Difference Between Offshoring And Offshore Outsourcing Business Essay

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The term offshoring and offshore outsourcing has often been misused synonymously in the present context. Despite from general public debate, several literatures around IS/ Information Technology research have mis-defined offshore outsourcing as simply the use of service supplied by another company, whether it is owned by a third-party or not, outside the national borders of the host company. (Pries-Heje, Baskerville & Hansen, 2005; Niederman, Kundu & Salas, 2006)& However, strictly speaking, there is a clear distinction on the ownership of this foreign supplier. Company that has an ownership stake in the foreign suppliers (affiliated) would not be considered as offshore outsourcing. Definition from the United States Government Accountability Office (GAO) has well covered this element, it defined offshoring as company sourcing services across the border by investing in a foreign affiliate while offshore outsourcing as company acquiring services outside the national border from an outside (unaffiliated) company. Exhibit 1.1 demonstrates the difference between offshoring and offshore outsourcing. Hence, those services acquired by General Electric (GE) in India would be classified as offshore outsourcing while it would only be classified as offshoring for Siemen as the former offshore development centers is owned and performed by a third party, Tata Consultancy Services (TCS) but the latter one is owned and performed by Siemen itself.

Section 2 - Request for bid's Description

Photo Decorator is an iPhone app that segment for youth especially teenage girls. It allows users to decorate their photos that taken from their iPhone with different cartoon stickers and different colorful text forms and share with friends. This idea is come from the Japanese Photo Sticker Booths, Purikura. Purikua is a shortened form of Purinto Kurabu, it means Print Club in English (J. M. Williams ). Since the mid 1990s, Purikura has become a crazy youth culture in Japan and has quickly spread throughout countries like Taiwan, South Korean and Hong Kong. Today, this culture has begun to expand into the smart phone apps' market.

Below would be the full bid description for Photo Decorator that posted on the VWorker site:

Since a number of iPhone apps exists in the market are similar, we are looking for a new programmer to assist us and to help design cute and more user friendly version of a photo decorator app which will allows users to decorate their own photos with a number of cute stickers or stamps, different colorful text forms and different style of hand drawings. The entire cute stickers' source would be provided, moreover, some pictures captured from similar apps would be included below to give the programmer an idea what our desire apps would be looked like, therefore this job should not be too challenging for a seasoned programmer. We would like this app to work on the iPhone 4, and if possible, on the iPod Touch 4G as well. Our timeline for the completion of this app is flexible, with up to 14 days although we would prefer the work to be done within 5 - 7 days (an extra 10% of the agreed project price would be added as a bonus if the app is 100% done within 5 - 7 days and with a satisfactory quality plus matching all our requirements).

Specifically, we are looking for is a programmer to cut and paste all the cute stamps (up to 50 stamps in total) provided by us into the apps. In addition, design 2 cute text forms, 2 different 'special and cute' hand drawing pen brushes with each consisting of 7 basic colors to allow users to complete the following functions below in a friendly way:

Users can upload or select images that want to be decorated by this app from their photos albums in their iPhone 4 or iPod Touch 4G

Users can save the decorated photos in their photos albums in their iPhone 4 or iPod Touch 4G

Users can add different cute stickers or stamps to the photo

Users can add their own text on the photo

Users can hand draws on the photo

Each sticker, stamp, text and hand drawing can be enlarged, shrunk, resized, rotate and freely movable.

Users can redo or undo any process

Section 3 - Risks

3.1 Country Risk

Country risk, can also be re-named as Geo-Political risk, is defined as a group of risk factors such as war, terrorism, border disputes, regulatory requirement and political bureaucracy that may disturb the continuity of the delivery from the service provider. (Aeh 1990; Smith et al. 1996; Carmel 1999) It is a complete new issue and has quickly become aware by corporate since 9/11 and the conflict of India-Pakistan Kashmiri. Today, it even turns into a norm for them, in particular for U.S. corporations, to take analysis on these risks in the vendor selection process for their offshore outsourcing projects. Stephanie Overby, CIO, tries to comment on that: Corporate in America recently has changed their mantras on offshore outsourcing by crying the projects to get done "safer, more stable, more secure" rather than "better, faster and cheaper".

