THIRD PARTY RISKS and THREATS
OUTSOURCING and OFFSHORING
last updated 2013 April 10
 
. This page used in the following courses taught by Prof. Richardson
.
BIT 801
MGD 415
MGT D06
MGT C44, MGT C46
MGT C11
..
 
INTRODUCTION , "If business operations are outsourced or conducted in cooperation with a business partner, valuable information often must reside on networks that lie outside of [your] organizational control. This creates a situation in which one is reliant on the efforts of that partner to protect the shared asset"

Volonino & Robinson Principles and Practices of Information Security Chpt 5, p. 71

vv.

first published by Dilbert in Aug 2009
,
Definition 
of terms
, A January 19th 2013 "Special Report" in "The Economist Magazine" provides 14 pages of excellent analysis and descriptions of Offshoring and Outsourcing trends in 2012. www.economist.com/topics/outsourcing
 http://www.economist.com/blogs/schumpeter/2013/01
/special-report-outsourcing-and-offshoring

Outsourcing in 2012 is typically associated with moving a call centre to India [actually, when you outsource outside your country it is called Offshoring], but in reality, outsourcing has been around for many years.
 
In the 1800's when shop keepers wanted packages to be delivered to customers, they made arrangements with horse and buggy operations. This allowed the shop keepers to supply products to their customers, without having to incure the extra expense of having a horse and buggy on site - which was not easy in the crowded cities of Europe

Outsourcing having some other person / firm do some activity which is part of your business operations.
- delivering product, arranging events, recruiting, developing advertising

Offshoring means moving work and jobs outside the country [offshore] to another location where the costs are much cheaper - "much cheaper" has to take into account that the lower wages must be low enough to counter balance the higher transportation costs for reaching that distance.

vv.
, some older examples

1. Pirates of the Caribbean

- The East India Company - founded in 1600, and given a royal charter by the Queen to trade in the East Indies
- it waged war, bought and sold slaves, had military and  government functions - some of which were noted in the films "Pirates of the Caribbean"
- by outsoucing, the Queen could reap the benefit of trade, without putting at risk her army or government in nasty disputes
- some historians say this gave England a very big advantage in the 1600's and 1700's and allowed it to benefit from exploration and trade in the Americas, without taking the same risks as the Spanish and French
(Sullivan,  Texas; Wasilewski , Poland; Keay, London; Andrews, Cambridge)

In the movie Jack Sparrow (Johnny Depp) once worked for the East India Trading Company and captained the Wicked Wench. When he refused to transport slaves, he was branded a pirate and his ship was ordered sunk by Lord Cutler Beckett, a company agent. - some say this is not far from what really happened in those days
"pirate girl" pic supplied by student Z. K. at Seneca
.c
http://www.youtube.com/watch?v=mwyZbRMxb9s&list=UUAtk_NQTEd9jP4hEI6lPUHA&index=30&feature=plcp Contributed by student Shawn T. at UTSC who obtained this clip from a new TV series in which Outsourcing is supposed to be discussed in a funny way - however the segment shown here actually shows how North Americans can be very insensitive to the "social-cultural environment" in dealing with their Outsourcing partners.

This 4 minute segment illustrates a good example of a condescending and patronizing attitude sometimes communicated in outsourcing situations.

c
Environmental
influences
effecting
outsourcing
, As the global business community (effected by the rise of the dot.coms) became more intense in the late 1990's and early years of Y2K, companies are striving in many different ways to cut expenses.

One of the key consequences of globalization is to make your stuff cheaper than some other company across the ocean that is cutting into your customer base.

So companies are seeking every avenue possible to cut 

  • design costs
  • production costs
  • shipping costs
  • customer service costs
  • financing costs
and one of the popular methods has been to outsource parts of your operation to a smaller company that can do part of your stuff cheaper than you can.

One of the most obvious considerations is that if the provider of this outsourced activity is indeed "doing it cheaper", how are they able to?

