Luận văn thạc sĩ opportunities in the total support service sector as part of oursourcing industry in vietnam a case study of sodexho

DALHOC QUOC GLA HA NOL TRUONG DAI HOC KINH TE NGUYEN ‘THI THANH SGN OPPORTUNITIES IN THE TOTAL SUPPORT SERVICE SECTOR AS PART OF OUTSOURCING INDUSTRY IN VIETNAM A CASE STUDY OF SODEXHO

DALHOC QUOC GLA HA NOL TRUONG DAI HOC KINH TE

NGUYEN ‘THI THANH SGN

OPPORTUNITIES IN THE TOTAL SUPPORT SERVICE SECTOR AS PART OF OUTSOURCING

INDUSTRY IN VIETNAM A CASE STUDY OF

SODEXHO

LUẬN VĂN THAC SI QUAN TRI KINH DOANH

NGƯỜI HƯỚNG DẪN KHOA HỌC: TS Hoàng Anh Tuần

Th.S 114 Nguyén

DALHOC QUOC GLA HA NOL TRUONG DAI HOC KINH TE

NGUYEN THI THANH SON

OPPORTUNITIES IN THE TOTAL SUPPORT SERVICE SECTOR AS PART OF OUTSOURCING INDUSTRY IN VIETNAM A CASE STUDY OF SODEXHO

Chuyên ngành: Quản trị kinh doanh

LUAN VAN THAC ST QUAN TRI KINH DOANH

NGƯỜI HƯỚNG DẪN KHIOA HỌC: TS Hoàng Anh Tuấn

'Th.§ Hà Nguyên

5 Analysis and interpretation

6, Research validity, rcliabilily and cthics

1.1.1 What is outsourcing?

1.1.2 Areas of outsourcing industry

1.1.3 Outsourcing: Pros and Cons

1.1.3.1 The benefits of Outsourcing:

1.1.3.2 Disadvantages of Outsourcing:

1.1.4 Why outsource?

1.2 THE TOTAL SUPPORT SERVICE INDUSTRY

CHAPTER 2

OUTSOURCING INDUSTRY IN VIETNAM

2.1 OVERVIEW OF OUTSOURCING INDUSTRY

3.2.2 Why mention to Sodexho?

3.3 FINDINGS about the lolal suppor! service sectors when

conducting market research for Sodexho

3.3 Catering service 63 3.3.2 Cleaning and laundry service

2.1.L Try to limit disadvantages of outsourcing by: 69 2.1.2 Choose the right outsourcing partner 70

2.1.3 Refer to outsourcing checklist for the real reason:

2.1.4 Do not rely exclusively on only one provider without considering

the situation of the market and the capability of the provider 72

2.1.5 “Businesses must constantly ass:

ss the effectiveness of outsourcing” and “should not be seen as a short-term solution” 7

2.2 For the total support service sector and the case of Sodexho 74

Exhibit A: List of main catering companies al

vin

Exhibit B: List of cleaning and laundry companies

INTRODUCTION:

I BACKGROUND

In order to remain competitive in today's global marketplace, organizations are tuming their focus towards their core competencies and looking to outsource

functions in which they lack expertise to maintain effective cost structures and to

improve their botiom Hines (profit)

“Some forward-thinking executives are beginning to use outsourcing as a change-

management tool to drive mayor, enterprise-level transformation.”

(Martha Craumer)

This is an idea of a business and marketing writer at [larvard Business School in

US Le considered outsourcing as a tool of change-management that helps companies to transform themselves to compete successfully with other rivals In the

context of today’s environment where competition is becoming tougher and

tougher, it is essential that organizations should realize whether they should do

everylhing by themselves or they should hire outsiders to carry some non core activities on behalf of them By doing so, they can focus on developing, their core

competencies which are very important to compete with their competitors or just to

gain more profits

As a leader or manager af organization, it is better for you to know about the

current trend that companies will outsource some of their non-core activities to

service providers who are very professional However, it is also necessary for Joadors and managers lo know about pros and cons of oulsoureing activities so thal

they can make right decisions for their organizations In simple word, outsourcing

or not depends on analysis of its benefits and disadvantages

Thus, within scope of this thesis, I would like to study about outsourcing industry in general and the total support service sector in Vietnam in particular As a leader or

manager of the company, it is essential to know about this trend, and the benefits

and the downside of outsoureiry, as well as opportunilies in the lolal suppor sorvice

sector

With the case sludy of the lotal support service industry with typical company Sodexho, a French firm providing support services, the thesis would like to deliver how a world wide company response to opportunities of this sector in Vietnam through market research process this company conduct in Vietnam ‘his market

research also provides realizable information to understand about this sector in

Vietnam

IE RESEARCH OBJECTIVES

« lirstly, give an overview of outsourcing industry as a current trend of today’s

> Based on these information, leaders or managers of any organizations can make decisions effectively whether they should take opportunities of outsourcing industry

as a outsourcer ar service providers or whether they should outsource some wark to outsiders or they should keep it in-house,

This thesis aims to answer the followiry questions

© What is outsourcing?