Surprisingly, based on a recent reports from The Brown-Wilson Group Inc.'s "2009: The Year of Outsourcing Dangerously", several current major locations for IT offshore outsourcing like Delhi, Bangalore & Mumbai in India, Bangkok in Thailand, Dalian in China and Kuala Lumpur in Malaysia were ranked as the top 25 most dangerous cities for offshore outsourcing. On top of that, India was given the name of the worst country for heightening of geo-political issue. Recent terrorist attacks in Mumbai, India would be a good example showing the unstable geo-political environment in India. Nevertheless, despite these bad ranking, India and China would probably still be the outsourcing venue for Photo Decorator, therefore, it would be better for us to analysis in depth on each of their geo-political risks in below:

India: Political climate would be the biggest source of uncertainty for taking India as an outsourcing venue. There is a long history of ongoing tension and dispute between India and Pakistan over Kashmir, in particular, the near war between the two sides in 2002. Currently, this relationship between the two sides still not cools down yet.

China: Similar to India, there is a long history of conflict among the control over its neighbor, Taiwan. Joel Plaut, VP Program Management of SendWordNow, comment "Political tension between China and Taiwan is probably higher than is realize, due to lack of an actual recent military incident.

Strategies for addressing country risk mainly related to multiple location diversity. In essence, it means never putting all your eggs in one basket. It is strongly recommend that corporate, in the process of vendor selection, should either choosing a vendor that have globally working site or separating the entire order into little pieces and placing them with vendors located in different countries to reduce the country risk.

3.2 Currency-Fluctuation Risk

Currency risk is defined as the risk of exposure due to volatile exchange rates. It arises whenever the offshore outsourcing transactions involve 2 different currencies. In most of the case, it would be USD to Indian rupee (INR) or Euro to INR, but in our case, it would be GBP to USD. It is suggested that corporate must ensure to take into account the effects of fluctuations on exchange rate as any unanticipated swinging would increase cost and minimize saving. (Kumar and Eickhoff, 2006) However, compared to a decade ago, this issue was not as hot as now. It is an issue used to be largely ignored by corporate who engage in the outsourcing activities. Mark Mayo, partner and president of TPI Global Resources Management tried to comment on that "Currency risk has become much more of a focus in the outsourcing industry than it has been in the past because of the fluctuation and volatility of the dollar."

To understand how the currency risk between GBP to USD plays out in our case, it would be better for us to consider a homogeneous offshore outsourcing contract as the contract of Photo Decorator but took place in a different period:

Start Date: 13Dec 2010 Finish Date: 28Dec 2010

Total Contract Value: USD$140 Payment Method: Pay-for-Deliverables

Under such scenario, we would be agreed to pay USD$140 at the end of 28Dec 2010 in exchange for the deliverables of Photo Decorator. In other words, based on the exchange rate between GBP/USD on the day we signed the contract, our total cost would be equivalent to around GBP£88. Since we expected that what we paid in USD on the 13Dec would be the same on the 28Dec, we left our GBP on the table. However, during these 2 weeks time, the dollar did strengthen and moved against our position. By the end, on the 28Dec, the GBP/USD fell from 1.5858 to 1.5366 (-3.10%). Our total cost has risen to around GBP£91 and hence, we exposed to the currency risk. Exhibit 2 shows the exchange rate movement from 13Dec to 28Dec.

Strategies for addressing currency risk mainly related to currency hedging or adding a provision in the contract. Currency hedging is a more familiar way for corporate to manage unanticipated swings in currency. It involves the use of derivative instruments like options contract or foreign exchange forward contracts. On the other hand, the concept of adding a provision in a contract is a new and rather innovative strategy. However, it is not commonly used by corporate as it highly depends on the willingness of the vendor on entering such agreement. It is basically an idea of allowing the outsourcing customers an opportunity to renegotiate or terminate the contract when the exchange rate moves against their positions.

