“COST AND BENEFIT ANALYSIS OF OUTSOURCING FROM THE PERSPECTIVE OF DATAPATH LTD.” Internship Report (Submitted in partial fulfillment of the requirements of BBA program) Submitted By: Md. Ariful Islam ID# 040341 Supervised By: Tarun Kanti Bose Lecturer Submitted To: Coordinator Internship & Placement Committee KHULNA UNIVERSITY Business Administration Discipline BBA Program Date of Submission: January 28, 2009
Cost and benefit analysis of outsourcing from The perspective of Datapath Ltd.
Cost and benefit analysis of outsourcing from The perspective of Datapath Ltd. MD. ARIFUL ISLAM BUSINESS ADMINISTRATION DISCIPLINE KHULNA UNIVERSITY, KHULNA BANGLADESH January 2009
January 28, 2009 Coordinator Internship and Placement Committee Business Administration Discipline Khulna University Dear Sir, Subject: An authorization letter for submission of internship report. With utmost respect, I am like to aware you the fact that, I am really delighted to submit you the internship report on Datapath Limited, which you have asked me to prepare. After getting your instructions, I have given my utmost effort to make the study successful. After sending me to the organization, you gave me some vital advice and instructions. I am really grateful to you for that generous act & those instructions really helped me to make this study completed. You know Sir that my study topic is “Cost and Benefit analysis of Outsourcing from the perspective of Datapath Ltd”. The immense knowledge & idea that I have gained with the study conduction will be really helpful for me for facing some challenges in the future time of my life & career. Any backwards, shortcomings or fault of this study is my fault or may be because of some misrepresentation of information from the sources from where I have collected all information. I am apologizing for any kind of mistake. I will be available for facilitating any point or part of this report any time when you asked me to do so. I am therefore like to request to accept my report & approved it & oblige thereby. Thanking youSincerely yours’ Md. Ariful Islam ID# 040341 Approved by: Tarun Kanti Bose Lecturer Business Administration Discipline Khulna University
II ACKNOWLEDGEMENT It's my immense pleasure to complete this study in due time by the grace of almighty Allah. I am grateful to those people who helped me a lot during the preparation of this report. First of all, I wish to express my profound sense of gratitude to my honorable advisor, Tarun Kanti Bose, Lecturer, BA Discipline, Khulna University, for his inspiration, guide, valuable suggestions, sympathetic advice and enthusiastic encouragement made throughout my study work. It is very complicated to accomplish such a study without cooperative endeavor. From the very outset of preparing this report I had to observe the total outsourcing process and taking interview from the General Manager and International Manager of Datapath Ltd. They helped me in different events. If I did not get their help and cordial behavior, I could not be able to prepare this report. Moreover, I like to avail the opportunity to express my deep gratitude and regards to Asfakur Rahman, General Manager, Datapath Ltd and Adam Barker, International Relationship Manager, July Business Services for their valuable time to talk with me and giving the information. I also want to express my deep & cordial respect to, Mr. Mehedi Hasan Md. Hefzur Rahman, Coordinator, Internship & Placement Committee and Assistant Professor, Business Administration Discipline, Khulna University; for allowing me to complete this internship program. Finally, we would like to thank all of my friends. Whenever I faced any problem they were really helpful to give their valuable suggestion to solve my problems.
III EXECUTIVE SUMMARY Outsourcing involves the transfer of the management and/or day-to-day execution of an entire business function to an external service provider. The client organization and the supplier enter into a contractual agreement that defines the transferred services. Now-a-days outsourcing is very common to all. Developed countries try to outsource lots of their business for cost saving, increased efficiency, reduced risk, controlled cost, increased reach and increasing problem-solving. This report has been conducted on Datapath Ltd. Here data has been collected by observing total outsourcing process, taking personal interviews and searching through internet. Management of July Business Services form an outsourcing company in Bangladesh named Datapath Ltd to outsource their core business. Their main objective was to minimize cost and increase efficiency from the time variation. When July Business Services formed an outsourcing company in Bangladesh named Datapath Ltd and started its operation, the company is starting to get benefits from five aspects which are human resource, commercial real estate leasing, internet, power and maintenance. Each and every month July Business Services can save approximately $275880 by outsourcing their business in Bangladesh. On the other hand, by these types of outsourcing business Bangladesh is also getting lots of benefits. From these types of business Bangladesh is getting foreign remittance and outsourcing business creates lots of employment opportunities and it helps to built up confidence of Bangladeshi labor force. So the findings of this report are that outsourcing is not only helpful for outsourcer but also helpful for outsourcing company. It increases the efficiency of the company which is outsource its business in the competitive market and also contributes in the economic development of the country where outsource happens.
TABLE OF CONTENT Authorization Letter I II III Acknowledgement Executive Summary CHAPTER 1: Introduction 1.1 Origin 1.2 Problem Statement 1.3 Scope 1.4 Limitations 1.5 Methodology 1.6 Objectives 01 01 02 02 02 04 CHAPTER 2: Organization 2.1 Overview 2.2 Structure 05 11 CHAPTER 3: Literature Review CHAPTER 4: Managing the outsourcing 4.1 Planning Strategy 4.2 Analysis 4.3 Design 4.4 Implementation 4.5 Operations 12 24 26 28 31 32 CHAPTER 5: Cost and Benefit Analysis 5.1 What benefits July Business Services gets from outsourcing 5.2 What benefits Bangladesh gets from July Business Services 35 39 CHAPTER 6: Concluding Section 6.1 Concluding Statement 6.2 Recommendations 6.3 Bibliography and References 40 40 41
CHAPTER 1 THE INTRODUCTION PART
CHAPTER: 01 INTRODUCTION PART 1.1 ORIGIN OF THE STUDY For business school student only theoretical knowledge is not enough for handling the real business situation, therefore it is an opportunity for the students to know about the field of business through the internship program. As internship program is a perfect blend of the theoretical and practical knowledge. When my honorable advisor assigned this study, I was delighted. I have planned that I will conduct my study as perfectly as possible. My advisor assigned me to conduct the study on “Datapath Ltd.”. According to the instruction of my honorable advisor I have conducted my study on “Datapath Ltd.” and made my report as informative as possible. This report is originated to fulfill the requirement of the assign project internship report on “Cost and Benefit analysis of Outsourcing from the perspective of Datapath Ltd.” In this regard an organization attachment in the Data path Ltd. has been given to me a period of three months commencing from 1st September, 2008 to 15th December, 2008. During this period I learned the important issues about how the reporting rules and regulations about the American Retirement Benefit plan. 1.2 PROBLEM STATEMENT OF THE STUDY Outsourcing business is not that much popular in Bangladesh. In world outsourcing business, China takes the lead, followed by India, Brazil, Russia, and Philippines. In the future, China will most likely become the largest and most competitive outsourcing destination, assuming China makes significant progress in geopolitical and legal arenas. In Bangladesh, cost of running business is very low, it has expert human resources with cheap cost, risk of running business is also low and infrastructure cost is also low. In spite of having these opportunities, Bangladesh is not be able to avail this business opportunity like China and India. Cost and Benefit analysis of Outsourcing from the perspective of Datapath Ltd. Page No-1
1.3 SCOPE OF THE STUDY My study is mainly based on cost and benefit analysis of outsourcing from the perspective of Datapath Ltd. Here I also tried to describe the total outsourcing process, how to manage the outsourcing and what are the ways for successful outsourcing. For conducting this study it is very much required that I have posses some idea about the conduction of study. With the help of my advisor I have tried to eliminate any types of shortcomings from our part. My study mainly posses cost and benefit of outsourcing. For getting the knowledge of cost and benefit I work with some variables. Those are Human Resource, Commercial Real Estate Leasing, Internet, power and maintenance etc. That will be helpful for the reader to know not just about overall outsourcing process and how Bangladesh can earn lots of currency form this new window outsourcing. 1.4 LIMITATIONS OF THE STUDY We all know that every study posses some limitations. In conducting this study I have Due to lack of trusted publication present statistics of outsourcing business in Bangladesh is not given.• Due to the lack of publication relating to Retirement benefit plan the information which is collected is not representative. • Due to confidentiality exact cost related data is not given because it can hamper the smooth flow of business of Datapath Ltd.