@ Whal are the benefits thraals of oulsourcing?

*# What should be outsourced?

* What is current situation of outsourcing industry in general and the total support service in paiticular in Vietnam?

« How oulsourcers and service providers think about, opportunities of this industry in Victnam?

© What kind of lessons can be drawn from this stady would be useful to

leaders or managers of company?

TV METHODOLOGY

Methodology usually refers to the general approaches to research while method refers to techniques for gathering evidence ‘Therefore, methodology is a theory and analysis of how research is done or should proceed It includes research paradigm, what kind of research (qualitative or quantitative), what methods to be used, how to

collect data and analyze data, how to ensure the validity and reliability of the sesearch, what kind of ethics issues may happen

1 Paradigm:

Paradigm is considered as a basic set of beliefs that guide action It defines the world-view of the researcher (Guba, 1990, cited in Denzin et at., 1994) A paradigm

encompasses [ree elements

« Dpistemology: asks, how do we know the world? What is the relationship between inquirer and the knawn?

¢ Ontology: raises basic questions about the nature of reality

«Methodology focuses on how we gain knowledge aboul the workd

Research is a process of structured inquiry that can he undertaken via different

approaches (Burn, 1997) There are three commun research paradigms, including

positivism, constructivism and eritival theory

Constructivism paradigm will be used in this research because the aim of this research is to understand the issue from multiple perspectives and describe it using qualitative approaches such as interviewing Constructivism aim for a depth

understanding about outsourcing industry in Vietnam by consulting with different people and understanding their perceptions rather than explaining a hypothesized

phonomenan (positivism) or creating social changes (critical theory) This paradigm helps us discover what we want to know through interactions with rescarch

participants

2 Qualitative research:

With constructivist approach, qualitative methods will be used in the research This methodology aims to understand and discover the nature and essences of research problems (Merriam, 1998) Qualitative is multi-method in foous, involving an

interpretive, naturalistic approach to its subject matter (Brewer & Ilunter, 1989,

cited in Denzin et al, 1994) It involves the studied use and collection of a variety

of cmpirical materials such as case study, personal cxpericncơ, interview,

observation, ele (Denzin et al., 1994),

For this research, qualitative approach is suitable because the researcher ties to explore one phenomenon in business, it is outsourcing in general and total support service in particular This issue will be examined from many aspects, including its

benefits, its pros and cons, ect

3 Research methods

Case study:

A ease study is a study in which the rescarcher explores a single eniily or phenomenon (the case) bounded by time and activity (a program, event, process, a social group, etc.) and collect detailed information by using variety of data

collection procedures during a period of time (Merriam, 1998: 21)

A case study can be qualitative research or quantitative research Stake (1994)

clarifies case study into 3 types

« Intrinsic case study is the study undertaken when one wants better

understanding of this particular case.

¢ Instrumental case study: a particular case is examined to provide insight into

an issue or refinement of theory The case plays a supportive role, facilitating

bur understanding of something else Tt is after looked in depth, its contexts

scrutinized, ils ordinary activities detailed

« Collective case study: means study a number of cases jointly in order to

inquire info the phenomenon, population, or general condition

This research chooses the total support service sector with Sodexho firm as an

instrumental case study lo examine the opporlumiies of tolal suppori service

industry in Vietam ‘Ihe researcher use the process of conducting market research

of the company to examines carefully the total support service sector in Vietnam

‘Through this case, the researcher also wants to send the message to the leaders and managers about one possibility to improve its competitiveness by finding ways to

improve its efficiency

For case study approach, followings are the main methods/ techniques used:

« In-depth interview

Document review or analysis

¢ Questionnaire and survey

With this cas sludy, the researcher will conduct interview with managers of

Sodexho and ils potential customers, review document related to the issue, which ts

available for public The rescarcher also usc questionnaire to further explore the

opinions of customers about outsourcing activities

Interview

The interview is the favorite methodological tool of the qualitative researcher It is

defined as a conversation, the art of asking questions and listening (Denzin et al,

1994: 353) Interview can be in one of three forms: structured, unstructured, and

semi-structure

(Fontana & Frey, cited in Denzin et al, 1994)

* Structured interviewing: refers to a situation in which an interviewer asks

each respondent a series of pre-established questions with a limited set of response categories (Fontana & Frey, cited in Denzin et al., 1994: 363)

« Unstructured interviewing: refers to interview without any pre-established questions It is very flexible way to conduct an interview ‘Ihe traditional type of unstructured interview is the in-depth interview