  • are they using cheaper materials than what you would have used
  • they're probably using cheaper labour
    • is this just because they pay a low wage
    • or do they also cut out any benefits which is a costly part of North American and European businesses
  • are they cutting safety standards and processes
  • do they get away with bypassing pollution and environmental considerations
In the following segments we will examine how outsourcing companies cut costs within the context of the influences by the "Environments"
.
Competitive
Environment
, The degree to which the company has intense competition is the prime motivator to outsource.

If the competition is very intense, then the company must carefully attend to all the other influences such as

  • Social-Cultural environment 
    • language considerations
    • management styles
  • Technology
  • Economics 
    • currency exchange rate considerations
    • labour wage rates
  • Political
    • rules and regulations for operating
    • political influences
  • Geography, weather


If the competition is NOT intense, then perhaps the only consideration might be some economic factors related to shaving a bit off the costs of production.

.
Technological
Environment
, Design costs are not just for designing a product or service in the very beginning, but in fact design costs are considered throughout the manufacturing process as a product is constantly changed and adapted for a global marketplace and in consideration of increasingly short Product Life Cycles which pressure companies to constantly innovate and re-design products and services.

More and more companies are outsourcing part, or all, of the design process to companies that have personnel and technology that is too costly, or otherwise not accessible to some manufacturers, particularly small and medium sized enterprises.

Sometimes, it is also the case that these special design companies have invested in special technology, such as advanced CAD CAM software, that allows them to create a design more easily, and with less cost, than the client.

Additionally, there is the HR considerations. Some design companies have personnel on staff who are very experienced with particular aspects of design and this is a tremendous resource.

The technological environment also contributes to outsourcing in the sense that advances in communications technology mean that an outsourcing entity does not have to be in the same "high rent" location as the client.

Many outsourcing companies in Bangalore grew on the strength of India's development of fiber optic cable and resulting high speed internet connectivity which allowed companies to be located in Bangalore where labour costs are cheap, but the technology allows the client to be served instantly.

.
Social-Cultural
Environment

Language

, I wonder how many people in Canada know that the number of people in India who speak English, is actually greater than the 34 million we have in Canada. How many people know that English is the national language of people in Guyana in South America, or that English is spoken by hundreds of thousands of people in the Philippines.

Because English is spoken by many people in developing countries, it is attractive to set up Call Centres in those countries to serve situations where you need many people to respond to customer inquiries by phone.

For simple answers to simple questions, this might not be a problem, but for complicated things, like telling a person how to set up the defaults in his ISP account to create a new user mailbox, it may not be desirable to have the outsourcing company use people who have an accent much different than the customers.

Some people reading this segment may have heard that a big part of successful communication is being able to look in the face of the other person and see the body language that accompanies the words. When you are talking by phone, this is not possible - therefore it is even more important to be "crystal clear" in the words you chose to say and the way you say it.

English, being a language composed of several other languages, is vulnerable to thousands of slang expressions and phrases which are often only understood well by native speakers in the same country.

.

this was first published by Scott Adams in May 2006

What makes this joke interesting for Canadians is due to the fact that there are thousands of I.T. professionals in Canada with backgrounds in India.


this was first published by Scott Adams in June 2006


RBC has 57,000 employees in Canada
 
 
RBC
outsourcing
In early April 2013 the situation of outsourcing I.T. to India  gained wide exposure in the news when Royal Bank was criticized for outsourcing I.T. jobs to a firm (iGate) that was then bringing in workers from India to replace Canadian employees at RBC - what made the situation even more worse was allegations that the Canadian workers were being asked to train their replacements !

RBC, which lists its profits as more than $ 1 Billion a quarter (think about it) said that it was taking these steps in order to be more competitive.

Newspapers, TV and radio covered the story extensively and the government got involved.

"Alyson Queen, a spokesperson for Human Resources Minister Diane Finley, said Monday (April 8 2013) application documents submitted by iGate are now being reviewed based on "apparent discrepancies" between RBC's public statement and information previously given to the government."
(ctvnews.ca/canada/rbc-employee-asked-to-train-replacement-before-layoff-1.1230913)

..
Social-Cultural
Environment

Management

, The Social-Cultural environment within which the outsourcing company operates can also effect the management practices of the operations and this may have some negative effects on the ability to do things smoothly for the North American or European client.
.
Social-Cultural
Environment

Management
Labour

Future trends

, Things will settle out in the long run.