faced some odds. I can conclude few of those:
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1.5 METHODOLOGY OF THE STUDY Observe/ask questions with open-ended answers•For this paper, I conducted qualitative research work. For this, I collected the necessary data by took structured and unstructured interviews. I performed the following things in group (focus group) discussion: Cost and Benefit analysis of Outsourcing from the perspective of Datapath Ltd. Page No-2 •
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Take notes on what is said and/or done Return to observe/ask more questions Theorizing Draw conclusions Exploratory Research: This type of research was used to identify and define the problems related to the objective more precisely, to gain insights for developing approaches to problems. Diary Method: I kept a personal account of daily trainings, feelings, discussions, interactions when doing the classification, recognizing policies and guidelines. Type of collected Data: Personal Observation (Both disguised and undisguised) Content Analysis Personal Interviews•
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Data-Path Database• Internal Data:
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External Data: Printed Publications Internet Microsoft Word Microsoft Excel•
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Cost and Benefit analysis of Outsourcing from the perspective of Datapath Ltd. Page No-3
1.6 OBJECTIVES OF THE STUDY According to the vital &
To know preliminary concept and process of
outsourcing. To know the cost and benefits of outsourcing companies.• • key information of my honorable advisor, I have conducted this study for the following important objectives: The broad objective of this report is to get an idea about the American retirement benefit plan and gather knowledge about why US companies come to third world countries like Bangladesh for outsourcing its core services. The specific objective of this research is: Cost and Benefit analysis of Outsourcing from the perspective of Datapath Ltd. Page No-4
CHAPTER 2 THE ORGANIZATION PART
CHAPTER: 02 THE ORGANIZATIONAL PART 2.1 ORGANIZATIONAL OVERVIEW Data path is a registered outsourcing company owned by Jim Hudson and John Humphrey. July Business Services is the mother company of Datapath Ltd. July Business Services is professional services firm committed to delivering focused retirement plan and other administrative services to business clients. We work closely with employers and financial partners to build customized services to meet their unique goals. Our consultants provide hands-on solutions for plan implementation and ongoing plan operation. We have many years of industry experience with clients ranging from small, closely-held businesses to large corporations competing in the global economy. July Business Services is one of the leading names in retirement plan industry in U.S.A. July Business Services is providing the following services to its US business client. 1. Plan design 2. Plan setup 3. Plan administration 4. Participant services 1. Tailored Plan Design We build retirement plans to meet the unique goals of each employer. Whether the objective is employee recruitment and retention or maximizing benefits for key employees, we have the expertise to design the best plan for you. Recruitment & Retention Retirement plans are a great tool for improving employee recruitment and retention. Good choices include 401(k) Plans, Safe Harbor 401(k) Plans, and Profit Sharing Plans. With the right mix of features, these plans can be designed to provide a great employee benefit while keeping employee funding costs to a minimum. Maximizing Contributions for Key Employees Plans can also be designed to maximize contributions for key employees. Options for this objective include Safe Harbor 401(k) Plans, New Comparability Plans, and Defined Benefit Plans. Cost and Benefit analysis of Outsourcing from the perspective of Datapath Ltd. Page No-5
Safe Harbor 401(k) Plans These plans allow highly compensated employees to contribute the maximum salary deferrals ($15,000 for 2006) without the risk of corrective refunds due to the plan failing the ADP Test or ACP Test. Safe Harbor 401(k) Plans automatically satisfy these tests. New Comparability Plans New Comparability Plans are a good alternative for companies wishing to retain some discretion in funding contributions while maximizing contributions for owners or highly compensated employees (up to $49,000 during 2006). Defined Benefit Plans These plans allow companies to provide employees with a stated benefit at retirement age (up to $175,000 for 2006) and require annual company contributions based on actuarial factors. Contributions do not have a statutory limit, but are limited only by the use of sound actuarial principals and factors. Defined Benefit Plans can be a great plan design for small businesses seeking to fund more than the $49,000 maximum under defined contribution plans. 2. Plan Setup Prototype Plan Documents Volume Submitter Documents Summary Plan Descriptions Loan Policies QDRO Procedure Other Required Forms• • • • • We provide all of the services to efficiently setup your retirement plan or to convert your existing plan from your current provider. Our dedicated setup team guides you every step of the way. Plan Documents We offer comprehensive plan documents prepared by experienced ERISA consultants. Our capabilities include:
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Our ERISA consultants understand plan design and have the experience to help you avoid costly mistakes. Cost and Benefit analysis of Outsourcing from the perspective of Datapath Ltd. Page No-6
Plan Setup & Prepare Enrollment Materials Coordinate Enrollment Meetings Prepare Setup Paperwork Contribution Submission Procedures Coordinate Transfer of Assets Prepare Letter to Previous Provider Coordinate Information Needed for Takeover• • • • • • •Conversion Your dedicated setup team provides hands-on services to coordinate all aspects of plan setup or conversion. Our services include: 3. Plan Administration Our consultants have over 25 years of plan administration experience and are experts in this highly technical field. A dedicated account representative will serve your plan, supported by a team of experienced professionals. Plan Operation Support We provide everything you ne Eligibility Calculations Contribution Allocations Vesting Calculations Distribution• • • •ed to maximize the value of your plan, including telephone and e-mail access to our consultants. Our services include the following: & Loan Processing Top Heavy Testing ADP• • • •Compliance Testing Your account representative provides complete compliance testing services to maintain the integrity of your plan. Our testing services include the following: & ACP Testing Minimum Coverage Testing General Nondiscrimination Testing Tax Compliance Our consultants deliver signature-ready tax returns to fulfill all tax filing requirements. Our services include the following: Cost and Benefit analysis of Outsourcing from the perspective of Datapath Ltd. Page No-7 •
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Form 5500 Form 1099-R & Form 945 Form 5330 (when needed) Form 5310 (for plan termination) 24 Hour Internet Access Daily Valuation of Accounts Plan Sponsor Account Access Quarterly Participant Statements• • • •Recordkeeping We provide automated recordkeeping services through our alliance partners and through our daily valuation recordkeeping platform: 4. Participant Services Enrollment Forms Investment Advice Many of the retirement products also include participant access to on-line investment advice and guidance. The ability for participants to receive online investment advice increases their chances of achieving a secure financial future, and as a result, can help to reduce plan sponsor fiduciary liability. For more information on which products provide investment advice, please contact our sales consultants or see information on featured products above.• Investment Fact Sheets
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Risk Profile Worksheet
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Investment Education • Enrollment Workbooks •Through our alliance partnerships with financial providers, we make available high quality tools for your participants to plan for and achieve a secure financial future. Onsite Enrollment Many of our recordkeeping and mutual fund partners conduct on-site enrollment meetings for your participants. These meetings include professional presentations, complete with power point slide shows, handouts and enrollment materials. The services offered by providers enhance the enrollment services offered by your independent financial advisor. Enrollment Materials All providers include professional enrollment materials to guide participants in making enrollment and investment decisions. These materials generally include the following: Cost and Benefit analysis of Outsourcing from the perspective of Datapath Ltd. Page No-8
Here in Bangladesh, Datapath provides all the administrative work for July Business Services and submitted the softcopy of all of its work through its own trusted network. Founding Partners Jim Hudson began his retirement plan specialization in the early 1980s while pursuing his career as a Certified Public Accountant. During this time, Jim became known as a specialist in this highly technical field. He was directly responsible for developing and managing a large retirement plan practice before founding July in 1994. John Humphrey also began his career as a Certified Public Accountant, providing tax consulting services with a large accounting firm before specializing in retirement plan administration. John co-founded July in 1994. Getting Started: Data-Path began operations in 1995, with no clients and a small professional office suite. During the early years, management worked to develop strategic business partnerships, hire key employees, and create business processes and procedures. The firm's marketing efforts resulted in important referral relationships, including investment advisors, mutual fund companies, banks, and brokerage firms. These relationships helped to create modest growth over the first several years. By the end of 1996, Data-Path had more than 250 retirement plan clients and 5 employees. Building Team Developed Foundation for Employee Culture Improved Efficiency of Service Delivery Implemented New Business Team Created Client Consulting Teams Created ERISA Consulting Team Created Dedicated Distribution Team Promoted Blake Willis to Partner• • • • • • • • •From 1996 through 2000, Data Path experienced an increased growth rate and added a number of key employees and partnerships. During this time, company management accomplished the following key objectives: & CAO Added and Developed Key Employees Improved Marketing & Sales Presence Cost and Benefit analysis of Outsourcing from the perspective of Datapath Ltd. Page No-9
Building Strategic Partnerships Relationships were formed with several key financial partners, including American Funds, MFS, First Mercantile, Hartford, ING, Manulife, and others. These relationships continue to benefit Data-Path clients by providing them with diversified investment options and automated plan recordkeeping services. By the end of 2000, Data-Path served more than 600 retirement plan clients and had approximately 15 employees. Recent History: Expanding Services Expanded Office Facilities Expanded Employee Training Program Improved Technology with Added IT Staff Added Dedicated Sales Department Started Daily Recordkeeping Services Opened Dallas• • • • • • • •In 2000, Data Path has continued to experience an increased rate of growth and has maintained good client retention statistics resulting from our efficient service, depth of technical knowledge, and friendly service team. The employee-friendly culture has created low turnover and high employee satisfaction. Other significant accomplishments since 2000, include the following: & Houston Offices Started Payroll Outsourcing Services Started Cafeteria Plan Administration Services Cost and Benefit analysis of Outsourcing from the perspective of Datapath Ltd. Page No-10
2.2 ORGANIZATIONAL STRUCTURE Cost and Benefit analysis of Outsourcing from the perspective of Datapath Ltd. Page No-11
Chapter 3 LITERATURE REVIEW .