Group interview refers to interview of several individuals simultaneously in formal

or informal settings (Frey & Fontana, 1994) This type of interview is very common

in marketing research where “focus group” technique is widely used

The researcher will use iervicw method Lo analyze the casc study as well as Lo

gain more in-depth knowledge about this issue by consulting with executives from different companies

In-depth interview:

As in-depth interview will be intensively used in this research, it is necessary to

understand more about this method

Taylor and Bogdan (1984, cited in Minichiello et al, 1990) define indepth

tilerview “repeated face 1o face encounters belween the researcher and infornaris

directed toward understanding, informant’s perspectives on their lives, experiences

or situations as expressed in their own words” In-depth interview can be structured

or unstructured

Why use in-depth in this research? Because it is the most appropriate qualitative research method to understand the insights of outsourcing from peaple who have

experience and knowledge of the ficld, In olher words, iedepth interview in this

research is aim lo gain access lo, and an understanding of, activilies and events

which can not be ebserved direlly by researcher

4 Tala collection

According to Patton (2002 4), there are three kinds of qualitative data

Tnlerview 1s conduct to collect indepth responses about people’s

experiences, perceptions, opinions, feelings, and knowledge

Observation refers to fieldwork descriptions of activities, actions,

conversations, interpersonal interactions, organizational or community

proces 8, or any other aspeel of observable human experience:

Documents refers to written materials and other documents from organizational, clinical, or program records, memoranda and correspondence, official publications and reports personal diaries, letters, eto

Data will be collected mainly through interviews wilh executives of Sodexho and

their potential customers as well as cxcoutives from diffcrent companies in the sector The rescarcher interviewed business development manager of Sodexho,

marketing manager of Somerset, CEO of Minh Nam catering Service Co.,Ltd, CEO

of Souther Catering Co.,Ltd, ete

5 Analysis and interpretation

In this research, three kinds of qualitative data will be analyzed and interpreted

« Interview will be recorded, transcripted and translated into English (if necessary) All information will be arranged by issues later

¢ Documents will be arranged and

sified by issues

* Writing the report

6 Rescarch validity, reliability and cthics

Research validity

Merriam (1998) classifies validity into internal validity and extemal validity Internal validily is abou! how resvarch findings match realily He offers six basis strategies to enhance intemal validity hey are triangulation (multiple investigators, multiple sources of data, or multiple methods), member checks, long- term observation, peer examination (asking colleagues to comment on the findings

as they emerge), participatory or collaborative modes of research, researcher's biases

This research will use triangulation and peer examination as the ways to increase internal validity for the research Multiple sources of dala (primary and secondary data) will be collected During the research, the researcher will ask comments from other students, poople in business sector.

Extemal validity is concerned with the extent to which the findings of one study can

be applied to other situations (Merriam, 1998) ‘Three strategies can be used, including

© Rich, thick description: providing cnough description so thal readers will be able to determine how closely their situations match the research situation

& Typicality or modal category: describing low typical the research is compared with others in the same class

© Multi-site designs: using several sites, cases, situations, especially those that maximize diversity in the phenomenon of interest

The researcher will use rich, thick description and multi-sile designs to improve extemal validity of the research

« ‘the investigator’s position: the researcher should explain the assumptions and theory behind the study,

«© Triangulation in terms of using muluple methods of dala collection and analysis

«Audit trail: independent judges can authenticate the findings of a study

10

In this research, triangulation will be the main technique to cheek the validity of the study Different methods of collecting data (interview, documents, observation) and different ways to analyze data will be used to improve reliability of the findings

Ethics

Ethics cancem about whether the investigation is conducted in an ethical manner

Merriam (1998) clanns that ethics issucs can exisi when the researcher collec! data

and analyze data, even disseminate Gndings 1 is important to minimize the effect

of researcher’s theoretical and political bias

Fontana and Frey (1994) assert that three ethical principles should be paid attention

to in qualitative research:

«) Tnformed consent: the research participants should be informed carefully and

truthfully about the research purposes

« Right to privacy: protecting the identity of research participants

Protection from hamn: physical, emotional or any other kinds

‘These principles will be employed when researchers collect data, analyze data and disseminate findings

In this research, the researcher will use case study and different method to collect,

analyze data, so it is important for the researcher to follow ethics guide from

university fo ensure thal the sludy is conducted a ethical marmer

V OUTLINE

Thore are three chapters in my thesis:

« Chapter 1: Literature review

11

«Chapter 2: Overview of Outsourcing industry in Vietnam

© Chapter 3: The Total support service sector in Vietnam - A case study of

Sodexho firm

CHAPTER 1

LITERATURE REVIEW 1.1, OUTSOURCING INDUSTRY

1.1.1 What is outsourcing?

Outsourcing is one of biggest trends in business today According to Mark, 90% of

all US businesses outsource some work Regarding to the concept of outsourcing,

many scholars as well as economists agree to some main points as follows

“Outsourcing (or contracting out) is often defined as the delegation of non-core

operations or jobs from internal production to an external entity (such as a

subcontractor) that specializes in that operation Outsourcing is a business decision

that is often made to focus on core competences A subset of the term (offshoring)

also implies transferring jobs to another country, either by hiring local

subcontractors or building a facility in an area where labor is cheap It became a

popular buzzword in business and management in the 1990s." This definition

refers to some key points:

Outsourcing is the delegation which means that one company called prime

contractor or host company will assign subcontractor who is sent and

empowered to act for the company in some limited activities

© The delegation should be for non-core operations only which can be

understood that the company will rely on outsiders for some work that they

" Definition from website of Wikipedia, the free encyclopedia (htip:/www.wikipedia org)

13

think is not important to the company but still necessary such as catering

Service Of mamtamiance service

Oulsorcing is business decision which means that the company makes Iltis decision based on analyse pros and cons of this activity and find out the benefits as well as disadvanges of this decision and its impacts on the operation of the company ‘he bottom fine of this decision is whether the ranning of the company will be more efficient or not

Offshoring: Tn many case, offshoring is refered to one common form of outsourcing, Offshoring can be defined as relocation of business processes (including production/manufacturing) to a lower cost location, usually overseas Offshoring can be seen in the context of either production offshoring or services offshoring After its accession to the WTO, China emerged as a prominent destination for production offshoring After technical progress in telecommunications improved the possibilities of trade

in services, India is a country leading in this domain

Auother definitions: In the book “Manging the outsourcing relationship”, outsourcing is defined as the contracting of any service or activity to a third party

organization (Mc.Huht, Merli& Wheeler, 1995), It is oftem describe as a form of

carried by outside scrvice providers who are specialized in some activities so that they can provide a better services with competitive prices ‘This leads to more

‘benefits for the company if they do not do those works by themselves

Outsourcing and out-tasking involve transferring a significant amount of

management control to the supplier Buying products from another entity is not

oulsoureing or out-lasking, bul merely a vendor relationship Likewise, buying

services from a provider is not necessarily outsourcing or oul-lasking Qulsourcing,

always involves a considerable degree of two-way information exchange, co-

ordination, and trust

Organizations that deliver such services feel that outsourcing requires the turning over of management responsibility for running a segment of business In theory, this

‘business segment should not be mission-critical, but practice often dictates

otherwise Many companies look to employ expert organizations in (he areas

targeted for outsourcing, Many companies also outsource customer support and call

center functions, manufacturing and ongincering Quisoureing business is characterized by expertise not inherent to the core of the client organization

A related term is out-tasking: tuming over a narrowly-defined segment of business

to another business, typically on an anual contract, or sometimes a shorter one This usually involves continued direot or indirect management and decision-making

by the client of the out-tasking business

15

"Outsourcing is just a new way of doing international trade,” said N Gregory

Mankiw, chairman of Bush's Couneil of Economie Advisors” This definition

considers outsourcing from aspect of trading among nations where countries bring into play the nation’s advantages over others, For this definition, the author mentioned comparative advantage theory and absolute advantage theory in terms of oulsourcing from one counlry to another country Just come back to key points of

these theories before considering im aspect of outsourcing,

The theory of absolute advantage was first explained by the Scoltish economist Adam Smith in 1776 He argued that a country has an absolute advantage in the production of a good when it can produce more of that good with a given amount of resources than another country It was developed later to the comparative advantage theory

The theory of comparalive advamlage explains why it can be beneficial for two countries to trade, even though ane of them may be able to produce every kind of item more cheaply than the other Tt was first described by Robert Torrens in 1815

in an essay on the cor trade He concluded that it was to England's advantage to trade various goods with Poland in retum for com, even though it might be possible

to produce that com more cheaply in England than Poland However, it is usually attributed to David Ricardo who explained it clearly in his 1817 book The Principles of Political Economy and Taxation in an example involving England and Portugal After that, this theory was further developed by Heckscher, Ohlin and

? In the article “Bush economic report praises ‘outsourcing’ jobs” by By Warren Vieth and Lidwin

Chen, Los Angeles Times, 10" Feb 2004

Sumuclson who argued that countries have different factor endowments of labour,

land and capital inputs Countries will specialize in and export those products which use intensively the factors of production which they are most endowed

Outsourcing in broad terms is @ transfer of some business functions or

components of business processes to an outside contractor’ To remain

competitive, many companies consider oulsourcing as a way to reduce costs,

increase efficiencies, and refocus on critical resources

Oulsoureing is not just related to the services sector A lol of manufacturing of products is also outsourced to countries like China and ‘Taiwan Consumer products inchiding clothes and computer hardware are manufactured in these countries thanks to cheap labor, which leads to cheaper prices in the consuming nations

