Outsourcing and Offshoring as a business strategy in

Outsourcing and Offshoring as a business strategy in global competition Prof. Dr. N. Koubek Chair of Business Administration Schumpeter School Bergische Universität Wuppertal, Germany St. Petersburg – Summer School April 3 rd, 2009 Koubek

Overview 1. Terminological delineation and characteristics. 2. Causes for and extent of Outsourcing and Offshoring. 3. Strategies for Offshoring. 4. The effects of Offshoring. 1. On the classic Triad model 2. On Eastern Europe 5. Conclusion. 6. Case Study Example: Automotive Industry. Koubek

1. Terminological delineation (1/2) • Basics to understand Outsourcing: – Outsourcing = „outside“, „resource“, „using“ – Origin is the „make or buy“-problem – In a narrower sense the transfer of work to an external company – In broader sense the transfer to an affiliated company, a spin-off, or a profit center Koubek

1. Terminological delineation (2/2) – „Outsourcing is the strategic use of outside resources to perform activities that are usually handled by internal staff and resources“ (Elmuti 2003, S. 33) – „Outsourcing can be defined as turning over all or part of an organizational activity to an outside vendor“ (Barthélemy 2003, S. 87) – „Outsourcing can be viewed as a form of predetermined external provision with another enterprise for the delivery of goods and/or services that would previously have been offered in-house“ (Kakabadse/Kakabadse 2000, S. 670) Koubek

1. Typical characteristics • The activity must have been performed by the company itself before having been outsourced. • The activity has to be outsourced to an external provider. • Activities may be of physical or non-physical (e. g. services) nature. • Outsourcing increases division of labour and leads to specialisation. • Outsourcing should be long-term and following strategical considerations. Koubek

1. Characteristics distinguishing Outsourcing from Offshoring – Offshoring is a special form of Outsourcing. – Offshoring can be defined as international Outsourcing: „It is the crossing of borders that distinguishes it [offshoring] from outsourcing in general“ (Kirkegaard 2005, S. 3) – Often used in a narrower sense than international Outsourcing; often related to relocation to low-wage countries; but equation is critical (example : Singapore). – Nearshoring: A special kind of Offshoring; term is used when there is only a minor distance to the Offshore-region. Koubek

1. The Evolution towards Offshoring Strategies • Quite recent is the development towards international Service. Outsourcing: Koubek

2. Causes for Outsourcing • External forces: - Intensive competitive pressure, particularly increased by globalisation. - Large degree of digitalisation in many departments. §Internal forces: Driven by the need to - Reduce costs. - Spread risks. - Access external know-how. - Create flexible organisational structures. - Focus on core competencies. Koubek

2. Extent of Outsourcing and Offshoring • It is difficult to make a clear statement due to missing statistics. • But: Trends based on approximation prove an increase in outsourcing and offshoring activities: – Expenditures for outsourcing worldwide have been US-$ 3, 7 bn. in 2001; – The global outsourcing market continues to grow at a steady pace, with a growth rate of 8. 1 percent in 2008. . – Worldwide volume of offshoring in 2003 approx. US-$ 1050 bn. ; 2008: roughly US-$ 70 bn, with India‘s share of approx. 45% Koubek

3. Strategies for Offshoring (1/5) From national to international outsourcing. National Outsourcing External provision Offshore. Outsourcing International Inhouse Quelle: (Weinert 2005). Captive. Offshoring Koubek

3. Strategies for Offshoring (2/5) Reasons for increasing international outsourcing: 1. ) Differences in factor costs such as in the factor „labour“ International comparison of labour costs of software engineers (€/hour) Quelle: DB Research 2004, S. 6. Koubek

3. Strategies for Offshoring (3/5) Reasons for increasing international outsourcing (continued): 2. ) Increasing legal security through international agreements. 3. ) Often very high level of education in offshoring countries. 4. ) Governmental subsidies and other benefits. 5. ) Global interlinking of information highways and digitalisation of corporate activities. Koubek

Outsourcing Onshore Outsourcing Offshore Outsourcing Spin-Off 3. Strategies for Offshoring (4/5) Internal provision Captive Offshoring National International Source: Schaaf (2004), S. 3. Koubek

3. Strategies for Offshoring (5/5) • Captive offshoring-strategy is preferred by enterprises in the german-speaking area (randomsample of 570 enterprises) • 2/3 of the worldwide volume of offshoring is captive offshoring. • Captive offshoring is usually combined with direct investments in the target country. Source: Schaaf / Weber (2005), S. 11. Koubek

4. Triad-Concept by Ohmae • Globalization creates companies which have strong competitive positions in the triad regions USA, West Europe, Japan • Homogenity of demand, extensive power and potential knowledge in all triad regions • Automization and IT in triad companies lead to settlements, cooperations and integration strategies • New design of company functions according to the triad criteria • Model for simultaneous market entry Europe Northern America South-East-Asia 1 – 2 years Source: Perlitz, S. 145 Koubek