CHAPTER: 03 LITERATURE REVIEW Outsourcing involves the transfer of the management and/or day-to-day execution of an entire business function to an external service provider. The client organization and the supplier enter into a contractual agreement that defines the transferred services. Under the agreement the supplier acquires the means of production in the form of a transfer of people, assets and other resources from the client. The client agrees to procure the services from the supplier for the term of the contract. Business segments typically outsourced include information technology, human resources, facilities, real estate management, and accounting. Many companies also outsource customer support and call center functions like telemarketing, CAD drafting, customer service, market research, manufacturing, designing, web development, content writing, ghostwriting and engineering. (Hawes, J, et all 2001) Outsourcing and off shoring are used interchangeably in public discourse despite important technical differences. Outsourcing involves contracting with a supplier, which may or may not involve some degree of off shoring. Off shoring is the transfer of an organizational function to another country, regardless of whether the work is outsourced or stays within the same corporation/company. (Homburg, C et all 2001) With increasing globalization of outsourcing companies, the distinction between outsourcing and off shoring will become less clear over time. This is evident in the increasing presence of Indian outsourcing companies in the US and UK. The globalization of outsourcing operating models has resulted in new terms such as near shoring, no shoring, and right shoring that reflect the changing mix of locations. This is seen in the opening of offices and operations centers by Indian companies in the U.S. and UK. A major job that is being outsourced is accounting. They are able to complete tax returns across seas for people in America. (Hess, Jon A. 2000). Outsourcing refers to large (predominantly IT) outsourcing agreements. Outsourcing is a framework to enable different parts of the client business to be sourced from different suppliers. This requires a governance model that communicates strategy, clearly defines responsibility and has end-toend integration. (Hawes, J, et all 2001) Strategic outsourcing is the organizing arrangement that emerges when firms rely on intermediate markets to provide specialized capabilities that supplement existing capabilities deployed along a firm’s value chain. Such an arrangement produces value within firms’ supply chains beyond those benefits achieved through cost economies. Intermediate markets that provide specialized capabilities emerge as different industry conditions intensify the partitioning of production. As a result of greater information standardization and simplified coordination, clear administrative demarcations emerge along a value chain. Partitioning of intermediate markets occurs as the coordination of Cost and Benefit analysis of Outsourcing from the perspective of Datapath Ltd. Page No-12
production across a value chain is simplified and as information becomes standardized, making it easier to transfer activities across boundaries. (Homburg, C et all 2001). There is growing apprehension among business leaders, economists, and ordinary American; that we are witnessing what may well be the largest out-migration of no manufacturing jobs in the history of the US economy. This concern has been fueled by newspaper reports and economic news highlighting the layoffs of thousands of people in high-tech, software and service sector companies in the US, and the practically simultaneous, seemingly coordinated establishment of offices and development centers, most often in India resulting in hiring of thousands of new employees in that country. For example, tabulation by the authors of reports in Indian newspapers and business journals for the month of July 2003 alone gave an estimate of 25,000 to 30,000 new outsourcing related jobs announced by US firms. In the same month, there were 2,087 mass layoff actions carried out by US employers resulting in a loss of 226,435 jobs.' The jobs being created in India and elsewhere are in a wide range of services sectors such as geographic information systems services for insurance companies, stock market research for financial firms medical transcription services, legal online database research, and data analysis for consulting firms, in addition to customer service call centers, payroll and other back-office related activities. (Hummon, P. & Patrick, D (2003). In this short overview we address the following questions: Have jobs been transplanted from the US? How significant is this phenomenon and how sustainable is it? What is the potential impact on future job creation and wage inequality in the US? How is it likely to impact the real estate sector? (Adler & Seymour 1980). Between 1987 and 1997, the share of imports in inputs used in US manufacturing increased from 10.5% to 16.2% and in high-tech manufacturing, such as computers and electronics, from 26 to 38% (See Figure 1). These data continue a long history of foreign outsourcing in US manufacturing and the associated loss of blue-collar jobs in many industrial sectors. Indeed, one of the attributes of the modem stage of globalization for advanced industrialized countries is the offshore production of intermediate inputs, usually in low-cost developing countries. The motivation, on the part of US firms, has been driven by the low costs of manufacturing abroad, primarily in the East Asian countries, such as Taiwan, China, South Korea, Malaysia and others, as well as the availability of skilled labor, the promotion of a businessfriendly environment and the existence of production and supply networks in those countries. At the same time, the higher value-added, better paying jobs in management, finance, marketing, research and development have been retained in the home country. (Hummon, P. & Patrick, 2003). Cost and Benefit analysis of Outsourcing from the perspective of Datapath Ltd. Page No-13
Considerable research has been carried out on the phenomenon of outsourcing in manufacturing and many of the economic insights and conclusions are applicable to Business Process/Services Outsourcing (BPOIBSO) as well. As pointed out by Bardhan, Jaffee and Kroll in their forthcoming book, Globalization and a High- Tech Economy, the outsourcing of parts of the supply chain of manufacturing has resulted in a shift of demand, and hence jobs, from blue-collar to white-collar and from manufacturing to services, increased wage inequality between blue-collar and white-collar jobs, and increased profitability of US firms, They also note that recessionary downturns seem to prod firms into making major restructuring moves, and that a recession might be the mother of innovation and dynamism.' (Jackson, W et all 200) The software sector was the first service sector to transfer significant activity to foreign locations, leading to the creation of a critical mass of expertise and resources in concentrated locales, such as the city of Bangalore in India. The rapid dissemination of the Internet, the transnational networks set up by immigrants in the US, and liberalization of emerging market economies created the conditions for a major burst of outsourcing in the 1990s, in hitherto primarily domestic segments of non-manufacturing sectors, such as telecommunications, retail trade, and finance (including banking and insurance). (Hummon, P. & Patrick, D2003). India’s information technology enabled services (ITES) sector, the primary destination of business services outsourcing from Western countries, now directly employs over 200,000 people with around $2.3 billion in exports, of which over 70% are to the US. While the sector is still small it is growing at a rate of 60% per annum. The software services sector overall has exports of approximately $9.5 billion, of which over $7 billion are to the US3. India’s National Association of Software and Service Companies (NASSCOM), the primary trade organization of all IT related firms, forecasts that exports would hit the $50 billion mark in the next five years. By that time, the business process/ business services outsourcing segment would employ over 2 million people, and the total exports of the IT industry would support over 8 million jobs. (Jackson, W et all 2000) The growth of the IT sector in general and the BPO segment in particular is not confined to India. Firms involved with software services outsourcing and BPO are rapidly gaining ground in the Philippines and Malaysia (call centers and other back-office BPO), China (embedded software, financial firm back-office BPO, some application development), Russia and Israel (high-end customized software and expert systems), and Ireland (packaged software and product development). While it is difficult to estimate the exact number of jobs created in these countries in these sectors, let alone those transplanted and created by US firms, tentative evidence collected by the authors suggests that business Cost and Benefit analysis of Outsourcing from the perspective of Datapath Ltd. Page No-14
process outsourcing and software outsourcing have together generated, at the very least, over a million jobs in the 1990s and hundreds of thousands more since the turn of the century. (Jackson, W et all 2000) The second half of the 1990s was a time of high employment and robust growth for the software-related sectors, as well as the services sector at large. The job creation from outsourcing in countries around the world during this period can be seen as spin-offs from the US because of tight labor markets, rather than job transfers out of the US in search of lower labor costs. However, the recent downturn and the continuing jobless recovery have legitimately given rise to the question whether services outsourcing involves the transfer of US jobs and occupations to other countries. Table 1 shows employment data for those sectors of the economy that felt a disproportionate impact of outsourcing. These include the computers and electronic products manufacturing sector (including its sub-sector, semiconductors and electronic components); professional and business services sectors such as business support services, which include call centers, and computer systems design services; and information industries such as telecommunications, software publishing, and Internet services providers. Between first quarters 2001 and second quarter 2003, i.e. in the course of just over 2 years, the employment in these sectors has plummeted by 15.5% in the US as a whole, and 21% in the state of California, corresponding to a job loss of over 1 million and 200,000 respectively in these sectors alone. (Jackson, W et all 2000) The occupational mix of a sector may determine its vulnerability. In BPO/BSO circles it is said half-seriously that any job that involves mostly “…sitting at a desk, talking on the phone and working on a computer…” is a job under potential threat. Figure 2 summarizes the essential attributes and features of jobs and occupations that might find themselves in jeopardy. (Jackson, W et all 200) While institutional and cultural compatibility and proliferation of the English language are key components of comparative advantage for countries that are destinations for BPO investment and activity, it is the cost differential, along with the availability of welleducated graduates, that provides the critical competitive edge. As Table 2 shows, the salaries of computer programmers in the emerging market countries of Asia and Eastern Europe are a factor of ten less than corresponding salaries in the US. The cost-differentia l in BSO is more difficult to pin down, since the range of occupations is so wide. Table 3 shows hourly wages for some sample occupations from the July 2002 National Compensation Survey of the Bureau of Labor Statistics matched with comparable occupations in India. The wage differential varies widely by occupation, with differences particularly high for lower wage, nonprofessional occupations and less extreme, although Cost and Benefit analysis of Outsourcing from the perspective of Datapath Ltd. Page No-15
