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ISBN 10: 1-292-04033-5
ISBN 10: 1-269-37450-8
ISBN 13: 978-1-292-04033-2
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Partnerships, Alliances, and Customer Relationships
Further, not all the information utilized for determining environmental impact is quantitative.
Much of it remains qualitative, subjective, and based on individual, personal, or corporate values. For
example, are corn-based bioplastics more or less environmentally responsible than plastics derived
from petrochemicals? Science can show the material consumption, energy, and carbon impact of either option—but if the corn came from genetically modified organisms, does that make the product
less clean? How should issues like these be factored into the framework that are meaningful, yet
don’t trump or compromise the individual values of companies?
Challenge #4: Communication Complexity
Initiatives such as ours gain the greatest momentum through regular dialogue and debate in face-toface meetings. However, with participants scattered across the continent in different time zones,
keeping our group’s communication lines open has been challenging. We’ve improved our effectiveness between in-person meetings by using a collaborative website so all information about our efforts is easy to access, easy to find, and easy to contribute to. Users can participate in virtual and
real-time meetings, discussions, wikis, voting, sharing of documents, and so forth. The site requires
users to be identified to participate and add content, so everyone knows who is participating and
how—just like in a face-to-face meeting.
One of the stated goals for the way we conduct ourselves during the creation of our eco-index
is to be as transparent as we can possibly be. A positive side benefit of the website is that it serves as
a permanent record of our activities to be shared with anyone who has interest in learning about our
process.
The website does not completely eliminate the need for in-person meetings, but it does help us
make progress between meetings. Plus, the carbon footprint of the bits and bytes necessary to make
an online community work pales in comparison to the emissions necessary to get 30-plus people to a
single location—a good thing for a group that is trying to promote environmental responsibility.
Success Factors to Successfully Navigate the Challenges:
• Identify and engage stakeholders very early in the process. These people—key influencers and subject-matter experts—must be included and consulted constantly so that they remain engaged and committed.
• Openness and a spirit of collaboration trump all else in this process. If companies don’t
check their self-interests and competitive positioning at the door, then the atmosphere for true
collaboration will never exist and the effort will fail.
• Develop a clear shared mission and vision, a well-defined structure and governance,
and an agreed-upon set of operating rules and procedures. Without them, we have no
common ground as we navigate difficult tactical tasks and competing interests.
• Constantly seek out examples, models, and other means that illustrate the business
case for proceeding. We must show that making products more environmentally responsible
for moral reasons also adds value to our businesses; without this business case, our efforts will
lose steam and die.
• Don’t be afraid to shake up the model of how collaboration takes place especially in
this busy and connected world.
Desired Outcome
Our goal is to establish one—and only one—framework for eco-comparison and selection among
vendors and products. It is our vision that some day consumers will be able to make quick and meaningful comparisons among similar products about the true environmental impact of each choice. Our
belief is that this will positively influence consumer purchasing behavior as well as drive business innovation toward more sustainable options. Ultimately this not only will make tangible, measurable
differences in the waste, emissions, and energy consumption of our products—making our planet
healthier—but also will drive business value for those who embrace the environmental practices, because consumers will expect and demand environmental responsibility just as they have grown to expect quality and performance.
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OUTSOURCING: HIGH RISK/HIGH OPPORTUNITY VERTICAL PARTNERSHIPS
In the mid-1990s, Hewlett-Packard decided to outsource 100% of its manufacturing. Indeed, HP
today does not manufacture any of its own products. With its outsourcing decision, HP’s outsource
provider (Jabil in many U.S. locations) took ownership of HP’s manufacturing facilities, and HP’s
manufacturing employees were “rebadged” as Jabil employees. As one might imagine, this change
was quite stressful. HP had been revered for its excellent benefits and organizational culture, and
employees were fearful that a different company wouldn’t be as generous. In another major change,
when HP decided to offer its products for sale via an Internet distribution channel, it originally performed many of those functions, including order fulfillment and shipping, from its own facilities.
However, HP quickly realized that the business of performing e-commerce was not one in which it
had a core competency; moreover, it distracted HP from its true core competencies (product innovation and marketing)—and so it outsourced the order fulfillment and distribution of all HP.com orders to FedEx.
Because of its increasing prevalence in high-tech industries and its increased complexity as a
type of partnership, this section focuses specifically on outsourcing as a unique form of vertical
partnership.