"As businesses collaborate, and as top-down control of work and employees weakens, regional labor markets will normalize. Workers in one area of the globe will hear about practices in other parts of the world, raising awareness and intensifying their demands for equity. Labor forces in relatively disadvantaged economies will lobby to bring workforce programs into alignment with those of their global peers. Meanwhile, the values of workers and consumers in wealthier regions will promulgate globally, creating pressure across markets to adopt safe and competitive labor practices. In the long term — 10 years or more — the continuous pressure for equitable practices will normalize work/life programs and start to narrow the gap among regional labor rates. The gap in rates between the Western economies and Southeast Asia will remain big, but the gaps between emerging-market countries in Southeast Asia or other global regions will narrow."
http://www.gartner.com
from  Outsourcing Backlash: Globalization in the Knowledge Economy 
by  Dion Wiggins, Diane Morello   31 July 2003

.
Political
Environment

Host
Country

 

, There are many things related to the political environment that would effect an outsourcing company serving and overseas client.

Rules and regulations related to paying wages and hiring practices may influence how the outsourcer can operate.

The jurisdiction within which the outsourcer operates may try to extract a higher corporate tax rate if they think the outsourcer is being paid by a rich company from the U.S.

Sometimes, in order for the outsourcing company to operate cheaply, bribes must be paid to local government officials. This may be acceptable or unacceptable to the overseas client, depending on their corporate ethics and depending on how confidential these arrangements can be kept.

Such bribes could relate to regulations being broken about underage workers, or the number of hours a week workers work, or sanitary facilities etc.

.
Political
Environment

Home
Country

 

, Politics in the country which is home to the parent company, can also effect the ability to conduct outsourcing.

In certain parts of the U.S., legislation is being discussed at the state level and the national level, which may limit the ability of particular companies to outsource "American jobs" to developing countries.

This has become a very sensitive issue and senior company executives are finding themselves in the position of having to defend laying off workers in the U.S. and hiring to be replaced by hiring people in India, or Mexico.

www.indiatimes.com says "If the US moves legislation on banning outsourcing, US companies are likely to suffer on account of impaired competitiveness. Overall, the US economy is likely to pay a heavy cost for keeping jobs at home and denying the benefits of outsourcing to its economy."

.
Economic
Environment
, One of the most obvious considerations in outsourcing is that the economy in the home country has a wage structure which makes it comparably expensive to hire full-time workers and pay them benefits.

Other considerations such as the currency exchange rate also effect the decision to outsource to a company operating in another country.

Presently (2006) the national currency in China is still quite low, compared to the U.S. dollar, and the Chinese government, despite urgings by Washington, is reluctant to let the Chinese currency rise much higher.

However, despite the enthusiasm of the Chinese leaders to tightly control their economy, market forces may prove more powerful. The simple fact is that tens of thousands of young Chinese business people are growing very rich serving the manufacturing interests of European and North American companies. It is obvious what they will do with this money - buy high priced goods from japan, Europe and North America - which will in turn effect currency exchange rates and lifestyles: - same thing in Indian cities like Bangalore.

.
Geographical
Environment
, The Geographical environment effects outsourcing in a number of ways
  • time zones
  • distance to travel for people and goods
  • weather extremes
  • seasonal differences
.
Geographical
Environment
, Time Zones

One of the reasons some California I.T. companies outsourced functions to companies in India was because the companies in India could be given tasks at the end of the day - work on them overnight while the Californians where sleeping, and email solutions back the next morning. This was particularly common in the late 1990's when many internet start-ups had massive amounts of compute programming to get done in a hurry.