still quite significant, at the upper end of the wage spectrum. (Johnston, J. & Thomas V. 1981). A lower wage scale is even more attractive if it comes with a well educated labor force. The three major emerging market economies—China, India, and Russia—have a sizeable higher education sector. While Russian expertise in many basic sciences and engineering subjects has been justly famous for decades, both the annual output and quality of science and engineering graduates from India and China have been increasing rapidly and are now comparable to the advanced countries. (Kildiff, M & David, K 1994) These countries face some constraints in exploiting this ongoing opportunity. India’s inability to provide education at the basic school level could stifle further growth in highly trained graduates. Russia faces growth constraints from a combination of institutional underdevelopment, erratic reforms and the gradual deterioration of the higher education system. The overpowering Chinese success in manufacturing may well be replicated later in the services sectors, but as yet business services outsourcing faces heavy language, institutional and cultural barriers. Rising wages and costs in these countries may spur secondary outsourcing to still less developed countries, but from the point of view of the US labor markets that are no consolation. (Krueger, Dale 1998) Despite these barriers, the phenomenon of services outsourcing is sustainable for the foreseeable future, unless there is a major disruption of the international economy or a severe backlash in the developed countries leading to establishment of regulatory hurdles. The benefits to US firms are the increased value addition and profitability resulting from savings due to low-cost outsourcing. (Lau, Geok-Theng et all 1999) With increasing globalization and the scope of companies becoming larger and more expansive, the concept of outsourcing has gained much more meaning than before. Outsourcing means the delegation of work to external firms or individuals either through a contract or not. The work can be done by brick and mortar firms or by freelancers operating from their homes or on the field. The basic essence is that some specific portions of the work are offloaded to people or firms who are not permanently related with the party providing the work. (Leary, M.R. & Maddux, J.E. 1987). Outsourcing means giving out work to someone else. That is the basic definition. You get the deliverables of the work within a stipulated deadline, and you make the payment for the work. After this, you might terminate the professional collaboration, or continue it with more outsourced work. (Lynne, Gary D. 1999). Cost and Benefit analysis of Outsourcing from the perspective of Datapath Ltd. Page No-16
Outsourcing is a general term, which refers to any party giving the work to an external party. However, a lot of work that is outsourced is also offshore. Off shoring refers to sending the work to a different country. This is where the cost cutting actually comes in. But there are several other benefits that are considered too. The following is a list of the benefits that an outsourcer gets when someone else does a portion of the work for them. (McNally, Regina 2002). Cost saving is certainly the number one benefit of outsourcing work. It is true that in Asian countries, work is done at a much lower cost than in the west. That is the reason why most American and European countries outsource their work to countries such as India, China, Pakistan, Philippines, Malaysia, etc. At the same time, there are highly qualified professionals in these eastern countries, but since the living expenses are lower, they can work at lower rates. Today, the main bulk of outsourced work is the work that is off shored from countries like America, Canada, United Kingdom, Australia and even Japan to these Asian countries mentioned above. (McNally, Regina 2002). Labor cost is very high in developed countries. But the same work can be done in third world countries through cheap labor. So, organizations of developed countries can come to third world countries to take this advantage. (Meyrowitz, Joshua 1997). For most companies, it becomes difficult after a point to handle all the aspects included in their business. A simple example would be handling their business website. Such singular jobs can be outsourced so that the company can focus more on the primary tasks such as production, distribution and promotion. Outsourcing reduces the overall workload of a Some countries do not have enough local talent to undertake a particular job, and even if they have, they may not be able to afford it. Consider a home business owner who wants to design a website. It is wisest for such an entrepreneur to look for outsourcing options on the Internet. (Doney, M. & . Cannon J 1997). Risk management has become an important concept in today's times with businesses becoming more experimental and innovative with their products and services. This is where outsourcing certain parts of the business can help. Outsourcing is generally done with a contract. That makes the person taking up the job becomes responsible and answerable for that part of the business. It is important to note here that if the company were to get this job done through its in-house staff, there would have been no specific contract for it, and the company itself would have been answerable if any problem did come out in the future. (Farnham, D 1999). When it comes to internationalization, outsourcing becomes necessary. Consider a US company that's trying to internationalize its business to China. Now, this will be Cost and Benefit analysis of Outsourcing from the perspective of Datapath Ltd. Page No-17
accomplished in the best way if the work were to be outsourced to China itself. (Forgette, R & Glenn J. 1999). Every company, howsoever much big it is in size, works under constraints of resources. These resources could apply to capital, staff, premises, and several other aspects. Outsourcing helps these companies to free up their resources. By delegating some of their work to others, they can use their limited resources for the more necessary tasks. This is also applicable for individual entrepreneurs who outsource their work. Gray, J & Dafna, E 1998). Doing jobs in-house for a long period leads to monotonousness. Getting that job outsourced ads to the freshness. This is more relevant in the creative tasks. Consider a company that outsource and advertising campaign. It is sure to get some very new ideas, different from what the company has been using in the past. (Forgette, R & Glenn J. 1999). When an external firm is handling a specific part of the job, they are definitely in much better position to accomplish that job carefully. They will know each and every aspect of the job and that will make troubleshooting easier in future. Instead, if the job were to be handled in-house along with a lot of other tasks, there is a definite chance that the problem-solving will become difficult. (Monsour, Michael, Vickie 1997) In some cases, the overall business might be good, but some aspect might be falling short of the customers' satisfactions. As an example, the product may be excellent, but the customer service isn't. This eats into the credibility of the business. But if this portion of the task is outsourced, it might heighten customer satisfaction with the product. (Morris, Michael H., et all 1997) Some of the major potential disadvantages to outsourcing include poor quality control, decreased company loyalty, a lengthy bid process, and a loss of strategic alignment. All of these concerns can be addressed and minimized, however, by companies who go about the outsourcing process in an informed and deliberate fashion. Info World's Maggie Biggs counsels businesses to define "exactly what business processes and/or functions it makes sense to maintain via a service relationship. Unless you have a lot of resources to expend, it may make sense to prioritize outsourcing projects based on the number of benefits you expect to gain from the arrangement." There may also be inherent advantages of maintaining certain functions internally. For example, company employees may have a better understanding of the industry, and their vested interests may mean they are more likely to make decisions in accordance with the company's goals. Indeed, most analysts Cost and Benefit analysis of Outsourcing from the perspective of Datapath Ltd. Page No-18
discourage companies from outsourcing core functions that directly affect the products or services that the business offers. (Morris, Michael H., et all 1997) To plan, monitor, and oversee the search for and organize a top management Steering Committee transition to outsourcing. Include members from your information systems division, key user groups, and executive management including marketing and/or strategy management. It is best to factor in changing needs, markets, and distribution channels from the start to help minimize surprises a few years out. Also, I believe that it is just a matter of a few years before corporate officers and directors will be sued by shareholders for losing important information resources, losing effectiveness, or leaving the company vulnerable to competition because of messing up an outsourcing deal. Thus management needs to know and be part of this process to assure due diligence is being performed and to provide appropriate stewardship up over these key corporate information assets. (Dean, Dwane Hal 2002). To guide you and your organization during the outsourcing Identify and engage an expert team decision, selection, and contracting processes. The team should include a small group of independent with specialization in outsourcing, including: an information technology consulting expert’s professional who understands your needs and the needs of the outsourcer and who is capable to help you administer the contract over time, assure a smooth migration to the new systems, and resolve problems that will arise after the contract is signed; an with specific contracting, business attorney and outsourcing expertise to develop and help negotiate an outsourcing contract that is fair to all parties and provides proper incentives for both sides to perform to make the relationship work; and an to help assure that the transition of organization development/merger and acquisition professional staff and relationships works well. This team is also warranted and needed to make tough decisions because perceived or actual weaknesses in your current IS team may have caused the failure of IS within your company in the first place. In addition, it is wise to engage independent experts to assist your IS managers in this process as it is these latter managers themselves that will probably be most directly affected by the move to outsourcing and the resulting contract(s). (Newcomb, I.M. 1953). Identify critical internal resources, such as a particularly competent data processing director or chief information officer, who will stay on your company's staff internally to help manage and administer the relationship between the outsourcer and your company. Determine which staff, and software and hardware licenses and resources should/must go to the outsourcer for the relationship to be successful. (Newcomb, I.M. 1953). Identify what is good and bad about your current installation in terms of: service; capability; performance; uptime; costs; user satisfaction; backlog; ontime, on-target Cost and Benefit analysis of Outsourcing from the perspective of Datapath Ltd. Page No-19
