs and on Research and Development.43

Catherine Morrison Paul and Donald Siegel, The Impacts of Technology, Trade and Outsourcing on Employment and Labour Composition, (London: Centre for Research on Globalisation and Labour Markets), no. 2000/10: 1.
43

42

Bartel et al., 2.

64

CHAPTER FIVE WHAT IS THE IMPACT OF OUTSOURCING ON THE OPERATIONS OF DELL INC.?

Dells venture in India

Dell, Inc. has taken a unique and forward-thinking approach to the application of outsourcing as it relates to the companys technologies. As one of the first American computer giants to implement outsourcing not only in the manufacture of goods, but also in the field of customer service, Dell pioneered off-shore business practices. Dells relocation of key customer support call centers to India marked one of the first ventures in the international outsourcing of services. This business decision carried great potential benefit, but was made a great risk because customer care was viewed as one of the companys core competencies. The positive results and also problems relating to Dells move to India reveal the most important factors in the outsourcing of technology. Measuring outsourcing can be difficult. A couple of major potential problems with outsourcing may occur, such as loss of quality product and the resulting customer

65 dissatisfaction. The predicted outcome of an outsourcing decision and the measurement of the end results can be very different. The reason for this discrepancy is because information on the outsourced function from the host vendor or country is not always readily available or reliable. Therefore, assumptions and forecasting often come to play and may differ from the reality of the data. The management of the outsourcing project must balance between underestimating and over-estimating the predictions with available data. In the off-shore outsourcing, such data are also dependent on the relation between the economies, political structures, and sometimes culture of the parent and host countries. This phenomenon is clearly illustrated by Dells venture in India.

Outsourcing to India

India has had a long-standing commercial and cultural relationship with the West that dates to the British colonial period. As a result, India has become the host country for many Western companies seeking outsourcing opportunities abroad. The prevalence of Englishspeaking, highly-educated, technologically-savvy Indians creates a suitable professional atmosphere for the business needs of Western, especially British and American companies. Whether such parent companies utilize outsourcing as a temporary solution, permanent strategy, or experiment for potential direct investment, India has experienced an influx of foreign business since the late 1990s. For several years, both the parent companies and host country benefited and experienced strong financial growth from their relationship. India became the poster child for off-shore outsourcing and investment among mid-range developing countries, and the

66 trend soon spread to other similarly-situated countries, especially in Asia. Now, however, the Asian outsourcing markets are beginning to show signs of over-saturation too much competition has driven down prices, stunted growth, and in some instances, depressed the quality of work. Although some outsourcing ventures continue to thrive in India, many projects are faced with an increasing potential of turning unprofitable. The original rising demand by Western companies for high-skill outsourced jobs in the 1990s was quickly met by increased education in the Indian labor force. This eventually led to higher employment costs and escalating costs of living. Such trends, coupled with the economic slowdown that began in 2001 hurt the economy in India. Even though salaries have risen by 20 percent yearly, revenues went down at a rate of 15 percent over the past 3 years.44 This disparity has threatened the stable growth of the Indian outsourcing sectors and has led to increased uncertainty amongst current and potential Western investors. Indian companies are therefore facing a new problem from their Western clients. Faced with rising Indian salaries, clients from the West have become increasingly demanding by requiring quality work with prompt delivery at cheaper labor costs. Parent companies have threatened to terminate contracts or dismiss services if products do not meet higher expectations. As a result of and adding to these business threats, cheap labor competition is rising in that region and other parts of the world. Lower outsourcing prices are making countries like the Philippines, Poland, and India struggle even more.45

Sonya Chopra, Outsourcing becoming unprofitable business a major new trend, India Daily (March 15, 2005): 2.
45

44

ibid., 2.

67 While prices are going up, wages continue to slide down, making India struggle to keep inflation under control.46 With the factors mentioned above, Indian companies struggle to keep employees happy. Both in the private and public sectors, India is in danger of losing more of its educated work force to jobs abroad, akin to the brain drain in the latter half of the twentieth century. With fluctuating wages and lack of job security, employee turn over is very high, leading to a shortage of well-trained, skilled workers. Average initial recruiting and training expenses cost Indian companies about US$1200 per employee (50,000Rs, Indian Rupee), and months until employee optimum productivity level.47 Each employee is therefore a sizable investment, and one only worthwhile if the demand for services exists. The burden of outsourcing success has thereby shifted from the parent company to the host company, as the latter is now more frequently responsible for training and the project structure.

Dissatisfied customers: Dell Inc.