.
Geographical
Environment
, Weather Extremes

One of the vulnerabilities companies face in outsourcing is the global phenomenon of floods, hurricanes and typhoons in recent years. These weather extremes are mostly effecting tropical regions, which is the same area of "low wages" that is targeted for outsourcing (nobody is hurrying to set up low-wage call centres in northern Sweden)

While the low wages of the tropical regions attract cost savings for outsourcing - at the same time the governments in these regions have proven themselves (in 2004 and 2005) to be ill equipped to deal with major disasters because of the lack of infrastructure such as good roads, a national communication network, and money for disaster recovery activities. 

The inability of some regions to handle weather extremes and natural disasters like earthquakes suggests a significant vulnerability that should be considered by companies that cannot afford any long period of "down time" while their call center gets rebuilt.

.

, from the January 19th 2013 "Special Report" in "The Economist Magazine" on Offshoring and Outsourcing trends in 2012.  www.economist.com/topics/outsourcing
 http://www.economist.com/blogs/schumpeter/2013/01
/special-report-outsourcing-and-offshoring

Outsourcing in 2012 
 

  • human resources problems
    • wages in China and India for skilled workers have been increasing
    • Chinese workers "their aspirations are rising and they are less willing to work long hourse in boring factory jobs"
    • the "labout-cost arbitrage in services is rapidly eroding"
    • ESL challenges, Indian call centres loving to the Philippines
  • energy costs in North America have been declining
  • politics
    • many Americans blame offshoring as a leading cause of economic problems
    • politicians criticize companies that send jobs overseas
  • transportation problems
    • costs of shipping across the Pacific has increased
    • fuels costs, labour costs, security and navigation costs
    • risks of wars and extreme weather threaten supply chains of long distances
    • skilled labour cost difference between Asia and Mexico is becoming closer - products travelling from Asia are measured in weeks, from Mexico... days
  • technological environment
    • reshoring (the reverse of offshoring) will be enhanced by the use of advanced manufacturing techniques such as 3D printing
  • Quality
    • concerns for quality, especially in personal computer electronics, has decreased the tolerance for poor quality as customers have higher expectations
some comments from the 2013 Economist Report, some comments from WTGR
vv

, "Two sets of strategic problems can arise from offshoring production to another part of the world, especially if it is poorly thought out"

1. Supply logistics.

"The more that firms spread their operations around the globe, the more vulnerable they become to disruption from unexpected events such as natural disasters and political unrest"
2. Marketing
"... the more a firm offshores and outsources, the worse it will be responding to customers quickly" ... because they have literally lengthened the distance between the customer and customer satisfaction.

some comments from the 2013 Economist Report, some comments from WTGR

vv..

, Offshoring manufacturing to China

Demographics - China is beginning to run out of skilled workers to assemble high quality consumer products - though 47 percent of China's population still live in rural areas and could potentially move to the cities if urban infrastructure was able to handle this.

Offshoring services to India

India suffers challenges from countries like the Philippines where people who work in call centres speak English with less of an accent - which is a big complaint of American customers.

As The Economist reports in the Dec 22nd 2012 issue even "cheap household labour is no longer in cheap supply"

some comments from the 2013 Economist Report, some comments from WTGR

vv

m


 
, Offshoring manufacturing to China - bounce to Mexico 2010 - 2013

David Agren twitter.com/el_reportero a Canadian freelance journalist in Mexico City
wrote an article in Maclean's magazine March 25th 2013 title "Mexico's Moment". www2.macleans.ca/2013/03/18/mexicos-moment/

Agren explains "Manufacturing activity is mushrooming across Mexico, mirroring an upswing in the overall economy. The country produced more than 2.8 million cars last year"

"Manufacturing is now moving back from China—almost as fast as it fled Mexico a dozen years ago—as Asian salaries and shipping costs continue to rise."
http://www.imf.org/external/pubs/ft/fandd/2013/03/pdf/kamil.pdf In Agren's article there is reference to a piece written for the IMF 

about Mexico by Herman Kamil and Jeremy Zook.

The IMF article is on the IMF website and can be accessed by clicking on the screen capture to the left.