systems delivery; controls; etc. assess each strength and weakness (budget constraints; changing needs of internal users; top management commitment; resistance to change; lack of tools and human resources; staff development and ability to attract and retain quality staff; lack of methodology; hardware technology limitations; platform limitations, etc.). Quantify and identify which items and service levels are "must haves" vs. "should haves" vs. "could haves", "now" vs. "later", etc. and which components must be improved and attained in the outsourcing arrangement. Shoot for "good enough" systems and targets that are attainable, affordable, and of necessary quality. (Chaudhuri, Arjun & Morris B. Holbrook 2001). Update the company's strategic business plan. The outsourcing agreement will typically cover a period of 7 to 10 years. To the extent possible you must know where your company is going locally and globally in terms of products, markets, manufacturing, sources of supply, distribution arrangements, labor sources, etc., before developing a systems plan to support those directions and needs. (Newcomb, I.M. 1953). Develop a strategic systems plan (7 to I 0 years, if possible) identifying the long-terms needs of the company that dovetail into the strategic business plan. Determine the new applications that will be required (for instance, electronic data interchange, integrated manufacturing and production control using robots and automated "smart" buildings, international telecommunications networks, "intranets" etc.), which applications will be updated, which will be discontinued and when, which will be developed from modified new applications software. (Chaudhuri, Arjun & Morris B. Holbrook 2001). Identify the alternative hardware and operating systems alternatives and determine the recommended new architecture(s) needed to develop and support the new systems plan (for instance: satellite communications, wide area networks, wireless communications, mainframe and client-server usage and inter-connect, specific operating systems, openarchitecture decisions, database and programming language decisions, special development and maintenance tools, etc.) (Nicolson, Carolyn Y et all 2001) Understanding the cost structure and determine/estimate future costs to create and support the projects outlined in the strategic systems and architecture plans developed in steps 6 and 7 above, including estimates of manpower and supporting hardware and software and equipment to build, upgrade, maintain, operate, and control such systems. Recognize that over the next 5 to 10 years you must also estimate all relevant capital as well as operating costs; costs of supervising the outsourcer, likely increases in costs for salaries, benefits, service contracts, etc.; "cost of money"; interest costs; residual value Cost and Benefit analysis of Outsourcing from the perspective of Datapath Ltd. Page No-20
of equipment and facilities; cost of transition, including personnel; cost of changes in direction and level of resources; cost of contract modification, etc. (Note: this is a most difficult task use your expert team for guidance or confirmation here.) (Nicolson, Carolyn Y et all 2001) Identifying your current and anticipated usage: normal operations, expanded operations over time, peak periods, off-site processing, storage, archive, integrations requirements, back up and disaster recovery requirements, etc. (Okuda, Hidetaku 1995). Reviewing the strengths and weaknesses of the outsourcing alternative. Determine whether how the outsourcing alternative will help your company achieve its long term goals and why that alternative is better than staying inhouse or partial outsourcing or working with multiple outsourcers. Determine which applications and resources should be outsourced and which should continue with a different approach. Update this information and re-evaluate the decision throughout this entire decision-making process as new or better information is gained. (Pau, Jae H., et all 2002) Using the expert team, identify several outsourcing alternatives. Obtain appropriate literature in a request for information from the team's preselected short list of outsourcers. (Petty, Richard E, et all 2003) Beyond all of the technical and administrative things you will need to know about your outsourcer, you will also need to know in depth: corporate history and stability; current, new and lost customers; employee numbers, turnover, and experience levels; financial stability through a review of audited financials and footnotes; technological status including methodologies, tools, platforms, expected life of existing hardware; age of current applications; their own business and systems plan; downtime statistics; results of operational and security audits; customer surveys and systems demonstrations (both are critical and must be well planned); conversion commitment success/history (a real "killer" if done incorrectly); such intangibles as responsiveness, control, competition for resources, flexibility, etc. (Andreassen, Tor Wallin 2000). Determining which areas of your company you would like to outsource. Identify a phased-in approach for outsourcing services if that is the preferred method.Services can be selected for virtually any part of your Information System areas including: All activities in a specified area (with only listed exceptions) vs. defined tasks, Provision of facilities, utilities, etc., Equipment, Applications software, Systems software, tools, etc., Personnel, Consulting services, Systems integration, Development of new programs Cost and Benefit analysis of Outsourcing from the perspective of Datapath Ltd. Page No-21
and systems, Data conversion, Live system operation, management, and control, Communications equipment, software, and interfaces, Daily and periodic processing and reports (accuracy; timeliness; formats), Responsibility for troubleshooting, Compliance with applicable laws, Audit trails, Pickup and delivery, Physical security, Data and program security, Backup procedures for programs, data, etc., Disaster recovery capabilities, Data entry , Maintenance, PC service, PC installation of hardware, software, and modifications, Help Desk. (Ammaniti et all 2003) Developing a rigorous request for proposal (RFP) which has a format that forces the responding outsourcer to answer questions in a way that will allow you to compare responses from multiple outsourcers. Ask outsourcers to simplify their answers to pricing so that you can really understand what services will be included and which will be extra. Note that pricing can take on many forms, and that different services may be priced differently or in alternative combinations to your advantage: flat monthly fees; transaction volume-based fees; fees based upon a customer unit of volume (i.e., number of customers, accounts, credit cards); fees based upon CPU usage required to execute your jobs; fees based upon the number of input or output transactions or both; fees based upon the amount of disk storage or other storage requirements; programming fees - may be different from enhancements, new developments, special reports, or rush jobs; data communication line charges; disaster recovery rates; training and seminar fees; consulting fees; documentation charges; conversion fees; etc. ( Cadinu, Maria Rosaria & Leyla, De Amicis 1999). Identify some key clauses that you would like to see in the contract so that you may be able to win some concessions on these during the bidding phase and so that you can determine the sticking points early. (Chandy, et all 2001) Identify Acceptance Criteria for outsourcer bids and for systems and service acceptance throughout the life of the contract: the accuracy, frequency, and timing of reports and information; response time for online transactions; uptime of the systems or the various components; emergency procedures in the event of downtime or other disruption of services; responsiveness of outsourcer personnel in the event of problems or errors; data archiving; access security; ease of use; unit, string, systems, and acceptance testing methodologies to be used; systems development methodologies and user participation and signoff points; usage of data query, parameter-driven, fourth and fifth generation languages in programs; user of upper- and lower-CASE tools, client-server architecture, and object oriented approaches; etc. (Boswell, Donald L. & David K. Dodd, 1994). “ Invite bidders to a bidder’s conference at your site and take each bidder on its own tour of your site. Have top management and the Steering Committee meet with the Cost and Benefit analysis of Outsourcing from the perspective of Datapath Ltd. Page No-22
outsourcing representatives for at least 45 to 60 minutes during the tour to set the tone and to demonstrate the importance and visibility of the study and resulting relationship. This can be very important if your top management must meet with the outsourcer's top management in the future. (Phan, Phillip H.& John E. Butler 2003). Evaluate proposals against your pre-established, and fully documented, criteria. Identify different approaches recommended by the outsourcer and determine how they differ from your own research and preliminary conclusions. Be open to suggestions but analyze differences carefully. Follow up with outsourcers to discuss alternatives and to clarify proposals. (Bangs, David H. Jr. & Linda, Pinson 1999). Rank proposals so that you have a backup vendor. This is needed in case negotiations break down with your preferred vendor. It is also required to give you the confidence to negotiate in a tough but fair manner. (Phillips, Joan M., Ben S. Liu, & Thomas G. Costello 1998). Identify absolutely necessary criteria early. No matter how well the outsourcer looks in other areas, if they don't meet the minimum "must-haves" - they should be contacted for clarification or dropped from the list. Any weighting or decision scheme that does not have this preliminary "go or no-go" decision point should be avoided. (Peterson, Robin 1989). Checking references is a critical part of the evaluation and comparison of outsourcers. Do it seriously. Visit other customers. If possible, review their contracts and the status reports on key projects. Establish a long-term communication flow. Don't underestimate the experiences of others with the outsourcer and/or assume your experience will be different. (Proudford, Karen L. & Kenwyn K. Smith 2003). Negotiate the contract using your expert team and using pre-determined target clauses, criteria, and escalating alternative dispute resolution (ADR) options to keep the outsourcing agreement and relationship on track. (Proudford, Karen L. & Kenwyn K. Smith 2003). Cost and Benefit analysis of Outsourcing from the perspective of Datapath Ltd. Page No-23
CHAPTER 4 MANAGING THE OUTSOURCING (The Process in Datapath Ltd.)