As a leader in outsourcing, Dell Inc. is one of many American companies that moved production functions off-shore and contributed to Indias role as a magnet for global companies.48 Inspired by low costs, Dell Inc. moved its call centers for customer care and technical support to the Indian technology capital, Bangalore. This strategy was originally proclaimed an innovative success in the business media. According to many unsatisfied

46 James Mehring, India: Inflation Will Take A Toll On Growth, Business Week (July 19, 2004).
47 48

Chopra, 2. Dell to step up India hires, 1.

68 customers, however, off shoring Dells call centers and customer service has sharply degraded the quality of service of Dell Inc. Dell may or may not be saving money by outsourcing its tech support, because while it is saving on labor costs, it is definitely losing loyal customers as a result of the move. If comments recently posted on one source for public corporate awareness, the Business Newsforge forum, are any indication, the flow of customers away from Dell Inc. is only going to increase.49 Cutting costs is good business only up to a point. The situation of Dells customer service proves this statement. It remains to be seen if customers will stick with Dell (or other companies with off-shore call centers) as the quality they expect gets cut. Outsourced or not and short-term savings or not, declining tech support, which was once a core competency, is not going to prove beneficial to Dell in the long term.

Why customers are unsatisfied with off shore call centers

While companies are offshoring jobs in countries like China and India to decrease production costs, many argue that sending jobs out of the country does not make economic sense and may be costing companies more than they think. Call center failures in offsite locations occur to many circumstances. For Dell, the most frequent and ardent complaints involve the foreign accent of their customer care representatives.

Business Newsforge Forum, (October 2003), Available on-line from: http://business.newsforge.com.

49

69 An accent is defined as a way of speaking typical of a particular group of people and especially of the natives or residents of a region.50 It can be characterized as an acoustic sound that is different than the one of the people or group of people who lives in a region. A foreign accent consists of a deviation from the generally accepted norm of pronunciation of a language that is reminiscent of another language, i.e. the speakers native language. It has to be emphasized that such a deviation must be defined in terms of its perception by listeners who are native speakers of the respective language and not in terms of differences in articulation that may be instrumentally measurable.51 A study reveals that Indians speak very fast in their mother tongues. When they switch to English, the average Indian speaks 180 words a minute, compared to 120 words by the average American, 70 words by people in the South of the US and 90 words by a Briton.52 One reason that seems to be the most common to call center failures is the language barrier. Being routed to offshore representatives with poor accents or fast speaking patterns creates frustration among customers requesting assistance with product failure.53 American customers therefore often feel less well understood when communicating with offshore representatives. Acquiring new customers is one of the most challenging tasks company faces, and keeping customers satisfied is another. Customer dissatisfaction is an important concern. A recent Purdue University survey of call center users revealed that:
50 51

Merriam-Webster Dictionary, s.v. accent.

Matthias Jilka, The contribution of intonation to the perception of foreign accent, (On-line Research Paper, June 2000), Available on-line from: http://ifla.uni-stuttgart.de/~jilka/papers/diss.pdf. 52 Khozem Merchant, Indias call centres drop the fake accents: Training for operators is moving away from mimicking the customers, says Kohzem Merchant, Financial Times (December 8, 2003): 13.
53

Anne Kandra, Misadventures in Tech Support, PC World (April 2004): 1.

70 -- 49% said their overall experience was very important in shaping their image of the company -- 43% said it was somewhat important -- 63% would stop using the company after a bad experience.54

One other reason for call center failures is perceived incompetence. Indian representatives seemed misinformed of companys policies or products. American customers therefore feel cheated with unqualified foreign representatives reading off of scripts. While scripts can help representatives narrow down customer problems, they can also keep them from doing any critical thinking about the problem.55 Customers notice that foreign representatives do not know the products they are supporting, or the tools used to report the problems.56

Dell Inc.s response to customer feedback

After all the complaints that Dell Inc. received from unsatisfied customers, in 2003, Dell decided to bring technical support operations for two of its corporate computer lines back to the United States. Calls previously handled by Indian native speakers are now handled in Idaho, Tennessee and Texas, but not all calls have been routed back to the United

Anne Stringfellow, Off-Shore Call Centers, Global Vista (June 7, 2004), Available on-line from: http://www.enewsbuilder.net/thunderbird/e_article000268013.cfm: 1.
55 56

54

Kandra, 1. Maryfran Johnson, Colliding with Customers, Computerworld (December 15, 2003) 37, Issue 50:

20.