Outsourcing is increasingly being applied, not only to manufacturing activities, but

to traditional m-house administrative and management functions, including data

processing and information technology operations, human resource management

services, avcourting funclions, internal audit aud marketing (Chalos, 1995)

Outsourcing may be undertaken to varying degrees In many situations, the relationship between an organization and an outsourcer resembles a partnership, yather than customer supplier relationship (Me Hugh et al., 1995)

Trom above mentioned definitions, some terminologies are needed to clarified their

meanings

¢ Core competencies: that should be kept in-house rather than outsource

§ Gutsourcing Toolkit

17

A company's core competency is tho one thing that it can do better than its competitors A core competency can be anything from product development to employee dedication Modem business theories suggest that most activities that are not part of a company's core competency should be outsourced In simple words,

core competencies are something that bring some advantages to the development of

the company and help ihe company to compels sucessfully with its competitors

And the competency of different company is nol the same, even they are operating

in the same industry because a core compeloncy yeilds a advantage to the company

Jf a core competency yields a Jong term advantage to the company, it is said to be a sustainable competitive advantage which makes it superior than its rivals

‘The concept of core competencies was developed in the management field C.K Prahalad and Gary Hamel intraduced the concept in a 1990 Harvard Business

Review article They wrote thal a core compelency is "an area of speciahved

expertise that is the result of harmonizing complex streams of technalogy and work

avtivily."

As an example they gave Honda's expertise in engines Honda was able to exploit this core competency to develop a variety of quality products from lawn mowers

and snow blowers to trucks and automobiles To take an example from the

automotive industry, it has been claimed that Volvo’s care competence is safety

According to Prahalad and Hamel a core competence has three characteristics

* it provides potential access to a wide variety of markets,

* it increases perceived customer benefils and

© itis hard for competitors to imitate

Fiver since Prahalad and Hamel introchiced the term in the 1990°s many researchers

have tried to highlight and further illuminate the meaning of core cơmpelonoe

According to Leonard-Barlon, 1D “Capabilities are considered core if they

differentiate a company strategically” On the other hand Galmie and Rodan (1998) argue that “a core competence differentiates not only between firms but also inside

a fim it differentiates amongst several competencies In other words, a core competency guides a firm recombining its competencies in response to demands

from the environment”

Ti is important to distinguish between individual compelcncics or capabilities and

core competencies Individual capabilities stand alone and are generally considered

in isolation Gallon, Stillman, and Coates (1995) made it explicit that core

competencies are more than the taits of individuals, ‘hey defined core

competencies as “aggregates of capabilities, where synergy is created that has sustainable value and broad applicability." ‘That synergy needs to be sustained in the

face of potential competition and, as in the case of engines, must not be specific to

one product or market, Se according to Ibis defiraion, core competencies are

harmonized intentional constructions

Coyne, Hall, and Clifford (1997) proposed that "a core competence is a combination

of complementary skills and knowledge bases embedded in a group or team that

results in the ability to execute one or more critical processes to a world class standard." ‘'wo ideas are especially important here ‘I'he skills or knowledge must be

19

complementary, and taken together they should make it possible to provide a superior product."

* Core functionaperation: In this paper, if is tain aotivity of a company For oxample, production is one of core functions of manufacturing faclory while payroll may be support function of the company When core function is mentioned, it refers to indispensable functions of the company which makes

it different with other companies In other words, core function of a company will bring the main sources of revenue and profit to the company

« Non core business/operation: In this paper, it can be understood as a supporting activity in a company which is necessary for the operation of the company but it is not the main activity of a company It does not bring revenue to the company

However, in reality, things are more complicated "It's really hard to figure ont

what's core and what's noncore today," says Jane Linder, senior research fellow and

associalc direclor of Accerture’s Tnslilutc for Strategic Change in Cambridge,

Massachusetts “When you take another look tomorrow, things may have changed

On September 9, airport security workers were noncore; on September 12, they were core to the federal government's ability to provide security to the nation lt happens every day in companies as well.”