CHAPTER: 04 MANAGING THE OUTSOURCING (THE PROCESS IN DATAPATH LTD) Organizations around the world are increasingly considering outsourcing as a strategic management tool, which can be leveraged to allow them to focus on their core competencies. Outsourcing is viewed as a means to reduce costs, improve customer satisfaction, and provide enhanced efficiency and effectiveness. However, many organizations never realize the full benefits of an outsourcing relationship. Outsourcing relationships fail when they are viewed as short-term or tactical solutions, rather than part of long-term strategic plans. The process of considering and/or implementing an outsourcing solution must be systematic and fully documented to achieve the desired results. A multi-step approach, including Planning, Analysis, Design, Implementation, and Operations phases, along with a contingency exit strategy, is required to achieve a successful outsourcing implementation. July Business Services selected Datapath Ltd. for outsourcing its services and managing the process now. July Business Services is not taking the decision in one day. Managing outsourcing is not an easy task. It follows some phases. An ideal managing process of outsourcing is given in the following. In Part One of this two part presentation, we will look at the first three phases: Planning, Analysis, and Design. 4.1 PHASE ONE: PLANNING STRATEGY Traditionally, outsourcing initiatives focused on headcount or cost reductions. Today, however, outsourcing is a more strategic decision, focusing on core competencies. Thus, it must have the full support of senior management, and all goals and objectives must be articulated from the top. Before outsourcing a business function, a Strategy and Goals document should be drawn up; detailing the organization’s outsourcing intentions, the strategic rationale for outsourcing, and describing: •
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Processes to be outsourced Objectives for outsourcing Cost and Benefit analysis of Outsourcing from the perspective of Datapath Ltd. Page No-24 •
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Relationship of outsourcing to the overall corporate strategy Links between the outsourced process and the organization’s core competencies Strategic forces driving the organization into an outsourcing relationship Scope of coverage Critical risks involved Expected duration of the relationship The strategy should focus Strategy and outlines the will realize
sessions which result in the formulation of this document on questions of core versus non-core processes. The Goals document then creates a value proposition that expected benefits customers - both internal and external because of the outsourcing arrangement.
Core vs. Non-Core Processes The definition of a non-core competency is any process that does not generate income or help your organization increase its market share. Non-core processes should be outsourced, allowing the organization to realize financial and competitive advantages by reallocating internal resources to focus on core competencies. To help identify business functions that are core competencies, ask: 1. Does this process create or defend a unique competitive advantage for the organization? 2. Is this process contributing directly to business growth or expansion? 3. If the organization was a start-up, would we build this capability internally? 4. Would other companies hire us to do this for them? Information Technology and Human Resources are non-core business competencies that have blazed the outsourcing trail. As the outsourcing of IT and HR has matured, other business competencies have jumped on the outsourcing bandwagon. Forecasts show that outsourcing the Finance or Accounting function is the fastest growing outsourcing trend. Expected Benefits of Outsourcing Typically, organizations can expect to realize the following benefits from a strategic outsourcing initiative: 1. Improved company focus, leaving operational details to the outside experts. 2. Reduced operating costs. 3. Increased customer satisfaction. 4. Re-allocation of internal resources to core activities. Cost and Benefit analysis of Outsourcing from the perspective of Datapath Ltd. Page No-25
5. Access to world class capabilities and services, without the need to build from the bottom up. 6. Reduced risk. Markets, competition, government regulations, financial conditions and technologies all change extremely quickly. Outsourcing is a vehicle that enables the organization to share these risks with the outsourcing provider. 7. Improved cost, quality, service and cycle times. 8. Cash Infusion. In some cases, outsourcing involves a transfer or sale of company assets to the provider. 9. Increased capital funds availability. Resources can be acquired through alternate methods rather than capital expenditures. 4.2 PHASE TWO: ANALYSIS Phase Two involves preparing and delivering a request for proposal (RFP), examining proposals, evaluating outsourcing providers, and determining required service levels. Request for Proposal (RFP) Before writing a Request for Proposal (RFP), the organization should prepare a list of possible outsourcing providers. This list should not include the entire universe of organizations providing the service, but typically those 10-15 companies that would appear to have the greatest synergy with your organization. The Request for Proposal itself should provide a complete picture of every aspect of the business function to be outsourced. Vagueness in the content of an RFP results in outsourcing providers submitting proposals based on assumptions about deliverables, which could quite possibly result in increased costs over the life of the outsourcing agreement. A well written RFP contains twelve basic elements: 1. Statement of Purpose. The nature and extent of the services to be outsourced and the overall objectives of the contract. 2. Background Information. An overview of the process as it is performed now, including relevant statistics, relationships with other outsourcing providers, facilities, and automated systems, along with an honest accounting of current problems and strengths. 3. Scope of Work. Specific duties to be performed by the outsourcing provider versus those to be performed by the contracting organization and/or other parties. Cost and Benefit analysis of Outsourcing from the perspective of Datapath Ltd. Page No-26
4. Term of Contract. Length and options for renewal. 5. Deliverables. A list and schedule of all products, reports, and plans to be delivered to the contracting organization. 6. Outcome and Performance Standards. Outcome targets and minimum performance standards expected of the outsourcing provider, as well as methods for monitoring performance and the process for implementing corrective actions. 7. Payments, Incentives, and Penalties. Terms of payment for adequate performance, the basis for incentives for superior performance, and penalties for inadequate performance or lack of compliance. 8. General Contractual Conditions. Standard government contracting forms, certifications, and assurances. 9. Special Contractual Conditions. Requirements unique to this contract. 10. Requirements for Proposal Preparation. Required format and content of the response to the RFP, including information to be submitted on outsourcing provider's personnel, technical and corporate qualifications. 11. Agency Contacts and RFP Schedule. Persons to contact with questions regarding the RFP, along with any contact restrictions, dates for submitting questions, pre-proposal conferences, submission of proposal, etc. 12. Evaluation and Award Process. Procedures and criteria for evaluating the technical proposals and bids, and for making the contract award. Finding the "Right" Outsourcing Partner In the ideal relationship, both the organization and outsourcing provider share a similar vision and contribute equally to the success of the project. The right partner can help the outsourcer define realistic expectations and articulate benefits of moving the process outside. Finding an outsourcing partner that can share your vision and merge seamlessly into your organization’s culture requires significant up-front effort. Several formal and informal meetings will be required get to know one another, to achieve a complete understanding of the scope of the project, and to fully discuss the specifics of the processes and procedures. Cost and Benefit analysis of Outsourcing from the perspective of Datapath Ltd. Page No-27
During the selection process, tough questions need to be asked, like: •
Is there strategic synergy between the two organizations? Can they work together to achieve a high level of benefits? Is there opportunity for growth? Can the relationship - and its benefits - be expanded? Does the relationship reduce the level of risk for your organization? Is the vendor financially viable? Is there good "chemistry" between your organization and the provider? Are your corporate cultures compatible? Is there clarity of purpose? Are the goals and benefits explicit and clear? Does each party benefit fairly from the relationship? Is this a "win-win" situation? Does the outsourcing provider have in place a management team capable of delivering best in class services? Does the outsourcing provider have the technology environment needed to support world class service? Is there a strategy in place for maintaining state-of-the-art technology and the updated skills to operate it? •
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Can the outsourcing provider leverage industry experience to devise improved solutions? Determining Financial Benefits of Outsourcing In evaluating the financial ramifications of outsourcing a business process, organizations often employ a simple Straight Dollar methodology, comparing the bid of one outsourcing provider to the bid of another. Then comparing the winning bid to the straight costs of performing the process internally. This method fails to consider the true impact of outsourcing. Instead, more sophisticated methods of evaluation, like the impact on cash flow, or on efficiency (Return on Equity and Return on Assets) and value creation (Total Business Return and Economic Value), will provide a complete picture of the potential benefits the provider and/or the outsourcing strategy can bring. 4.3 PHASE THREE: DESIGN A sound agreement is critical to the success or failure of an outsourcing engagement. It allows the organization to maximize the rewards of outsourcing, while minimizing the risk. Each party must understand the reasons for the outsourcing decision and approach the contracting process with a give and take philosophy. Cost and Benefit analysis of Outsourcing from the perspective of Datapath Ltd.
