Opportunities in the total support service sector as part of oursourcing industry in VietNam a case study of Sodexho

ĐẠI HỌC QUỐC GIA HÀ NỘI TRƯỜNG ĐẠI HỌC KINH TẾ NGUYỄN THỊ THANH SƠN OPPORTUNITIES IN THE TOTAL SUPPORT SERVICE SECTOR AS PART OF OUTSOURCING INDUSTRY IN VIETNAM A CASE STUDY OF SODEX

ĐẠI HỌC QUỐC GIA HÀ NỘI

TRƯỜNG ĐẠI HỌC KINH TẾ

NGUYỄN THỊ THANH SƠN

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

SODEXHO

LUẬN VĂN THẠC SĨ QUẢN TRỊ KINH DOANH

NGƯỜI HƯỚNG DẪN KHOA HỌC: TS Hoàng Anh Tuấn Th.S Hà Nguyên

Hà Nội – 2007

ĐẠI HỌC QUỐC GIA HÀ NỘI

TRƯỜNG ĐẠI HỌC KINH TẾ

NGUYỄN THỊ THANH SƠN

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

Mã số: 60 34 05

LUẬN VĂN THẠC SĨ QUẢN TRỊ KINH DOANH

NGƯỜI HƯỚNG DẪN KHOA HỌC: TS Hoàng Anh Tuấn Th.S Hà Nguyên

Hà Nội – 2007

5 Analysis and interpretation 9

6 Research validity, reliability and ethics 10

1.1 OUTSOURCING INDUSTRY 14

1.1.1 What is outsourcing? 14

1.1.2 Areas of outsourcing industry 24

1.1.3 Outsourcing: Pros and Cons 30

1.1.3.1 The benefits of Outsourcing: 31

1.1.3.2 Disadvantages of Outsourcing: 35

1.2 THE TOTAL SUPPORT SERVICE INDUSTRY 40

2.1 OVERVIEW OF OUTSOURCING INDUSTRY 43

3.2.2 Why mention to Sodexho? 58

3.3 FINDINGS about the total support service sectors when

conducting market research for Sodexho 60

2.1 For successful Outsourcing strategy 69

2.1.1 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 assess the effectiveness of outsourcing"

and "should not be seen as a short-term solution” 73

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

2.2.1 For service providers 74

2.2.2 For users (customers) 76

Exhibit A: List of main catering companies 81

Exhibit B: List of cleaning and laundry companies 83

INTRODUCTION

I BACKGROUND

In order to remain competitive in today's global marketplace, organizations are turning 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 bottom lines (profit)

“Some forward-thinking executives are beginning to use outsourcing as a management tool to drive major, enterprise-level transformation.‖

change-(Martha Craumer)

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

US He 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 everything 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 of 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

leaders and managers to know about pros and cons of outsourcing activities so that

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 outsourcing as well as opportunities in the total support service sector

With the case study of the total 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 This market research also provides realizable information to understand about this sector in Vietnam

II RESEARCH OBJECTIVES

 Firstly, give an overview of outsourcing industry as a current trend of today’s business

 Secondly, analyze the benefits and downside of outsourcing industry, which will help firms to make business decisions relating to outsourcing

 Thirdly, examine the total support service sector in Vietnam with a case study of Sodexho

 Fourthly, explore opportunities in the total support service industry in Vietnam

 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 or service providers or whether they should outsource some work to outsiders or they should keep it in-house

III RESEARCH QUESTIONS

This thesis aims to answer the following questions:

 What is outsourcing?

 What are the benefits/ threats of outsourcing?

 What should be outsourced?

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

 How outsourcers and service providers think about opportunities of this industry in Vietnam?

 What kind of lessons can be drawn from this study would be useful to leaders or managers of company?

IV 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 research, 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 three elements:

 Epistemology: asks, how do we know the world? What is the relationship between inquirer and the known?