Outsourcing is an arrangement in which one company (the customer or the client) hires another company (the supplier or outsource provider) to perform a particular function on its behalf. It
involves the transfer of the management and/or day-to-day execution of an entire business function
to an external service provider. Based on a contractual agreement that defines the transferred services, the client agrees to procure the services from the supplier for the term of the contract. In addition, the outsource provider may acquire the means of production in the form of a transfer of some
combination of people, assets, and other resources from the client.
The trend toward outsourcing began in the mid-1980s, when many companies outsourced
their manufacturing to providers in emerging economies, such as China, in order to reduce labor and
manufacturing costs. Businesses whose manufacturing operations were located in places with relatively high labor and materials costs found that to remain competitive, they had to lower the costs of
doing business. Hence, contract manufacturing was a key solution, not only in high-tech industries
with electronics manufacturing companies such as Jabil, Solectron, and Flextronics, but also across
a wide swath of industries.
Next to outsourced manufacturing (often referred to as contract manufacturing), the growth
in outsourcing has occurred mostly in two categories: One of these is business process outsourcing
(BPO), which outsources business processes such as customer service, finance and accounting,
human resources, analytics, or perhaps even new product development. The other is information
technology outsourcing (ITO), which outsources IT functions such as website design or IT infrastructure. Another type of outsourcing receiving quite a bit of attention from high-tech companies in
recent years is outsourced innovation (including R&D, product development, and design work),
sometimes known as original design manufacturing (ODM). These outsourced product designs,
in which companies use a predesigned platform, can shave 70% off development costs for a mobile
phone, for instance.50 In 2005, the percentage of product development/product design efforts that
were handled by outsource providers included:51
•
•
•
•
•
70% of PDAs (handheld devices such as Palm Treos and RIM BlackBerrys)
75% of notebook PCs
65% of MP3 players
30% of digital cameras
20% of mobile phones
In theory, outsourcing allows a customer to gain access to best-in-class services performed by
experts. Outsource providers become highly skilled in performing the outsourced function. When
coupled with the aggregation of business from many customers, outsource providers develop
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Partnerships, Alliances, and Customer Relationships
Analytics (market research, financial
analysis, risk calculation)
Human Resources (payroll administration,
benefits, training programs)
Finance and Accounting (accounts payable,
billing, financial and tax statement preparation)
Engineering (testing and design of electronics,
chips, machinery, car parts, etc.)
Customer Care (call centers for tech support,
air bookings, bill collection)
Information Technology (software development,
tech support, website design, IT infrastructure)
Manufacturing (for electronics
sector only)(contract)
Logistics and Procurement (just-in-time shipping,
parts purchasing, after-sales repairs)
$0
$40
$80
$120
$160
$200*
FIGURE 3 Global Spending on Outsourcing for Various Business Functions, 2005
* in billions
Source: Engardio, Pete, “The Future of Outsourcing,” Business Week, January 30, 2006, pp. 50–64.
economies of scale that further refine their knowledge base about the function. The combination of
specialized knowledge, skill proficiency, and scale economies drives the cost efficiencies that underlie a key reason for outsourcing. A second reason for outsourcing is that companies can then better focus on their own business model, allowing them to increase revenues.
Despite its controversies (discussed subsequently), outsourcing has grown steadily over the years
in both the variety of services that are outsourced as well as the volume of business. As Figure 3 shows,
business functions outsourced (outside of a company’s domestic borders) include manufacturing, logistics and distribution, IT management, customer service, human resource management, accounting and
finance, website development and management, product development (including software engineering)
and product testing, and sales and marketing (including search engine positioning), to name just a few.
Despite the volume of business represented in Figure 3, the offshore component (relative to outsourcing
to domestic partners) varies widely by business function. For example, with respect to business process
outsourcing, the offshore component was estimated to be roughly just 10% in 2005.52
Figure 4 shows the geographic regions involved in this major business trend. India accounts
for nearly 60% of the volume of business process outsourcing due in part to English as a primary
language, but also to the talented workforce, solid education system, and ruthless efficiency in their
service operations. Emerging areas of the global economy—including the BRIC countries (Brazil,
Russia, India, and China) as well as eastern Europe, Egypt, and the Philippines—have developed
proficiencies not only in manufacturing, but also in software engineering and other skill sets that are
highly desired by global multinational corporations. Table 7 shows the major outsource providers in
key industries.
More Outsourcing Terminology
The jargon surrounding outsourcing can be formidable. In addition to the terms presented above,
following are definitions for other common outsourcing terms.