71 States.57 American protectionists who ardently lobby against the loss of U.S. jobs to foreign countries proclaimed the Dell transition as their first victory in a long campaign to bring jobs back home.58 The return of call centers to the US may have created domestic political support for Dell, but it has conversely escalated into diplomatic tension between India and the United States. In order to continue some outsourcing business and to better respond to customers demands, Dell Inc. decided to seek vendor companies abroad that would be capable of giving the right training to their employees. New requirements for off-shore host companies include training in American accents and thorough education on the background and functionality of products they would be supporting. Contrary to how training was previously performed, Dell now requires more training time for each call center employee in order to give the appropriate skills to the workers and not to rush in the learning process.59 Although it has suffered the consequences of the lack of due diligence and hasty implementation of its original off-shore project, Dell has emerged with a seemingly successful and sustainable model of technological outsourcing. In response to the underlying problems of call center outsourcing raised by the Dell situation, Indian professionals are increasingly concerned with the potential jobs losses in their country. Many members of the educated workforce are attending additional training classes to improve language and other skills. It is now increasingly common that current outsourcing students or employees even squeeze in such supplementary courses between

57 58 59

Cade Metz, Tech Support Coming Home?, PC Magazine ( February 17, 2004) 23 Issue 3: 20. Business: Loss in Translation; Offshoring, The Economist (November 29, 2003): 86. Merchant, 13.

72 classes or even during lunch breaks.60 Close to 120,000 trained IT professionals and 3 million other graduates are added each year to the Indian workforce, fueling the creation of 94,000 more jobs within this business year.61 As previously stated, outsourcing permits companies to bring down productions costs. On March 21, 2005, Dell Inc. decided to use its new, more thorough outsourcing model to push deeper into low cost countries. By hiring another 1200 staff for one of its call centers in India and building a factory in Eastern Europe, Dell renewed its commitment to off-shore labor. That same date, company founder Michael Dell opened the companys third call center in Punjab, India, which is expected to increase from 300 to 1500 workers within the year.62 As part of its off-shore expansion efforts, Dell Inc. publicly announced that it intends to continue to reevaluate and implement a global infrastructure as its international business continues to grow. Prior to this most recent expansion, Dell has established many technical and customer support centers and related operations in India, Panama, Slovakia, Morocco, China, as well as design centers in Brazil, Singapore, China, and Taiwan. Facilities are currently being designed or under construction in Canada, El Salvador, and Mohali, India which will be leased by Dell for technical and customer support operations in early fiscal year 2006.63

Dell Inc. numbers

60 61 62 63

ibid., 13. Dell to step up India hires, 1. ibid., 1.

United States Securities and Exchange Commission, 2004 Proxy Statement of Dell, Inc. (filed 2005), Available on-line from: http://www.sec.gov/Archives/edgar/data/826083/000095013405004423/d22995e10vk.htm.

73

Despite specific problems with the Indian call centers, Dells off-shore operations can be attributed to a large part of its success. While many PC makers were struggling with the decrease of computer equipment sales from 2000 onward, Dell Inc. was still gaining market share against its competitors and was generating high revenues. In 2004, Dell Inc.s operating profit rose to 8.8%, helping Dell achieve high profit levels for four consecutive years.64 If sales continue to grow, Dell Inc. is expected to record $60 billion in revenue for the 2005 fiscal year, compared to $49 billion in 2004.65 The tables below clearly shows the numbers that made Dell Inc. the number one PC vendor worldwide for the past two years.

Table 5-1: Top 5 Worldwide & US PC Vendors, 2nd Quarter 2003 vs. 2004 (measured in thousands of unit shipments)

Worldwide
Dell Hewlett-Packard IBM Fujitsu/Fujitsu Siemens Acer Others Total Market

Q2/04 Shipments 7,080 6,130 2,535 1,506 1,302 24,249 42,802

Q2/03 Shipments 5,781 5,306 2,157 1,265 995 22,270 37,774

United States
Dell Hewlett-Packard Gateway IBM Apple Computer Others Total

Q2/04 Shipments 4,295 2,539 1,065 740 505 5,407 14,551

Q2/03 Shipments 3,699 2,260 842 687 458 5,114 13,060

K.C. Swanson, Dell Savors Sweet Quarter, Thestreet.com (November 12, 2004), Available on-line from: http://www.thestreet.com/tech/kcswanson/10193942.html. Dell Inc., Yahoo Finance, Available on-line from: http://finance.yahoo.com/q/is?s=DELL&annual.
65