4. Triad-Concept Evaluation: • Orientation on cost leadership by penetration, whereas the differentiation strategy is less important • Convergency in triad regions (products for the world market) • Orientation on large companies, whereby innovations in small and medium sized companies are underestimated • Dynamics of various world regions (e. g. Eastern Europe) are neglected • Reference model: Japanese company strategies for American and European high-tech consumer goods markets Koubek

4. The effects of Offshoring on the classic triad model • • Nearshoring-regions expand the Triad Model Each of the three classic Triad regions has got a typical nearshoring-region. Koubek

4. The effects of Offshoring on Eastern Europe (1/3) • Eastern Europe increases its attractivity as Offshoring- and Nearshoring-Region • The Czech Republic is in the Top 5 of the most attractive Offshoring-Locations • Reasons: • Level of education • Lower costs than in Western Europe • Regional and cultural proximity • Political Stability • Economic performance Source: AT Kearney (2004), S. 2. Koubek

4. The effects of Offshoring on Eastern Europe (2/3) • • Eastern Europe is increasingly attractive for Captive Offshoring (esp. as subsidaries). Eastern Europe benefits from the relocation of production in Western and Central Europe. Koubek

4. The effects of Offshoring on Eastern Europe (3/3) • Eastern Europe benefits likewise from the relocation of several services to: • External providers (Offshore Outsourcing), for example the placing of orders for developement and programming in the software sector. • Subsidaries (Captive Offshoring), for example the DHLComputer Center in the Czech Republic, SAP has got a Shared Service Center in Prague Koubek

5. Conclusion • Outsourcing und Offshoring intensify globalisation • Motors of Offshoring are international companies and booming economies in Eastern Europe • Eastern Europe is becoming an improtant Nearshoring-Region for estern european and international enterprises • The proximity to the european market is an advantage of location against Asia; this partially compensates a higher level of costs Koubek

6. Case Study Example Automotive Industry in Russia Koubek

General Economic Data German – Russian Cooperations in 2004 (2001) • 2. 250 enterprises with german shareholding (1. 173) • Among these were 1. 350 Russian-German Joint Ventures (775) and … • … 800 subsidaries with 100%-ownership (544) Source: www. russische-botschaft. de ( 2004); Valiullin/ Valiullina (2006) (for 2001). Koubek

Automotive Production Locations in Russia (2006) Koubek

Automotive Industry Example: Volkswagen Group • Previous engagement as exporter to Russia was rather moderate: -> Market share of 4% in the 1 st term of 2007 (20. 000 of 500. 000) • Since 2006: Installation of an assembly plant in Kaluga • It is planned to become a ful-fledged automobile-plant and to increase the market share to 10% within 5 years. • Intended production of 115. 000 automobiles per year. Source: FAZ, Nr. 154, 06. 07. 2007; www. bfai. de (12. 07. 2007). Koubek

Automotive Supplier Production Locations in Russia (2006) Koubek

Automotive Suppliers Example: ZF Friedrichshafen AG • As an important strategical industrial sector it currently is in a crucial phase of development and change as there was no independent automotive industry sector during the Soviet regime. • Securing of local share of supply by partners abroad. (Regulation No. 166 , 29. 03. 2005) • Further impulsion for investments by means of regulation No. 566 , 21. 11. 2006. • Clustering of suppliers for manufacturers with regional focus on the European part of Russia. • Example: Cooperation of ZF with Karmas In the following three years the production will be about 75. 000 gears per year and there will be about 200 Mio. Euro of total revenue. Source: FAZ, Nr. 163, 17. 07. 2007; Ostausschussinformationen(2007) Koubek

Literature Examples • Quinn, James B. /Hilmer, Frederick G. (1994): Strategic Outsourcing. In: Sloan Management Review, Summer, 1994, S. 43 -55. • Kakabadse, Nada/Kakabadse, Andrew (2000): Critical review – outsourcing: A paradigm shift. In: The Journal of Management Development, Vol. 19, No. 8, 2000, S. 670 -728. • Booz Allen Hamilton (2001): Profits or Perils? The Bottom Line on Outsourcing. Booz Allen Hamilton, ORT, 2001. • Power, Mark J. / Desouza, Kevin C. / Bonifazi, Carlo (2006): The Outsourcing Handbook - How to Implement a Successful Outsourcing Process • Craumer, Martha (2007): How to think strategically about outsourcing In: Executing strategy for business results, Boston, Mass. : Harvard Business School Pr. • Weinert, Stephan (2007): Offshore Service Centres of Multinational Companies. Hamburg. Koubek