3.3 Security Risk

Security risk, can also be re-named as Intellectual Property (IP) Protection risk, is a risk associating with physical assets or intellectual properties that belongs to the outsourcing corporate which have being stolen or manipulated by their service providers. (Smith et al. 1996; Carmel 1999) In most of the developed countries such as U.S and U.K, it is a business norm for companies to keep on their customer confidential information, however this does not apply to others especially to those developing countries in Asia. During the past decade, there were plenty of stories involving unethical companies in developing counties illegally obtain data from their clients and threatened for compensation or even marketed them. For example, In October 2003, University of California San Francisco Medical Center (UCSF) was threatened by an outsourcing transcriber in Pakistani on exposing its patients' confidential medical records.

Based on a research in 2011 done by A T Kearney on the best outsourcing destination, Singapore and Canada remain the leader in business environment in terms of protection on security of intellectual property. While several current major locations for low cost IT offshore outsourcing like India, Thailand and China are on the bottom of the table. Exhibit 3 shows the full table from the report. Recent cyber hacking incident on Google e-mail accounts in China would be a good example showing the problem of data security in China. However, despite these bad reputation, India and China would probably still be the outsourcing venue for Photo Decorator, therefore, it would be better for us to analysis in more detail on each of their development on protecting intellectual property in below:

India: Protection on intellectual property in India is remarkable improving. It is one of the most responsible members of World Trade Organization (WTO) and has been continue meeting the WTO standard on laws' of intellectual property rights since 2005. Moreover, National Institute for Intellectual Property Management (NIIPM) has been established in 2005 to perform training, policy advices and research on this area. Steve Ballmer, Chief Executive Officer of Microsoft Corp. said: India is not perfect but the intellectual property protection in India is far, far better than it would be in China.

China: Over the past decade, China has signed a number of international protocols related to the protection of intellectual property in international level such as the Agreement on Trade-Related Aspects on Intellectual Property Rights. However, it is still often under criticizing. Chris Devonshire-Ellis, a senior partner of Dezan Shira & Associates Business Consultants tried to comment: There are too many misconceptions or misunderstandings about the subject and how to cope with intellectual property when it comes to "the China issue.

Strategies to mitigate this risk mainly related to auditing. The idea is that corporate should verify their service providers' security process before, during and even after the project to ensure all the private data are secured.

3.4 Culture Difference Risk

Culture difference risk, can also be re-named as Cross-Cultural risk, is a risk derived from the differences in terms of national or corporate cultures between the two sides which influence the offshore outsourcing relationship. (Aeh 1990; Ramarapu et al. 1997; Carmel 1999) Culture is a collective phenomenon. It is learned from people who live around, not innate. (Hofstede 2005) It consists of unwritten rules of the social game. One classical example would be Indian are never comfortable to say "No". In India, people used to avoid giving negative responses. They tend to say "Yes" to everything especially when responding to their clients. Whatever tasks their clients ask them to finish, they would answer with a "Yes". However this "Yes" does not mean that they guarantee to complete all the tasks for you. It does only mean that they would try their best to finish. Therefore, those people who believe on this "Yes" may be disappointed in the end or at a very late stage.

It is often the case that the degrees of culture difference vary from place to place. Nearshoring providers tend to have a much closer culture with the customer organization. (Kvedaraviciene 2009) However, since our project, Photo Decorator, would probably be outsourced by providers in far east like India and China, therefore, it would be better for us to analysis in more detail on each of their culture in below:

India: Apart from the "Yes" culture, management style is also different between India and Western countries. In India, managers are required to follow up the projects frequently; otherwise, employees may classify those projects as unimportant and delay the progresses. Beside this, another typical difference would be the right for subordinates to interrupt a conversation in a meeting. In India, sub-ordinates in a team are not allowed to give their contribution or opinions freely until their seniors ask them to do so, otherwise, this would consider as disrespectful to their senior.

China: Chinese culture is difficult for Westerners to follow. One typical difference would be negotiating or bargaining in China is recommended between customer and seller as it is viewed as a part of establishing a good relationship. They argue that "money will come back, customer may not". In other words, seller would choose to loss profit rather than a customer.

Strategies for addressing culture difference risk mainly related to comprehension. The most ideal case would be personally visiting the offshoring location and experiencing how do these people communicate and work. However, if this is not the case, corporate should alternatively seek advices from either specialists or any employee who has experiences with both of the cultures.