64

74

Source: Quick Statistics: PCs, Gartner Dataquest

Table 5-2: Top 5 Worldwide & US PC Vendors Market Share, 2nd Quarter 2003 vs. 2004 66 Worldwide
Dell Hewlett-Packard IBM Fujitsu/Fujitsu Siemens Acer Others Total Market Q2/03 Market Share (%) 15.3 14 5.7 3.3 2.6 59 100

Q2/04 Market Share (%) 16.5 14.3 5.9 3.5 3 56.7 100

United States
Dell Hewlett-Packard IBM Fujitsu/Fujitsu Siemens Acer Others Total Market

Q2/04 Market Share (%) 29.5 17.4 7.3 5.1 3.5 37.2 100

Q2/03 Market Share (%) 28.3 17.3 6.4 5.3 3.5 39.2 100

Source: Quick Statistics: PCs, Gartner Dataquest

66

"Quick Statistics: PCs," Gartner Dataquest (July 2004): 1.

75

CHAPTER SIX WHAT STRATEGIC APPROACHES TO OUTSOURCING INCREASE EFFICIENCY IN THE BUSINESS WORLD AND AT DELL INC.?

Failures with outsourcing

Although many companies have moved some or most of their business processes to outside vendors, outsourcing is not for everyone. Outsourcing requires proper planning, meaning that firms must spend sufficient time to understand whether or not it is the right solution, or risk failure at implementation. As seen in the example of Dells call center problems in India, companies can be compelled to bring back recently outsourced processes due to loss of control or quality. Bringing back a process to be produced internally doubles the cost to a company, as the process must be re-designed for the domestic labor market. Outsourcing failures also cause internal issues within a company. Disclosure of unsuccessful outsourcing partnerships often lead to questioning of the competence of the management team that negotiated and established the outsourcing agreement. Such situations can also create clashes and loss of trust between the board of directors and the

76 management team.67 For publicly traded companies, any perceived failure, especially in the outsourcing sector, leads to negative reactions from investors. At the fundamental level of outsourcing is the understanding of why third party companies can successfully perform tasks better than parent companies. Whereas outsourcing represents a single business process, parent companies view this in the context of the entire corporate strategy. For example, Dell Inc.s core competency is twofold -- to build fast and reliable computer systems and provide excellent customer support. Dell builds almost all of its products to the specific requirements of each order, meaning that the company needs to fully assemble and test each system prior to shipping them to end customers. While Dell has to spend a considerable amount of time to meet customer demand, the company also must maintain solid administrative work, such as accounting, business planning, and forecasting. If Dell Inc. is able to efficiently outsource its call centers, the company can then be able to concentrate more on the core competency. Dell thereby cuts costs on the training of customer representatives and support personnel. An outsource vendor that provides services to companies like Microsoft and Dell Inc. must have the capabilities and the necessary tools and staff to perform all outsourced tasks successfully and at an effective cost. Those vendors are either able to provide inexpensive educated labor or to invest in cutting edge technology and more effective systems than the parent company. The latter outsource vendor is a specialty company which provides services specific to completing a task because it can spread the cost over multiple clients. These firms

Outsourcing , Canadian Heritage Institution, Available on-line from: http://www.pch.gc.ca/progs/arts/pdf/outpap/tdm_e.cfm.

67

77 are also better able to adjust the amount of staff based upon the workload because the resources can be distributed among different client organizations.68

Process for outsourcing

Although there is substantial literature available to companies to help them with their outsourcing decisions, no one procedure or model has emerged as the definitive solution to successfully outsource one or many functions. The field of outsourcing is currently too dynamic and too individualized for a standard process. There are some generally accepted basic principles, however, that firms must follow when approaching an outsourcing decision. Before selecting a vendor company to perform jobs or tasks, a company should begin by asking the same questions as journalists: who, what, where, how and why. Who: Who will be doing the work? Will the vendor company be using its own employees, the companys employees, independent contractors or some combination? Who controls the work? Is the vendor reliable and capable of performing the work properly? Is the vendor credit-worthy? What: What is the nature and scope of the work? What are the activities or tasks that the company wishes to transfer and what are those that the vendor is willing to accept? Where: Where are the premises located? Will the vendor use the companys premises, its own, or those of a third party? Are there any backup locations or sites to perform the work in case of location problems?

Michael Cohen, Successfully Implementing an outsourcing vendor, Physicians News Digest (September 2004), Available on-line from: http://www.physiciansnews.com/business/904cohen.html: 1.