Kamil and Zook explain that when Mexico signed NAFTA it looked forward to gerater access to the U.S. hoping American manufacturing companies would look to move south but "Mexico’s fortunes changed dramatically after China joined the WTO in 2001. WTO membership reduced many barriers to Chinese exports. China's low-cost manufacturing base and ample production capacity enabled it to compete head-on and significantly undercut Mexico's export share in the U.S. market..."

"Between 2001 and 2005, Chinese manufacturing exports to the United States expanded at an average annual rate of 24 percent while Mexico's export growth rate decelerated sharply from about 20 percent a year to 3 percent each year."

Since 2010, Mexico has increased its share of the export market to the U.S. which has coincided with a decrease in Chinese exports. The biggest areas of business are electronics and automotive asssembly and uato parts.

some comments from the 2013 Maclean's magazine issue dated March 25th (article written by David Agren), some comments from WTGR

vv
Outsourcing
Fraud
,
Mari-Lem De Guzman,  in COMPUTERWORLD
(www.ITworldcanada.com) April 28, 2006
wrote a good article titled
"Bank Fraud Trail leads to former Outsourcing Help"

This story discussed how former workers at EDS stole money from account holders of the CSB Canada Savings Bond program. The story is very upsetting cause usually Canadians think the lowest risk for investing money is Savings Bonds with the government, and it turns out even that is risky because the government sub-contracted aspects of this work to some U.S. firm - and the employees there committed this fraud cause they thought they could get away with it.

.
Outsourcing
Fraud
, EDS is a giant U.S. IT firm that provides outsourcing IT work for many companies - mostly in the payments processing end of a company's activities.

In writing this story, Guzman interviewed Joe Greene, Ottawa-based vice-president of IT security research for IDC Canada.  www.idc.ca

Greene said "Corporate IT security is not just about protecting against external attacks like worms and viruses, but it's also about recognizing the potential of internal threats... you can have the best firewalls in the world, but if you let your guard down internally, you're still going to get burned"

Greene added "I think this is a clue to anybody that is going to be outsourcing that they need to make sure that the people they are outsourcing to are hiring only credible people".

Permission to quote ComputerWorld given by Greg Enright, Editor, ComputerWorld Canada, June 14th, 2006. Copies of emails kept in the permissions binder

.
Outsourcing
Sins
,
Judy Artunian,  in COMPUTERWORLD
(www.ITworldcanada.com) June 2006
wrote a good article titled
"The Seven Deadly Sins of Outsourcing"

1. Feeble governance
2. Overblown expectations
3. Blindly banishing projects
4. Dumbly disowning projects
5. Bad assumptions
6. Sloppy service levels
7. End-game myopia

Artunian is a freelance writer in Newport Beach, Calif. jartunian@sbcglobal.net

Permission to quote Artunian's piece on Seven Deadly sins of outsourcing given by Greg Enright, Editor, ComputerWorld Canada, June 14th, 2006. Copies of emails kept in the permissions binder

.
Outsourcing
Sins

Think ahead

, "The Seven Deadly Sins of Outsourcing"

1. Feeble governance

"Before you sign with an outsourcer, nail down an organizational structure, establish methods for keeping tabs on the work being done, and spell out how you will manage the outsourced project on a day-to-day basis. "Your governance system should provide continual feedback to the organization regarding how the relationship is working, what value you are getting, how you are solving problems that have cropped up," says Michael F. Corbett, executive director of the International Association of Outsourcing Professionals in LaGrangeville, N.Y.

.
Outsourcing
Sins

Think ahead

, "The Seven Deadly Sins of Outsourcing"

2. Overblown expectations

If you're shopping based on cost, you may have to give a little on service level.
"you get what you pay for" - even if it is in a country half-way 'round the world.
 

.
Outsourcing
Sins

Make sure there is a "fit"

, "The Seven Deadly Sins of Outsourcing"

3. Blindly banishing projects

Don't send outsourcing to companies operating in a country where that type of industry sector is not well understood.