 Ontology: raises basic questions about the nature of reality

 Methodology: focuses on how we gain knowledge about the world

Research is a process of structured inquiry that can be undertaken via different approaches (Burn, 1997) There are three common research paradigms, including positivism, constructivism and critical 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 phenomenon (positivism) or creating social changes (critical theory) This paradigm helps us discover what we want to know through interactions with research 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 focus, involving an interpretive, naturalistic approach to its subject matter (Brewer & Hunter, 1989, cited in Denzin et al., 1994) It involves the studied use and collection of a variety

of empirical materials such as case study, personal experience, interview, observation, etc (Denzin et al., 1994)

For this research, qualitative approach is suitable because the researcher tries 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 case study is a study in which the researcher explores a single entity 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 our understanding of something else It is often looked in depth, its contexts scrutinized, its ordinary activities detailed

 Collective case study: means study a number of cases jointly in order to inquire into the phenomenon, population, or general condition

This research chooses the total support service sector with Sodexho firm as an instrumental case study to examine the opportunities of total support service industry in Vietnam The 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 case study, the researcher will conduct interview with managers of Sodexho and its potential customers, review document related to the issue, which is available for public The researcher also use 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 The 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 interview method to analyze the case study as well as to gain more in-depth knowledge about this issue by consulting with executives from different companies

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 people who have experience and knowledge of the field In other words, in-depth interview in this research is aim to gain access to, and an understanding of, activities and events which can not be observed directly by researcher

4 Data collection

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

 Interview is conduct to collect in-depth responses about people’s experiences, perceptions, opinions, feelings, and knowledge

 Observation refers to fieldwork descriptions of activities, actions, conversations, interpersonal interactions, organizational or community processes, or any other aspect 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, etc

Data will be collected mainly through interviews with executives of Sodexho and their potential customers as well as executives from different companies in the sector The researcher interviewed business development manager of Sodexho,

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

of Southern Catering Co.,Ltd, etc

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 classified by issues

 Writing the report

6 Research validity, reliability and ethics

Research validity

Merriam (1998) classifies validity into internal validity and external validity Internal validity is about how research findings match reality He offers six basis strategies to enhance internal validity They 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 data (primary and secondary data) will be collected During the research, the researcher will ask comments from other students, people in business sector

External 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 enough description so that readers will be able to determine how closely their situations match the research situation

 Typicality or modal category: describing how 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-site designs to improve external validity of the research

 The investigator’s position: the researcher should explain the assumptions and theory behind the study

 Triangulation: in terms of using multiple methods of data collection and analysis

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

In this research, triangulation will be the main technique to check 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 concern about whether the investigation is conducted in an ethical manner Merriam (1998) claims that ethics issues can exist when the researcher collect data and analyze data, even disseminate findings It 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:

 Informed 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 harm: 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 to ensure that the study is conducted in ethical manner

V OUTLINE

There are three chapters in my thesis:

 Chapter 1: Literature review

 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.‖1 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

1

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

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

 Outsorcing is business decision which means that the company makes this 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 The bottom line of this decision is whether the running of the company will be more efficient or not

 Offshoring: In 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

Another 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 oftern describe as a form of

carried by outside service 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 outsourcing or out-tasking, but merely a vendor relationship Likewise, buying services from a provider is not necessarily outsourcing or out-tasking Outsourcing 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 the areas targeted for outsourcing Many companies also outsource customer support and call center functions, manufacturing and engineering Outsourcing business is characterized by expertise not inherent to the core of the client organization

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

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

by the client of the out-tasking business

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

Mankiw, chairman of Bush's Council of Economic Advisors2 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 memtioned comparative advantage theory and absolute advantage theory in terms of outsourcing from one country to another country Just come back to key points of these theories before considering in aspect of outsourcing

The theory of absolute advantage was first explained by the Scottish 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 comparative advantage explains why it can be beneficial for two countries to trade, even though one of them may be able to produce every kind of item more cheaply than the other It was first described by Robert Torrens in 1815

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

to produce that corn 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

2

In the article “Bush economic report praises 'outsourcing' jobs” by By Warren Vieth and Edwin Chen, Los Angeles Times, 10 th Feb 2004

Sumuelson 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 a transfer of some business functions or

components of business processes to an outside contractor3 To remain competitive, many companies consider outsourcing as a way to reduce costs, increase efficiencies, and refocus on critical resources

Outsourcing is not just related to the services sector A lot of manufacturing of products is also outsourced to countries like China and Taiwan Consumer products including 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 in-house administrative and management functions, including data processing and information technology operations, human resource management services, accounting functions, internal audit and marketing (Chalos, 1995)

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

From above mentioned definitions, some terminologies are needed to clarified their meanings

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

3

Outsourcing Toolkit

A company's core competency is the one thing that it can do better than its competitors A core competency can be anything from product development to employee dedication Modern 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 the company to compete sucessfully with its competitors And the competency of different company is not the same, even they are operating

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

If a core competency yields a long 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 introduced the concept in a 1990 Harvard Business Review article They wrote that a core competency is "an area of specialized expertise that is the result of harmonizing complex streams of technology and work activity."