«© Outside contractor or Subcontractor: A subcontractor is an individual or in many cascs a business that signs a contract to perform part or all of the obligations of another's contract,

A subcontractor is hired by a general or prime contractor to perform a specific task as part of the overall project

The incentive to hire subcontractors is a cut in cost to the general contractor

while receiving the same or better service than the general contractor could have

provided by itself, Most subcontractors do work for the same companies rather

than difTerert ones This allows subcontractors Lo further specialize their skills

« Tixiemal Entity, third party is another word to refer to subcontractars or service providers who are contracted to do some work for the host company

and specialize in some aspects

In my opinion, ovtsourcing is a business decision, which is made by leaders or

inanagers of an organization, deciding 1o hire outsiders to carry some work of the

company This decision will bring some benefits to the company like cost saving or less management work or meeting demand of customers while the company still keeps the core operation which is necessary for its development and

competitiveness

Outsourcing is the trend of inoreasing specialization for more efficiency and

tmovation It is general to know thal one company oflen do better if a1 devotes its

efforts and concentrate its resaurces on some core activities only Specialization

will help company to do things in the most professional and effective ways Lo

stimulate new ideas, inmovations However, it also makes competition become

fiercer and the demand of outsourced services are so sophisticated According to a

founder of outsourcing company: "As outsourcing continues to grow, our challenge

21

has shifted - from building a global community to keeping up with the demands of a marketplace that's larger and more diverse than we've ever imagined."

1.1.2 Areas of outsourcing industry

‘There are many ways to clarify areas of outsourcing industry

According ta Indian economists, outsourcing industry includes following areas:

« Manufacturing outsourcing: it can be said the oldest form of outsourcing activities ‘The host companies do not produce all components by themselves, instead they buy components from other specialize company For example, a

ear is assembled from more than ten thousand components and car makers

like Toyola or Ford do not produce all components but they buy from others

Under the context of globakvalion, more and more manufacturers transfer

their production to other countries where there are lower wages This tronds bring a lot of opportunities for developing countries like China, India or

astern European countries to be destination for manufacturing outsourcing

According to Mr Klein, the sixth ClO of the global management consulting firm,

“Manufacturing Outsourcing To Be The Next Big Wave

Across industries, manufacturing oulsourcing is nol a new concepl for Original

Fquipment Manufacturers (OFMs) “Make vs buy” decisions have been around for

a long time, and it's hard to find any company that completely manufactures ils own products these days Manufacturing outsourcing is not about handing off

manufacturing responsibility and underperforming, assets to reap cost improvement

4 At World Economic Forum 2003

gains Today's tough business climate has exposed many weaknesses in such assumptions More than ever, such outsourcing relationships should be focused on strategic outcomes that will enhance the supply chain and promote the business objectives of the ODM It's incumbent on both parties to forge relationships

leveraging the strengths of each, striving toward process and technology integration

and shared perceptions of success Such collaboralive relationships, wher focused

on adaptability, product capability and, of course, cost performance have a much

Deller chance al succeeding in changing business conditions and throughout (he product lifecycle than the more typical outsourcing arrangements have been able to

deliver

«TT ontsoueing: Tt has become popular during 1990s and become one of the

most common forms of outsourcing today Some people even consider outsourcing, as I'T outsourcing only In simple words, I'f outsourcing is using

outside vendors to create, maintain, or reengineer If architectures and

systems ‘his form of outsourcing, sometime called off-shoring provides a

good chance far beth outsourcers and service providers In this field, India

has been emerging as an allractive destination while other courtnes such as

China, Vietnam or Philippines may become next destinations for IT

oulsouruing aclivilics

«Business process outsourcing (BPO) is the contracting of a specific business

task, such as payroll, to a third-party service providers Usually, BPO is

nnplemented as a cost-saving measure for tasks thal a company requires but

23

does not depend upon to maintain their position in the marketplace BPO is

often divided into twa categories: back office outsourcing, which includes

internal business functions such as billing or purchasing, and front office outsourcing which includes customer-related services such as marketing or

tech support

RPO thal is contracied outside a company's own country is sometimes called

offshore oulsourcing BPO that is contracted to a company's neighboring

country is sometimes called near-shore oulsourcing, and BPO thal is contracted with the company’s own county is sometimes called onshore outsourcing,

© Commercial outsourcing in some vase, can be underslood as business

process oulsourcing Commercial oulsourcing refers Lo oulsaurce some kind

of job like Human Resource, Finance, Logal, Marketing, PR or cven documentation to professional service provider In these oases, the outsourcer will sign contract with service provider to provide those kinds of services According to Professors from [larvard Business School, outsourcing industry can be

divided into:

¢ ‘Transformational outsourcing: In general, transformation is the manner and speed by which some companies are able to fundamentally reshape thei businesses This involves a much more sophisticated approach towards

partnering—one in which companies leverage superior third-party

outsourcing capabilities to dramatically improve operational efficiencies as

well as business and revenue performance Unoughoul the enterprise This

type of strategic arrangement is refered as “business transformation outsoweing," In IY outsourving, this kind of outsourcing is an emerging form of IT outsourcing that combines cost saving with the potential for enhanced IT flexibility As firms seek a greater retum from their IT investment, the potential for outsourcing vendors to deliver continuous improvement through cnbwneed strategie and IT Mexibilily serves as an

altractive value proposilion

Like this, tausformalional oulsourcing is nol only concomed with cost saving but also and more importantly with creating an envionment of shared risk, improving share price and market position, As a result, it enables business transformation more rapidly, with more flexibility and less risk