68

78 How: How will the vendor provide the services? How should the contract be structured? What are the terms of the outsourcing arrangement, including payment arrangements, etc? Why: Why was the service outsourced? What reasons or considerations other than financial have led the company to outsource? Does the service include an obligation that the company may no longer wish to accept in the future? After reviewing the answers to the above questions, the company will have a better idea of the benefits and potential risks. It should be possible to develop a relatively simple model to evaluate the market. Using the case of Dell Inc. the following information can be gathered: Who: Dell Inc. must select a vendor with excellent financial condition, a reputable vendor with many years of experience, and a vendor who can show statistics of past experiences to prove its efficiency. What: the vendor will maintain call centers, help desk, and a customer service network to answer customer questions. The service will be provided 24 hours a day, 7 days a week to ensure customer satisfaction. Where: the vendor will be located in India, or other off-shore locations, because of cost savings and efficiencies of remote call centers and their suitable outsourcing capabilities. How: the calls will be routed to India, or another off-shore location, while the customers will dial local US phone numbers. Service agents will be increased at peak time, and will have understandable accents. American English language classes will be provided to representatives during training.

79 Why: Dell Inc. has determined that maintaining its own representatives in the US is more costly, and therefore will be cutting on costs if offshored those services to Asia or other developing regions. With this information, Dell Inc. can determine the benefits and risks to be transferred. With the above scenario, there are a number of risks presented. What happens if the employees do not perform well? What if the vendor does not honor its contract agreements? What if the routing of phone calls is not successful because of phone line problems or electrical failure? What if the vendor delegates the outsourced jobs to another company? What if customers dislike dealing with foreigners and take their business elsewhere? Once those risks are identified, Dell Inc. can examine the risk thoroughly and make contract agreements accordingly with the vendor company located abroad. To effectively implement an outsourcing process, Dell Inc. should perform thorough research to determine whether or not outsourcing a process is the right strategic move. Dell Inc. must be able to select the best off-shore company that will allow them to minimize costs and keep, or even improve, the quality of the product. Organizations should enter into extensive arrangements with a full understanding of the partner and relationship in order to improve the opportunity for success. This requires due diligence in the selection, planning and implementation of the relationship between the parent company and the vendor company.69 A recent study conducted on the criteria used in selecting an outsourcing partner shows that companies who evaluate outsourcing opportunities consider the above criteria before selecting an outsourcing partner.
69

ibid.

80

Figure 6-1: Key criteria that international clients need to consider while outsourcing. 70

Source: Managing successful outsourcing relationships, IDC, www.stylusinc.com

Identifying the right outsourcing partner

After having decided to outsource a process or a whole production, companies must identify the right outsourcing partner. The importance of selecting a compatible and sustainable partner cannot be over-emphasized to companies considering outsourcing. This process is crucial because the company itself and its business partner will be contractually linked in a relationship that can be costly if there is miscommunication between the two parties or if the outsourcing partner fails to deliver what the company needs. The business partner will have a direct impact on the future of the company, therefore selecting the right outsourcing partner is of the utmost importance.

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Managing successful outsourcing relationships, 2.

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Fundamentals of outsourcing implementation

The following section serves as a guideline to decision-making on outsourcing or simply put, what to look for in an off-shore business partner. Before outsourcing an IT function a firm must look at its own goals and business culture. The following questions must be must be asked and answered clearly to help guide management towards the right partner. What business objective is a firm trying to accomplish by outsourcing a particular function? How will the company benefit from outsourcing the function and how will it impact the workflow within the company?

Monetary reasons: Price is always a factor for outsourcing but cannot be the only reason to send a job to another country. Selecting the cheapest provider does not mean reliability or performance in the project. Latest technology: While determining which partner to choose from, a company must choose the provider that possesses current technology and stays current to respond to the needs of its clients. Employee make-up of the outsourcing partner:

82 High employee turn over rate can be an indication of lack of reliability and also an indication of delivery problems. A company must stay away from a vendor whose employees are not satisfied. If the employees are not satisfied, the more likely their performance will be low. Meet the team: Before signing the contract with the vendor, it is advisable to meet with the people who will be conducting the tasks. This will allow the company has a better idea on who will be working on the project. What you are buying: Before making a decision, it is important to have a set of requirements and objectives. This will help companies avoid surprises after the contract is signed. It is therefore recommended to ask for samples and prototypes, as well as a business plan. Samples help get a clearer idea of the partners capabilities. Samples help one make realistic appraisals of quality standards and technical expertise of the outsourcing provider. In absence of existing samples, a prototype can help in the evaluation of the skills of the partner. Due diligence: A company looking at a potential outsourcing partner should find useful information that could help them select the partner. The partner should be able to provide the company with statistics on their previous clients and number of projects they were involved in or previously handled. Most importantly, a company should insure that the potential outsourcing is financially secure to conduct the project or tasks. References:

83 In order to have a better picture of the outsourcing partners credentials and qualities, the host company must be able to provide references upon request of previous clients. Those references should be thoroughly checked to determine how the partner performed with its previous clients. Therefore, a company should always ask for references before selecting an outsourcing partner. Work samples do not always show issues like schedule adherence, trustworthiness and responsibility, all traits that can be determined through references. Business objectivity: A company must make clear to the business partner its business goals to ensure the smooth execution of the project. If the outsourcing partner fails to understand the companys business needs, the partner may have hard time providing the company with the right service and may not be able to communicate accordingly with the companys needs. Both the company and the outsourcing partner must match their needs in a realistic manner to avoid confusion while the project is in process.

Communication: The number one reason for outsourcing failure is a difference in language and culture. Both companies must understand each others requirements in order to minimize misunderstanding. Companies and outsourcing partners must agree on the communication channels to be used. With current technology, companies can communicate quickly and easily. When selecting the outsourcing partner, a company must ensure that the partner has good and reliable communication skills and tools.

84 Since most outsourcing companies are located in Asia, American companies must not forget about the deference in time zones. Both parties should take this under consideration and try to have a fix for this problem. Technical competence: Once the above credentials have been determined, a company must find out if the business partner possesses the infrastructural and technical expertise to handle the requirements of the project. An outsourcing partner should be able to provide the company with methodologies that the partner will be following throughout the completion of the project. Knowing the methodologies help a company know how the project will be handled and whether it is in sync with the companys quality requirement. Risk mitigation: Since off-shore outsourcing partners are usually located far away, a company must have the means to follow the process of the development of the project. This is very important as the distance decreases the amount of control a company can have over its project or projects. The business partner must have provisions to enable period checks of the development of the project. Surprise difficulties may arise if the company fails to monitor the progress of the project.

Current and post development support: Since both parent and host company are bounded by a contract and both have obligations for one another, companies and outsourcing partners must develop good relationships throughout and after the completion of the project. The success of a project is most of the time judged after its implementation and sometimes, completion. Therefore,

85 good relations are necessary for the life cycle of the product or service as most projects need maintenance and other follow-ups. Outsourcing providers must offer post-development plans, support, and testing to ensure customer satisfaction to ensure successful completion of an outsourcing venture.

CHAPTER SEVEN SUMMARY AND CONCLUSION

Introduction

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A comprehensive assessment of this research study is best attained by re-examining the four major objectives presented in the introductory section which all addressed the correlation between technology and offshore outsourcing. The use of Dell Inc. as a case study specifically demonstrates why and how technology affects the business world in the process of offshore outsourcing. The major assumptions and goals of this study that intersect in the description of the relationship between technology and offshore outsourcing can be summarized as follows: How historical background of offshore outsourcing leads to a better understanding of the new developments in and future of this business trend. The direct impact of technology on why companies offshore their labor outside of the country. How outsourcing impacts the operations of Dell Inc. The strategic approaches that Dell Inc. can undertake to select an appropriate business partner to enhance efficiency in specific operations and the company as a whole. Dell Inc. is an ideal case study in outsourcing because it is very successful, and is unique in its business strategy and operations from other computer companies around the world. Dell is one of the few companies that operates completely via phone and the internet. Whereas its competitors rely on retail distribution, Dell does not have physical sales outlets or a middleman to carry or sell its products and services. It is not only capable of building computers per customers requests, but uses this model as its sole pattern of operation. This

87 strategy enables Dell to achieve high volume sales while carrying low inventory of preassembled computers and other computer peripherals. While Dell offshores many of its activities (primarily call centers and manufacturing), it has been able to compete with the most powerful companies in the industry. As illustrated in the example of Dells call centers in India, the companys pioneer attitude toward outsourcing resulted in certain initial difficulties. Dell acted responsively toward customer complaints by adapting its offshore model to improve service. In this manner, Dell Inc. has been able to find ways to accommodate its customers while succeeding in keeping its costs down. After investigating and distinguishing between the hypes and the facts about offshore outsourcing, it is clear that this is a trend that is not going to dissipate rapidly. Outsourcing will continue to grow and develop new paths as the demand for low cost inputs continues to increase and as technology continues to rapidly evolve. While there exists a growing body of literature and data on outsourcing, the sub-field of offshore information technology, especially in service sector, has yet to be sufficiently documented. While this study focused on the intersection of outsourcing, technology, and offshore services, a broad review of the topic was also necessary explain the reasons behind the successes and the failures of outsourcing as a whole.