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Middle East and Africa4
Latin America
and Caribbean3
China and
Southeast Asia2
India
Central and
Eastern Europe1
FIGURE 4 Business Process Outsourcing, by Region
Sources: Engardio, Pete, “The Future of Outsourcing,” Business Week, January 30, 2006, pp. 50–64; and A.
T. Kearney Global Services Location Index, 2005.
1. Czech Republic, Bulgaria, Slovakia, Poland, Hungary Up-and-comers: Romania, Russia, Ukraine
2. China, Malaysia, Philippines, Singapore, Thailand Up-and-comers: Indonesia, Vietnam, Sri Lanka
3. Chile, Brazil, Mexico, Costa Rica, Argentina Up-and-comers: Jamaica, Panama, Nicaragua, Colombia
4. Egypt, Jordan, United Arab Emirates, Ghana, Tunisia Up-and-comers: South Africa, Israel, Turkey, Morocco
Offshoring generally refers to performing functions outside the client’s home country.
Captive offshoring refers to a company performing the function in its own company-owned facilities in another country. For example, Microsoft has an office in Hyderabad, India, that does software
development in collaboration with its headquarters based in Redmond, Washington. Reverse outsourcing is a situation whereby an outsource provider, say an Indian-based company performing
work for a U.S.-based company, opens an office in the client’s home country (e.g., the United
States) in order to fulfill the outsourcing contract. Near-shore outsourcing is provided by an
TABLE 7 Major Outsource Providers, by Function
Business Services
Software Development
Call Centers
Hewitt Associates (U.S.)
ACS (U.S.)
Accenture (U.S.)
IBM (U.S.)
EDS (U.S.)
Hewlett-Packard (U.S.)
Wipro (India)
HCL Technologies (India)
Tata Consultancy Services (India)
WNS Global Services (India)
Tata Consultancy Services (TCS) (India)
Infosys Technologies (India)
Wipro (India)
Accenture (U.S.)
IBM (U.S.)
Cognizant Technology Solutions (U.S.)
Satyam (India)
Patni Computer Systems (India)
EDS (U.S.)
CSC (U.S.)
Convergys (U.S.)
Wipro (India)
ICICI OneSource (India)
ClientLogic (U.S.)
24/7 Customer (India)
SR. Teleperformance (France)
eTelecare International (U.S.)
SITEL (U.S.)
Teletech (U.S.)
CustomerCorp (U.S.)
Source: Engardio, Pete, “The Future of Outsourcing,” BusinessWeek, January 30, 2006, pp. 50–64; and Gartner Inc.
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Partnerships, Alliances, and Customer Relationships
outsource provider located in a country near the client’s own home boundaries and in proximate
time zones. Homeshoring generally refers to outsourcing the function to a domestic provider. However, it can also refer to (and be confused with) the hiring of independent domestic workers who
perform the outsourced function in their own homes. For example, Dell hires customer service
workers across the United States to whom customer service inquiries are routed.
Farmshoring refers to outsourcing to rural areas, typically in a company’s own country. Given
the large volume of business from government contracts, many believe a government has an obligation to outsource contract work within its own boundaries prior to seeking an offshore provider.
Farmshoring often requires a build-out of broadband infrastructure and other technology centers in
rural areas. Indeed, calls for “universal service” of broadband technology are often tied to economic
development opportunities for rural areas. One example of farmshoring is found in the hiring of Native Americans who face dire economic circumstances on their reservations, where unemployment
rates can be as high as 80%. Yet, these American Indians have found outsourcing to be an economic
opportunity that allows them to stay close to family and tribal customs that are an important part of
their heritage.53
Reasons for Outsourcing
The growth in outsourcing is due to many factors, as illustrated in Figure 5 and discussed next.
By taking advantage of lower costs in other markets, economies of scale, and specialization, outsourcing offers the potential of huge cost savings. With respect to contract manufacturing in particular, outsourcing’s lower costs of production are driven primarily by economies of
scale. By accumulating volume over many OEM customers’ product needs, the outsource provider
gains economies of scale in the learning process, secures volume discounts from the upstream suppliers of raw goods and materials, and gains efficiencies in manufacturing and supply chain
processes.
COST SAVINGS
Cost
savings
Focus on
own core
competencies
Access to
outsource
provider’s skills
Mitigate
human resource
Technology
issues
Other
(globalization,
competitive
intensity, faster
pace of business)
Reasons
Risks
Cost advantages
don’t materialize
Dilution of
competitive
advantage
FIGURE 5 Reasons for and Risks of Outsourcing
164
Quality
concerns
Dependence
on vendor
Public
backlash