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 core 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 benefits and

 it is hard for competitors to imitate

Ever since Prahalad and Hamel introduced the term in the 1990’s many researchers have tried to highlight and further illuminate the meaning of core competence According to Leonard-Barton, D ―Capabilities are considered core if they differentiate a company strategically‖ On the other hand Galunic and Rodan (1998) argue that ―a core competence differentiates not only between firms but also inside

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

It is important to distinguish between individual competencies 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 traits of individuals They 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 So according to this definition, 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." Two ideas are especially important here The skills or knowledge must be

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

 Core function/operation: In this paper, it is main activity of a company For example, production is one of core functions of manufacturing factory 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 out what's core and what's noncore today," says Jane Linder, senior research fellow and associate director of Accenture's Institute 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 It happens every day in companies as well."

 Outside contractor or Subcontractor: A subcontractor is an individual or in many cases 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 different ones This allows subcontractors to further specialize their skills

 External Entity, third party is another word to refer to subcontractors or service providers who are contracted to do some work for the host company and specialize in some aspects

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

managers of an organization, deciding to 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 increasing specialization for more efficiency and innovation It is general to know that one company often do better if it devotes its efforts and concentrate its resources on some core activities only Specialization will help company to do things in the most professional and effective ways to stimulate new ideas, innovations 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

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 to 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 car is assembled from more than ten thousand components and car makers like Toyota or Ford do not produce all components but they buy from others Under the context of globalization, more and more manufacturers transfer their production to other countries where there are lower wages This trends bring a lot of opportunities for developing countries like China, India or Eastern European countries to be destination for manufacturing outsourcing According to Mr Klein, the sixth CEO of the global management consulting firm,

―Manufacturing Outsourcing To Be The Next Big Wave‖4

Across industries, manufacturing outsourcing is not a new concept for Original Equipment Manufacturers (OEMs) ―Make vs buy‖ decisions have been around for

a long time, and it's hard to find any company that completely manufactures its 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 OEM 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 collaborative relationships, when focused

on adaptability, product capability and, of course, cost performance have a much better chance at succeeding in changing business conditions and throughout the product lifecycle than the more typical outsourcing arrangements have been able to deliver

 IT outsourcing: It has become popular during 1990s and become one of the most common forms of outsourcing today Some people even consider outsourcing as IT outsourcing only In simple words, IT outsourcing is using outside vendors to create, maintain, or reengineer IT architectures and systems This form of outsourcing, sometime called off-shoring provides a good chance for both outsourcers and service providers In this field, India has been emerging as an attractive destination while other countries such as China, Vietnam or Philippines may become next destinations for IT outsourcing activities

 Business process outsourcing (BPO) is the contracting of a specific business task, such as payroll, to a third-party service providers Usually, BPO is implemented as a cost-saving measure for tasks that a company requires but

does not depend upon to maintain their position in the marketplace BPO is often divided into two 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

BPO that is contracted outside a company's own country is sometimes called offshore outsourcing BPO that is contracted to a company's neighboring country is sometimes called near-shore outsourcing, and BPO that is contracted with the company's own county is sometimes called onshore outsourcing

 Commercial outsourcing, in some case, can be understood as business process outsourcing Commercial outsourcing refers to outsource some kind

of job like Human Resource, Finance, Legal, Marketing, PR or even documentation to professional service provider In these cases, the outsourcer will sign contract with service provider to provide those kinds of services According to Professors from Harvard 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 their 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 throughout the enterprise This

type of strategic arrangement is referred as "business transformation outsourcing." In IT outsourcing, 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 return from their IT investment, the potential for outsourcing vendors to deliver continuous improvement through enhanced strategic and IT flexibility serves as an attractive value proposition