Summary Historical Background (Chapter 3): The historical background section of the study analyzed data and past trends in order to understand the development of outsourcing as business practice. There exist two main

88 views on outsourcing -- that which encourages the trend and that which opposes it. There is little common ground between those support offshore business practices and others who espouse protectionist ideals. The media is in part responsible for creating this divide, as outsourcing is frequently presented to the public as a polarized issue. It is undisputable that outsourcing has become a fashionable business practice over the past few years, although the media has vacillated in its economic and political analyses of the trend. To discuss the impact of technology on the process of offshore outsourcing, an overview on how technology has evolved in the past few years was included in the discussion of historical background. This rapid evolution of technology has affected not only specific functions of companies, but has also impacted and improved corporate culture. Technology has now become fully integrated into the business world. Despite the daily use of technology, the research and development costs that went into each process must not be forgotten. In order for companies to stay in business, they must be able to use the latest technology and simultaneously be able to maintain low production costs. The search for quality output at lower costs has driven the origin and progression of outsourcing. Since certain countries have significantly lower labor costs in comparison to Western countries, nations of the developing world started offering their services to foreign investors. The United States and the United Kingdom have become two of the most prominent outsourcing parent countries, sending their business to host companies to such insourcers as India and China. These outsourcing relationships have proven profitable for both parent and host. Western outsourcers obtain educated, highquality labor at lower costs. The insourcers benefit from increased employment, an inflow of foreign currency, and, perhaps most importantly, the transfer of technology.

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Technology and International Outsourcing (Chapter 4): Computer technology was initially developed and implemented for government and military applications, but has evolved dramatically into everyday public usage. As the need for computers has spread to all industries, many companies and individuals found themselves not ready to invest in the purchase of and training for expensive technologies. At the outset of computer and internet revolution, most businesses did not even understand how computers worked or could improve efficiency. Early investors in business technology struggled to keep updated with the latest software, hardware, training, and maintenance. It became increasingly challenging for companies to stay up to date than to acquire the initial technology. This phenomenon gave rise to outsourcing. The most technologically advanced and financially successful companies were those who understood how to either specialize or to mitigate the cost of technology changes through outsourcing. Outsourcer companies were able to minimize the costs of their investments by providing their skills and tools to companies who were less able to implement technology. The initial group of small and medium organizations who outsourced some of their functions set the business stage for the off-shore services sector. Not until the 1990s did large organizations start outsourcing functions of their production. Once such companies were impressed by the efficiencies gained by the first results, the outsourcing boom was unleashed. During the beginning of widespread outsourcing, especially to offshore sources, some companies greatly benefited while others failed completely. Those who succeeded with outsourcing were able to boast rising profits on their balance sheets, while others struggled to

90 bring back the function that was once done inside the firm. As seen with the problems in Dell Inc.s initial outsourcing venture and subsequent reorganization, the learning curve for outsourcing continues to improve over time. Companies now have a much better understanding of how outsourcing affects their bottom line and that detailed research is required before engaging in such practice. As technology has rapidly changed over the past few years, it was expected that business practices would follow suit. Many companies throughout the world are struggling against increasingly fierce global competition. Companies in developed countries like the United States and United Kingdom are trying to escape high production costs and are therefore turning to developing countries like India and China in hopes of improving profitability. While organizations spend a lot of money keeping up with technology changes, this necessity is being changed by ability to outsource. Outsourcing host companies can help parent companies eliminate huge technology costs. The former can take over the latters technology functions and provide a service better than if it was done internally. While outsourcing can seem easy to accomplish, companies must not neglect due diligence in order to avoid the danger of picking the wrong business partner who is not itself able to keep up with technology.