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It is essential that the outsourcing contract reflect all the critical issues, specifically the scope, performance, and pricing. Important contractual considerations include: •
Terms of agreement. Today’s trend is toward a shorter-term, renewable option (2-5 years). •
Scope of project. The contract should specify the services to be provided in as much detail as possible. If this description is absent, disputes may arise as to whether particular requests are inside or outside of the scope of the project. It is in the best interests of both parties to have a complete listing of all services to be performed, service levels, and deliverables detailed in the agreement. •
Confidentiality. The agreement must specify that the organization owns the information it submits to the outsourcing provider and that the information is to be kept strictly confidential. Service level agreements. A contract should include service level agreements (see more on SLAs below). Without them, there are no objective criteria for managing the outsourcing relationship. Performance measures should be easy to understand, relatively few in number, and reasonable/possible. •
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Warranty. The vendor warrants that it will provide the services as defined in the agreement and will accommodate a specified increase in requirements. Change management. The contract should spell out the cost/fee implications of changes to the original agreement, and the personnel authorized to request and accept changes. Planning for change is critical to the success of any outsourcing agreement. •
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Pricing. Pricing is an area where flexibility can be used to reward both the organization and the outsourcing provider. A new trend involves spreading business risk by adding a quality or performance bonus tied to service level agreements. This is meant to guarantee that the outsourcing provider has a significant interest in the organization’s business performance. •
Termination plan. How the decision to terminate the relationship will be executed in a fair and equitable manner, without resulting in disruption in services.
Cost and Benefit analysis of Outsourcing from the perspective of Datapath Ltd. Page No-29
Service Level Agreements (SLAs) Properly structured performance incentives and penalties enable the outsourcing provider to work with your organization as a partner, be accountable for their performance, and tangibly demonstrate the value they bring to your organization. The most successful outsourcing relationships involve the outsourcing provider and the organization participating in continuous process improvements. Performance incentives should focus on: •
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Clearly understanding the areas impacted by the outsourcing relationship. Identifying the Key Performance Indicators (KPIs). Defining the handoff between the internal organization and the outsourcing provider. Putting substance behind the attainment of service levels. •
When establishing the performance indicators or SLAs, a defined structure like the one outlined below will eliminate ambiguity. SLA Structure 1. Objective: The business reason for measuring the service level 2. Definition: A specific definition of the service level 3. Method: A description of how performance will be measured 4. Period: The time through which the performance will be measured 5. Action: What happens when service levels are and are not met? If developed in detail, service level agreements will provide you with the information needed to fully understand the quality of service your outsourcing provider is delivering. Outsourcing agreements should always be living documents. The organization should monitor and evaluate the performance of their outsourcing provider in relation to the agreement on an ongoing basis. Cost and Benefit analysis of Outsourcing from the perspective of Datapath Ltd. Page No-30
4.4 PHASE FOUR: IMPLEMENTATION During the implementation phase, the transition from in-house provision of services to outsourcing is made. To ensure complete capture of all critical elements of a project, the outsourcing provider should adhere to a formal project management process, including: Assignment of a dedicated Project Manager: The center point of contact for the project’s implementation is the Project Manager. This person manages all phases of implementation and controls project planning, task assignments, project issues and resolution, status reporting, along with any direct client contact necessary to manage and control the project deliverables. Completion of a Requirements Study: A Requirements Study documents and provides definitions of and solutions for all of your organization’s requirements. The document generated by the Study details the organization’s system needs and how these needs will be implemented in the environment. It also defines any customizations required, and fully describes the project plan. Establishment of a project timeline with designated milestones and sign-offs: At key points throughout the project, your organization should be asked to sign off on the completion of major milestones in the design and development process. These sign-offs serve to indicate an agreement between the outsourcing provider and the organization that the specified deliverable has been completed to the satisfaction of both parties. Report customization: The outsourcing provider can assist in determining the design and data content of requisite reports. System design, development, and configuration: This is where the process of building the outsourcing solution actually begins. Custom rules, identified as part of the definition of project requirements, are detailed and defined to include analysis, design, and specifications. Recommendations of test scenarios and test guidelines are created. All necessary code is developed and integrated into the system. At this stage, all documentation is finally completed. System testing: A plan is established to ensure that the solution developed by the outsourcing provider works correctly, is complete, and meets the organization’s specifications as previously outlined in the definition of project requirements. Cost and Benefit analysis of Outsourcing from the perspective of Datapath Ltd. Page No-31
Transition to "Go Live": This is the final stage of project implementation. Once the project has been designed, developed, configured, and tested, it is ready to be activated or "go live". 4.5 PHASE FIVE: OPERATIONS Signing an outsourcing agreement should not and cannot mean the abdication of the organization’s responsibility for the business activity. Effective management of the relationship between the organization and the outsourcing provider is key to the success of the project. Strong working associations must be developed on multiple levels to gain the trust and understanding needed for a successful, long-term partnership. The outsourcing provider should appoint a dedicated account manager, who will be resident at their location, but travel widely throughout the customer organization. The organization should assign a project manager or single point of contact, who is knowledgeable in terms of the outsourced infrastructure and its cost drivers. This management team then becomes responsible for establishing and maintaining open communication channels and ensuring the success of the project. Additionally, the outsourcing provider’s personnel should be trained to understand the organization’s business environment, culture and goals. This will help them develop sensitivity to the key issues that drive the organization. It is also a good idea to include provider staff in internal meetings and improvement programs, and to encourage joint participation and sponsorship of quality teams and/or recognition events. On average, organizations report that 4% of the outsourcing contract’s value is spent on managing the relationship. Measuring Success Ultimately, successful outsourcing relationships must focus on results. To be meaningful, these results have to be objective, measurable, quantifiable, and comparable with preestablished criteria. Interestingly, according to a survey of executives by Price Waterhouse Coopers, the financial benefit realized from outsourcing non-core business processes is not the main reason for satisfaction with the decision. Most of the executives surveyed saw the practice of outsourcing as a means of transforming their business strategies around core competencies. Their goal was to realize improvements in process efficiency, Cost and Benefit analysis of Outsourcing from the perspective of Datapath Ltd. Page No-32
effectiveness, and customer and/or end user satisfaction, more than to achieve a given cost benefit. A powerful technique for managing the outsourcing relationship and measuring its success is the use of balanced scorecards. Balanced scorecards include categories representing the most general level of expectations -- usually built around cost, service, and quality. Within each category, specific attributes are defined through a joint buyerprovider process, with the exact composition and number depending on the goals of the relationship and the service in question. Choices are made about an appropriate measure for each attribute. Terminating an Outsourcing Relationship In most cases, following the steps outlined above will result in an outsourcing solution that is viable over the long term. However, sometimes even the most carefully considered and well-structured plan can break down, requiring termination of the outsourcing relationship. This may be the result of cause or convenience, but in either case, a predefined exit strategy and termination plan is essential. Issues to consider in formulating a termination policy, include: •
How services will wind down if the vendor is terminated for cause; how long the process will take; and any penalties that may accrue. How much notice is required to terminate the vendor without cause, for convenience? Typically, sixty to ninety days is considered sufficient notice. If termination is for convenience, will the organization pay a termination fee to the vendor and how will this be structured? •
•
Ultimately, the goal of the exit strategy is to guarantee no gaps in the performance of the business process, along with a seamless transition to either another outsourcing provider or back into the organization. A properly planned, well-structured and carefully managed approach to outsourcing noncore business functions can prove of tremendous benefit to your organization. But, the decision to outsource cannot be made lightly. To be successful, outsourcing must result from a long-term strategic plan, not from short-term perceived benefits. July Business Services does not follow all the above steps thoroughly. When the management body thought that it was the time to go for outsourcing for being competitive, it is going through planning phase. First, it decided which services it was going to outsource, what is the objectives for outsourcing, is there any Relationship of outsourcing to the overall corporate strategy, is the company going to outsource its core Cost and Benefit analysis of Outsourcing from the perspective of Datapath Ltd. Page No-33