Artunian says "Use common sense and send projects offshore only to countries where your industry is mature. India and the Philippines, for example, while good choices for services like health insurance data entry, are poor choices for jobs that require decision-making related to health insurance... That's because in-depth knowledge of the field is still scarce in those areas. "Health insurance wasn't prevalent even 10 years ago in those locations," 

.
Outsourcing
Sins

Make sure there is a "fit"

, "The Seven Deadly Sins of Outsourcing"

3. Blindly banishing projects

Also, don't outsource a function that requires clear communication with your customers, if the people providing that communication are not easily understood by the majority of people you do business with.

Artunian explains "..Dell Inc. outsourced its technical support to offshore providers, the company was inundated with complaints from U.S.-based customers who reported that they couldn't understand the service providers because of their accents. Dell had to move a chunk of its technical support services back home to Texas."
- this is not a "racial issue", it is a "speaking clearly the language of your customer" issue
- if a company has a large group of customers from one language group, it simply makes sense that these people can talk to someone who sounds like them, and can easily understand them

.
Outsourcing
Sins

Don't Surrender
too much

, "The Seven Deadly Sins of Outsourcing"

4. Dumbly disowning projects

Don't give away so much of the company that your third-party outsourcer ends up knowing how to do things better than you.

Artunian says "You've outsourced so much of IT that your outsourcer knows almost as much about your customers, your products and your industry as you do....the IT department of another major automotive manufacturer recently realized that it outsourced too aggressively and is now trying to rehire nearly 150 former employees who went to work for the outsourcer."

.
Outsourcing
Sins

Assumptions

, "The Seven Deadly Sins of Outsourcing"

5. Bad assumptions

"Technologies change so fast and the needs of clients change so fast, most parties should go into the contract expecting that after the first two years there is a pretty high likelihood that they'll have to renegotiate the contract," says Robert M. Finkel, an attorney at Milbank, Tweed, Hadley & McCloy LLP in New York.

.
Outsourcing
Sins

Sloppy Service

, "The Seven Deadly Sins of Outsourcing"

6. Sloppy service levels

Artunian advises "Define service levels in the contract and stipulate penalties for missed service levels. 

"..it's not uncommon for vendors to want to wait until after the contract is signed before agreeing to specific service levels. That takes away your leverage and makes it less likely that you will reach a satisfactory agreement."

WTGR adds: most companies, when they are negotiating the level of service they need, seem to spend too much emphasis on negotiating a bottom rate price - which is their main focus, saving money - they should not be blind to the importance of making sure they get a level of service that will be equal to, or at least approach equality with the original service they had before outsourcing - otherwise they will lose customers.

.
Outsourcing
Sins

Think ahead

, "The Seven Deadly Sins of Outsourcing"

7. End-game myopia

Artunian explains that you have to have a contingency in case 

  • you decide to stop using that outsourcer as the contract nears its end
  • the outsourcer has a failure that means your company cannot do some critical task
"You didn't include a transition plan in your contract. Now, as it draws to a close, your efforts to move to another outsourcer or bring the work in-house are stymied. An even worse case: Your outsourcing relationship ends abruptly. One of Giera's clients, a midsize manufacturing company, outsourced all of its payroll functions to a firm that suddenly went out of business. "My client couldn't pay its hourly workers on time that Friday. There were no provisions in the contract to get the data and employee records back, so they had to go to a manual payroll system."
.
Outsourcing
Yourself ??
, Outsourcing Yourself ??

Student Radi H., in MGTC46 at UTSC in January 2010 sent a link to a fascinating video on YouTube in which U.S. office workers discuss outsourcing their work to professionals in India and other countries.

Radi says 
I was talking to Professor Michael Jones about outsourcing just last month. This is what we foreshadowed in the end: http://www.youtube.com/watch?v=rYaZ57Bn4pQ
 

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.
Permission to quote Artunian's piece on Seven Deadly sins of outsourcing given by Greg Enright, Editor, ComputerWorld Canada, June 14th, 2006.
Copies of emails kept in the permissions binder
.
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