Outsourcing and Dell, Inc. (Chapter 5): Outsourcing does not affect only the parent countries that outsource, it must also be viewed from the perspective of host companies in insourcing countries. Host outsourcing countries like India and the Philippines cannot be said to totally benefit from outsourcing, as

91 they do have certain problems resulting from offshored jobs. Competition and depressed labor costs among and within developing countries can hurt such economies. In low wage countries that host foreign industry, especially manufacturing, human rights issues are prone arise. Human rights and development advocates often question the ethics of advanced countries profiting from developing countries low wages. Even though outsourcing is practiced by many firms, it cannot be effectively implemented my all companies. It can make a company make or save as much money as it can cause other companies to lose. Many companies have spent lots of money to move production to foreign locations only to find that outsourcing was not really the best solution. While it could have been a successful move, some companies have failed to conduct the necessary studies and research for the best business vendor that is capable of providing them with right tools or solutions. For Dell Inc., outsourcing has created varied outcomes, but has produced an overall favorable result. While it helped the company be one of the computer leader manufacturers, Dell Inc. experienced a deterioration of customer support at the same time. Outsourcing jobs to non-native English speaking countries initially decreased customer loyalty. Complaints surrounding the language barrier made Dell Inc. reconsider its outsourcing of call center jobs to India. American customers were frustrated and unsatisfied with the competency level of Indian representatives. Dell Inc. was forced to bring back some of the jobs to the United States to please its customers. It seemed that Dell Inc. would have to choose between lower production costs and customer satisfaction. Instead Dell devised a new business strategy that achieved a balance between both goals. While some of the call center jobs were brought

92 back to the United States, Dell was eventually able to salvage its outsourcing venture by designing and implementing better training of offshore representatives.

Strategic Outsourcing (Chapter 6): Although there is a rich body of literature on standard models of outsourcing procedures, data on and descriptions of the outsourcing experiences of specific countries is rarely published. This study therefore required research from diverse sources to arrive at Dell Inc.s strategic approach to outsourcing and the factors which affected its efficiency prior, during, and post outsourcing. In determining the reasons for outsourcing failure, lack of due diligence and prior experience emerge as the two most prominent. In practice, outsourcing failures can occur due to various reasons. While it can be the vendors fault, the parent company can also be the one to blame. Poor research by the people in charge of the outsourcing process can lead to undesirable output. Failure to devise an easily accessible and responsive communication system between the vendor and parent company can also create negative results. Although it is natural to have some difficulties in a pioneer business strategy, outsourcing failures tend to create concerns about management within and outside of a company. It is therefore extremely important to approach any potential outsourcing venture with full knowledge of the process, as well as potential problems. Returning to the case of Dell Inc., the following is an approach to outsourcing designed to avoid failures and make Dells future outsourcing experience a successful one. The steps presented start with the decision-making process and proceed through the final

93 stage of getting the product from the host company. Above all, Dell must look beyond the numbers to address fundamental questions, including: What business objective is it trying to accomplish by outsourcing? How will it benefit from outsourcing the function? How will outsourcing impact the work flow within the company? Will Dell Inc. be able to keep its competitive edge by outsourcing its jobs to a different location? After these questions are answered, Dell Inc. must devote time to the selection of the outsourcing partner. Dell Inc.s business partner must be technologically advanced and capable of keeping up with technologys rapid evolution. Detailed discussions between the two parties regarding all aspects of the outsourcing agreement of should take place prior to signing a contract. Both companies must understand each others operations and goals and set up clear guidelines for their joint business. It is important that both the vendor partner and Dell Inc. be able to communicate clearly to achieve mutual benefit.

Conclusion and recommendations:

The introduction of off-shore outsourcing was met with initial popular concern over economic diversion abroad. Any detriment due to outsourcing, especially in the technology sector, has been clearly countered by increases in profitability. Companies that have strategically outsourced business functions can and should become more efficient, as they expand production and employment in other lines of work. When a company outsources jobs to a foreign vendor, it is usually offshoring the most inefficient part of production and at a

94 cheaper cost. The firm can then reallocate previously wasted money on enhancing other areas by investing in research and development or by and creating new jobs. The company is now able to reduce production costs, such that it can lower the price of the final good and generate a higher demand.

The result implies that outsourcing is probably driven by a combination of factors rather than any one simple influence. While scale economies are an important determinant of firms outsourcing decisions, the transaction costs associated with using vendors, which vary based on firms characteristics, affect their decisions. There is no one clear pattern to outsourcing practices, but this investigation attempts to provide a coherent account of the manifestations and the general occurrences of the outsourcing of technology between developed and developing countries. Future work in this field of study should deal with more detailed descriptions of the outsourcing practices of individual companies, such as classifications of how Dell Inc. could use new technologies to outsource specific functions worldwide and increase customer satisfaction and productivity. A final important extension of this work would develop a more exact, prescribed method of outsourcing to achieve maximum output and customer benefit. In conclusion, it can be claimed that that the present research study has reached its goal of examining and describing the relevant aspects of how outsourcing has affected the productivity of technology services at Dell Inc., and in the global business community.

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