Key Elements of Transformational Outsourcing,

© Commercial Leverage helps manage costs and risks while preventing

serious impacts on the balance sheet

Technology Exploitation changes the lschnology paradigm for an organization

© Business ‘lransformation changes the way a business operates and is structured Operational Kfficiency ensures robust, effective and efficient processes

Business process outsourcing (BPO) refers to outsource one or some process

of business activities to outsiders For example, pay roll activities will be

carried out by professional company rather than by company themselves

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However, other scholar like NelsonHall defines BPO as the outsourcing of

business fictions or processes, such as procurement, to a third party In these contracts the provider is responsible for performing and managing the outsourced function or process on behalf of the customer In order to qualify

under this definition, BPO contracts must involve the provider taking overall

yespotsibility for the business process and nol just supplying TT applications or

services 1o facilitate the process

Busiriess process oulsoureing is the leveraging of tecmology vendors lo provide and manage a company's critical and/or non-critical enterprise applications Through the business transformation process of service-oriented transformation, which leverages the technologies and standards of service-oriented architecture, companies can increasingly leverage third party companies that act as business

service providers Business process onlsourcing can use off-shore resources, but

¢ Sales outsourcing refers to using, outsider to conduct sales activitios

« Call Cenler onlsoueig usually refer to taking order ardor providing

customer service solutions not by people in the company but by professional

service providers may be from other countries For cxample, auswering queries from customer at IBM in USA can be by people who are Indian and working in India By doing so, the cutsourcer can take advantage of lower cost, working around clock, etc

Document cutsoweing refer to preparing documents by third party, including

report preparation, documentation typing, ete

Another way to classify outsoureing industry:

The tolal support services refer to services thal support operalion of an

organization, These services are necessary for operation but do not so important to company his leads to the trend that companies will sign contraet with support service providers to provide those services

entioned above

TT outsourcing: as

Manufacturing outsourcing: as mentioned above

Business process outsourcing

1.1.3, Outsourcing: Pros and Cons

Outsourcing is a business decision It is the result of a process of analyzing pros and cons of this activity by leaders or managers of the company at a certain time They

have to decide whether they should oulsourec ilis aclivily or thal activily, whether

they should focus on some narrow areas or on everything Their decision should

‘base on analysis of internal forces such us management capacily, resources capacity,

cle as wll as analysis of external forces such as lax, competition, ele

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Many businesses choose an outsourcing partner or service provider on instincts, without initially matching their needs with the partner's capabilities ‘Ihe two most important Outsourcing Advantages and Disadvantages factors in a successful outsourcing relationship are trust and security - without these the relationship is

destined for failure It is therefore important that you take the time and effort

required to find the perfect partner Some actors you must consider whon you are

involved in outsourcing They are cosi long-tenn benefils, relationship, and

cumpotitivensss

L131 The benefits of Outsourcing:

It may have started as a way to cut costs, but outsouroing is now embraced by executives for another reason it gives them more control over business

outcomes

According to a recenl Accenture survey of more than 800 health, manufacturing,

retail and travel executives in the US and Europe, 86% said outsourcing gives them

amore comtral over business resulls in a variety of critical arcas, the most important

being the ability to plan While cost-cutting is among these key areas, the executives also reported equal levels of control in reliability, cost variability improvements and effective implementation of ideas

Furthermore, 95% of respondents said outsourcing allows their companies to

implement strategies and change at a faster and more controlled rate And more than

half (57%) the executives surveyed said they experience contral gains within the first eight months of ant oulsourcing agreement

As for the overall prevalence of outsourcing, more than 80% of respondents said they are committed to outsourcing at Jeast one business function permanently Only 14% plan to use outsourcing on a temporary basis to improve key functions and

return them in-house once efficiencies are realized

Which functions and processes are outsourced most frequently? Information technology is the most common al 43%, followed by supply chain (36%), learning/training (31%), human resources (25%), finance and accounting (21%) and

customtor relationship management (13%)

Hence, the benefits of outsourcing can be summarizes as follows:

« Allow a business Lo focus on core acl or ability to concentrale on ce

funclions, this is one of the bigges! benefils of outsourcing When an

organization hires outsider to carry some non-core activitics, for cxample

cleaning, services, the managers have more time to do other work rather than spending effort on those kinds of activities As a result, they can contribute all their time, energy for core activities If they do this well, it will strength their core competencies and increase competitiveness For example, a

manufasturer can focus on their production and do not need to manage

catering service for their workers by themselves if they outsource this

aclivily lo catering companies

¢ Streamline business operations, it will increase efficiency and productivity

Outsourcing increase specialization, which will help companies take

advaniage of better price, better service and betler quality When business

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operations are strcamlined, organizational structure, as well as flow chart of work will be better and more efficient because they promote strengths of the company while limit weaknesses owing to outsourcing