Like this, transformational outsourcing is not only concerned with cost saving but also and more importantly with creating an environment 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

o Commercial Leverage helps manage costs and risks while preventing serious impacts on the balance sheet

o Technology Exploitation changes the technology paradigm for an organization

o Business Transformation changes the way a business operates and is structured Operational Efficiency 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

However, other scholar like NelsonHall defines BPO as the outsourcing of business functions 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 responsibility for the business process and not just supplying IT applications or services to facilitate the process

Business process outsourcing is the leveraging of technology vendors to 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 outsourcing can use off-shore resources, but

 Sales outsourcing refers to using outsider to conduct sales activities

 Call Center outsourcing usually refer to taking order and/or providing customer service solutions not by people in the company but by professional

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

 Document outsourcing refer to preparing documents by third party, including report preparation, documentation typing, etc

Another way to classify outsourcing industry:

 The total support services refer to services that support operation of an organization These services are necessary for operation but do not so important to company This leads to the trend that companies will sign contract with support service providers to provide those services

 IT outsourcing: as mentioned above

 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 outsource this activity or that activity, whether they should focus on some narrow areas or on everything Their decision should base on analysis of internal forces such as management capacity, resources capacity, etc as well as analysis of external forces such as tax, competition, etc

Many businesses choose an outsourcing partner or service provider on instincts, without initially matching their needs with the partner's capabilities The 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 factors you must consider when you are involved in outsourcing They are cost, long-term benefits, relationship, and competitiveness

1.1.3.1 The benefits of Outsourcing:

It may have started as a way to cut costs, but outsourcing is now embraced by

executives for another reason — it gives them more control over business

outcomes

According to a recent Accenture survey of more than 800 health, manufacturing, retail and travel executives in the US and Europe, 86% said outsourcing gives them more control over business results in a variety of critical areas, 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, 55% 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 control gains within the first eight months of an outsourcing agreement

As for the overall prevalence of outsourcing, more than 80% of respondents said they are committed to outsourcing at least 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 at 43%, followed by supply chain (36%), learning/training (31%), human resources (25%), finance and accounting (21%) and customer relationship management (13%)

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

 Allow a business to focus on core activities or ability to concentrate on core functions, this is one of the biggest benefits of outsourcing When an organization hires outsider to carry some non-core activities, for example 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 manufacturer can focus on their production and do not need to manage catering service for their workers by themselves if they outsource this activity to catering companies

 Streamline business operations, it will increase efficiency and productivity Outsourcing increase specialization, which will help companies take advantage of better price, better service and better quality When business

operations are streamlined, 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 themselves Consequently, it help outsourcing industry develop more and more and increase competition 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 result, both parties have a chance to improve themselves in order to develop relationship, which brings benefits to both of them

 Improve service quality, which is resulted from specialization of service providers and more focus on core business function On the whole, outsourcer have more chance to improve their service quality thanks to concentration on their core activities and using professional capabilities from services providers

 Free 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 meet requirements seasonally

 Increase the control of your business, especially cost Outsourcers can help control cost over time For example, if a business unit comes to the IT department and wants a new server and application installed, the internal IT department will do what the client requests However, when the next budget year arrives and that division's new IT budget is presented with the increase 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)

1.1.3.2 Disadvantages of Outsourcing:

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

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 outsource some services to outsiders

 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 outsource For example, one manufacturing outsource their marketing to outsider, it may not control this activity and lead to dependence on outsiders and consequently affect business operation

 Outsourcing may affect quality of the service because you can not control everything by yourselves even you can check 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

satisfy with this service, they will think that the whole service of the company is not good

 Creates potential redundancies when the manager find that it will be more effective when using outsourcer rather than using their own people

 Other companies may also be use the service provider Therefore in some cases, the best interests of the service provider may be diluted with other users

 You may lose focus of the customer and concentrate on the product (the outsourced process)

 The loss of talent generated internally due to relying on outsiders As a result, internal employees will lose some opportunities to exploit their talents

in areas that are outsourced

 Employees may react badly to outsourcing and consequently their quality of work may suffer This is psychological consequence when some work carried out by others and affect the whole business process

 Gain access to world-class capabilities because of professional way to deal with work

 Free internal 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

 Handle 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 including:

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

growing organizations

 To replace a poor internal service (may not be connected to lack of skills)

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

 The process may 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