service. As a result of outsourcing, it can reduce its operating cost, increased customer satisfaction, can be able to reduce its risk and finally it can improve cost, quality, service and cycle time. Then it has gone for analysis the proposal. First, it has decided from where it will outsource and from which company. After analyzing the proposal and selected Bangladesh as location, then it has gone to establish the company and design the contract. After that management body, appointed one general manager as project manager and one international manger for implementing the outsourcing project. As the owner of Datapath Ltd. and July Business Services is same, the operation of the outsourcing project here in Datapath Ltd. is easy than the other outsourcing business. Cost and Benefit analysis of Outsourcing from the perspective of Datapath Ltd. Page No-34
CHAPTER 5 COST AND BENEFIT ANALYSIS
CHAPTER: 05 COST AND BENEFIT ANALYSIS 4. Data path is a registered outsourcing company owned by Jim Hudson and John Humphrey. The name of its mother company is July Business Services which is operating in the U.S.A. Now the world is very competitive. Competition is everywhere. July Business Services is also facing competition in its home country. To be cost effective it has started its operation in Bangladesh as a form of outsourcing company and given its name as Datapath. In Bangladesh, these types of companies are helpful for generating revenue and employment. Bangladesh has cheap human resources, cheap infrastructure cost and some other facilities with low cost and where foreign companies get opportunity to reduce its cost by getting the same services and be able to become more competitive. As a result, this organization can be able to provide better services than it competitors. Here for clarifying the total scenario, I will discuss in which perspective, July Business Services, gets its cost advantages. This will be discussed in the tabular and in the narrative form. As a result it will be clear that in how many areas July Business Services get its benefits and what is its value. Simultaneously, I will depict in how many areas Bangladesh government gets benefits and it will be discussed in the narrative form. Here, for business purposes exact data is not given. 5% error should be considerable. 5.1 WHAT BENEFITS JULY BUSINESS SERVICES GETS FROM OUTSOURCING July Business Services gets benefits from the following perspectives. 1. Human Resource 2. Commercial Real Estate Leasing 3. Internet 4. Power 5. Maintenance 1. Outsourcing Advantage Evaluation: Human Resource Perspective In U.S.A July Business Services is operating its in Waco, Texas. In that office, 60 people are working. But for making comparison logical, we assume the number of employee is 50. On an average, every employee gets $5000 per month as remuneration and working Cost and Benefit analysis of Outsourcing from the perspective of Datapath Ltd. Page No-35
from 9 am from 6 pm where as in Bangladesh, Datapath has 50 employees. On an average, each of them is getting $358 per month as remuneration. Table: 1 Human Resource Perspective U.S.A (a) Unit Salary Employee Total Remuneration Cost Savings (a-b) $5000 50 $250000 Bangladesh (b) $358 50 $17900 $232100 From the above table it can be found that July Business Services is getting $232100 cost advantages when it started its full phase operation in Bangladesh. As a result it can reduce its services charges accordingly and get competitive advantage in the retirement industry. 2. Outsourcing Advantage Evaluation: Commercial Real Estate Leasing perspective For operating any organization, office space is important. In case of service organization it is very important. For, operating business in U.S.A. July Business Services lease 7000 square feet space and cost of per square feet space is $ 7.40. On the other hand, in Bangladesh Datapath lease 6000 square feet space for its operation at the rate of $1.72 per Unit. For comparison, we assume July Business Services lease 6000 square feet space. Table: 2 Commercial Real Estate Leasing perspectives U.S.A (a) Unit Price (per Square feet) Space (In Square feet) Total Cost Cost Savings (a-b) $7.40 6000 $44400 Bangladesh (b) $1.72 6000 $10320 $34080 Above table shows that July Business Services can save $34080 from leasing commercial real estate. 3. Outsourcing Advantage Evaluation: Internet perspective In case of any outsourcing, information system is very important. Here in Bangladesh, Datapath is doing all its activities through the original server of July Business Services by using internet. Internet speed is very slow in Bangladesh because we are not still getting Cost and Benefit analysis of Outsourcing from the perspective of Datapath Ltd. Page No-36
the full advantage of optical fiber. That why, to minimize this problem Datapath is taking dedicated internet line which speed is 1.44 mbps and the cost of this service $8600 per month. But in U.S.A internet speed is very fast and the cost of this service $10000 per month. All the computer of July Business Services and Datapath is connected by one network. If anyone wants to do anything he/she must enter in that network and then he/she can do his/her work. Table: 3 Internet perspective U.S.A (a) Total Cost Cost Savings (a-b) $10000 Bangladesh (b) $8600 $1400 From the above table it can be found that July Business Services can also save $1400. But here the main thing is that internet service is far better in U.S.A than in Bangladesh. For doing any work in U.S.A. if it takes 5 minutes then in Bangladesh it takes 7 or 8 minutes. 4. Outsourcing Advantage Evaluation: Power perspective For operating any business, power is one of the key things. In U.S.A, there is no shortage of power. For that reason business firm does not consider alternative power source in case of shortage. Every month firm provides service charge and feel free that there will be no problem in power. But in Bangladesh, one of the biggest problems is power. Here there is no guarantee that power will be available all time. For that reason, most of the business firms arrange alternative power source. Like this Datapath has its own alternative power source in case of shortage. In U.S.A July Business Services provide $6500 service charge per month for power supply and in Bangladesh, Datapath provides $5000 service charge per month. Table: 4 Power perspective U.S.A (a) Total Cost Cost Savings (a-b) $6500 Bangladesh (b) $5000 $1500 So, from the above table it can be found that July Business Services can save $1500 per month from power expense. Cost and Benefit analysis of Outsourcing from the perspective of Datapath Ltd. Page No-37
5. Outsourcing Advantage Evaluation: Maintenance perspective July Business Services buys office stationary, provide lunch and some other food during office time and buys other office maintenance things. For this purpose it spends $10000 per month. In Bangladesh Datapath does the same thing but cost of food and other things is very cheap here. That’s why it takes only $3200 per month for this purpose. Table: 5 Maintenance perspective U.S.A (a) Total Cost Cost Savings (ab) $10000 Bangladesh (b) $3200 $6800 Overall Cost Savings Table: 6 Overall Cost Savings Savings Human Resource Commercial Real Estate Leasing Internet Power Maintenance Cost Savings (a-b) $232100 $34080 $1400 $1500 $6800 $275880•In case of maintenance, July Business Services can save $6800 and increase its strength in competitive market. After combining all segments, July Business Services is saving total $275880 per month when it started its full phase operation in Bangladesh through Datapath. Except the above main factor there are some other factors which are not negligible. In U.S.A, companies paid federal tax and state tax but in Bangladesh, companies paid tax for only one time. It can be said that in Bangladesh, companies are paying less tax than the companies in U.S.A. So, July Business Services is also saving tax by outsourcing its business in Bangladesh. Simultaneously, Bangladesh government is also getting some extra tax from Datapath Ltd. This is the extra earning of the government of Bangladesh. Cost and Benefit analysis of Outsourcing from the perspective of Datapath Ltd. Page No-38
In Bangladesh labor union rules and regulation is not that much stringent like in U.S.A. As a result, Datapath Ltd. is getting comparative advantage in this sector. Here in Bangladesh, Datapath Ltd. does not conduct any CSR (Corporate Social Responsibility). And most of the outsourcing firms do not conduct any CSR activities. As a result CSR expenditure is zero. But in U.S.A, not only July Business Services but also most of the companies conduct CSR activities. So, it adds considerable cost for those companies. It is also an important cost saving benefit to conduct an outsourcing business in Bangladesh. 5.2 WHAT BENEFITS BANGLADESH GETS FROM JULY BUSINESS SERVICES Bangladesh is also getting some advantages from July Business Services. Those advantages are in the following. 1. Foreign Remittance 2. Employment Opportunity 3. Confidence Built up 1. Foreign Remittance For operating business in Bangladesh, July Business Services has to spend lots of money in the form of salary, lease payment, energy bill payment and other expenses. Each and every month, this organization is sending money in the account of Datapath through banking system. As a result Bangladesh is getting lots of foreign currency. This money contributes in the economic development of Bangladesh. 2. Employment Opportunity Datapath is creating lots of employment opportunity for the people of Bangladesh. At present, 50 people are working there. As it is a growing company, in future it will recruit lots of new people. 3. Confidence Built up In Datapath, employees are doing exactly what the employees of July Business Services are doing in U.S.A. So, it proves that Bangladesh people can do exactly as its counterpart is doing in U.S.A. As a result, Bangladesh people will be more confident. Cost and Benefit analysis of Outsourcing from the perspective of Datapath Ltd. Page No-39
CHAPTER 6 THE CONCLUDING PART
CHAPTER: 06 THE CONCLUDING PART CONCLUDING STATEMENT 6.1 After conducting internship program, collecting and evaluating data on outsourcing and Datapath Ltd. I have made my report as informative as possible. After evaluating all the things I have found that outsourcing is beneficial for both outsourcing and outsourcer company. I have also evaluated prospect of Bangladesh in outsourcing business. Bangladesh has most of the characteristic of outsourcing business. As a result, by utilizing this sector Bangladesh can earn lots of foreign currency. 6.2 RECOMMENDATIONS Process should be easy for getting outsourcing business license; Government should promote this business to the people of Bangladesh; Special tax treatment should be given to the outsourcing business; Adequate power should be available; Adequate and speedy internet service should be available; Establish an information centre from where people or interested business man can get necessary information about outsourcing.• • • • • •When the world outsourcing comes, also comes the name of India, China, Philippines and Vietnam because they are the giant in outsourcing business. Now outsourcing plays an important role in the economy of third world countries. Each and every year they are earning billions of dollars. This sector also creates lots of employment opportunities for the unemployed people. Bangladesh is in evolving stage. If the government nurtures this business and ensure supporting facilities for growing this business then it can be the sector from where Bangladesh can earn lots of foreign currency. But the support from the government is not up to the mark. Still government is not focusing on this sector. The following activities can be helpful for strengthening the outsourcing business in Bangladesh. Cost and Benefit analysis of Outsourcing from the perspective of Datapath Ltd. Page No-40
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