Give you access to professional capabilities, which is obvious to all Specialization permits companies focus on their core competencies and develop professional capabilities As a result, they are able to offer better price, better quality than before Nowadays, every simple services like cleaning or gardening are provided in professional way which forces all

companies think about ability to consider outsourcing or doing by

themaelves Consequently, it help outsourcing: industry develop more and

more and increase compelilion and efficiency of the whole economy

Share the risk and increase reliability owing to interaction between

outsourcers and outsourcing providers It is clear that there is connection

between those two entities Business risk will be shared between them As a

resull, both parties have a chance to improve themselves in order to develop

relationship, which brings benefits te both of them

Improve service quality, which is resulted from specialization of service

providers and mare focus on core business function On the whole,

oulsourver have more chance 10 improve their service quahty thanks lo

concentration on their core activitics and using professional capabilities from

serviees providers

Tree up human resources, which means that they have more choice to choose

workforce depending on your demand It is very useful for organizations

which need seasonal workforce or mecl requirements scasonally

Increase the control of your business, especially cost Outsourcers can help control cost over time For example, if a business unit cames to the IT

department and wants a new server and applicalion installed, the internal TT

department will do what the client requests However, when the next budget

year arrives and that division's new TT budgel is presented with the ineroase for the new server and support of the application, the division will often

complain about the increased cost When the service is outsourced and a

division asks for the application and new server, immediately the outsource service provider will indicate that this request is outside the scope of work

and an increase will occur in cost A decision about this cost increase may

sometimes delay or revise the request, thus helping to control costs

Make the business more flexible to change (i.e demand)

L132 Disadvantages of Outsourcing:

The fear of the service provider ceasing to trade (bankruptcy, etc) It is very tisky if something happen to service provider such as labor disputes,

mismanagement, eto, it will automatically affect the host company to some

extent In some case, it has very serious consequence Take British Airway as

an example Britissh Airways was forced to cancel hundreds of flights earlier August 2005 because of the strike of employees of catering company who

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provides about 80,000 in-flight meals daily for BA The strike was triggered

by a dispute between catering staff and the U.S.-owned firm Gate Gourmet, which provides onboard meals for British Airways According to some analyst, the airline may lose as much as 40 million pounds ($72.4 million) Through this example, we can understand about the risk when we decide to

oulsouree some services lo oulsiders

You may lose control of the process which will affect the whole process of your business When you outsource some work, it is clear that you rely on

your service provider for the quality of work, time As a result, there is

possibility that you may lose control of the process which you oulsouree For

example, one mauufacluring oulsource heir marketing to oulsider, it may not

control thus activity and lead to dependence on outsiders and consequently affect business operation

Oulsourcing may allect quality of the service because you can nol control

everything by yoursclves even you can cheek the result but you can not

monitor the whole process of outsourcing activity When you outsource, you

want to transfer some management responsibilities to other entities

Consequently, you rely on them and if they do not provide good service as promise, it will affect the quality of your products or services Take an

example, when a company using telephone answering services for their

customer inquiries which is provided by a call center, if customers do not

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satisfy with this service, they will think that the whole service of the

company is not good

«= Creales potential redundancies when the manager find thal il wall be mure ofective when using oulsourcer rathor than using Lheir own people

« Other companies may also he use the service provider Therefore in some

cases, the besl inlerests of the service provider may be diluted with other

in areas that are outsourced

¢ Employces may react badly to outsourcing and consequently their quality of work may suffer ‘his is psychological consequence when some work carried out by others and affect the whole business process

1.1.4, Why outsource?

According to The Outsourcing Institute, Survey of Current and Potential

Oulsoureing End-Dsers, the lop len reasoms why companies oulsource arc:

« Reduce and control operating costs owing to specialization and economies of

scale

« Lmprove company focus thanks to concentration on core activities only

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«Gain access to world-class capabilities because of professional way to deal

with work

« Tree intemal resources for other purposes

* Gain access to resources that are not available internally or Resources are not

available in-house to complete the process

«Accelerate reengineering benefits

* Llandle functions that are difficult to manage or are out of control

« Make capital funds available

* Share risks

«Bring in a cash infusion

In addition, there are many other reasons why a business may consider outsourcing inchading,

« The lack of existing skills to complete a process that is common for fast

growing organizations

» Toreplace a poor inlonual service (may not be cormecied to Tack of skills}

+ The process is difficult to manage (in general or due to business growth)

© The process imay be performed better/cheaper by other services, especially in

the context of tough competition

+ the process may not contribute to competitive advantage and you do not

want to spend time for those activities because it do not bring long-term

benefits to your organizations