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Amity Business School

Amity University

Assignment

Submitted to: Submitted by:


Hargovind Kakkar Shalini Bahadur
Lecturer Enr no.-A0102309050
Amity Business School Sec- D,Roll-30
Outsourcing

1.Introduction
Outsourcing can be defined as an allocation of specific business processes to a specialist
external service provider. Most of the times an organization cannot handle all aspects of a
business process internally. Additionally some processes are temporary and the
organization does not intend to hire in-house professionals to perform the tasks. Once the
task is assigned to the service provider, he will take the responsibility of carrying out the
tasks and maintaining the organization’s assets.

Organizations outsource their business process due to:-


• Lack of expert-labor in some portions of the business process
• Availability of cheaper labor, whilst not comprising on the quality of output
• Ability and feasibility to concentrate on the other crucial business process
• Expertise in communication capabilities
• For technical expertise

Outsourcing can be undertaken to varying degrees, ranging from total outsourcing to


selective outsourcing. Total outsourcing may involve dismantling entire departments or
divisions and transferring the employees, facilities, equipment, and complete
responsibility for a product or function to an outside vendor. In contrast, selective
outsourcing may target a single, time-consuming task within a department, such as
preparing the payroll or manufacturing a minor component, that can be handled more
efficiently by an outside specialist .

However prior to outsourcing any component of business to a third-party vendor, it is


essential to understand the advantages and disadvantages of outsourcing. Although
outsourcing presents a variety of benefits to your organization, it could also pose
difficulties if not outsourced to the right service provider. Some common examples of
outsourcing include manufacturing of components, computer programming services, tax
compliance and other accounting functions, training administration, customer service,
transportation of products, benefits and compensation planning, payroll, and other human
resource functions. A relatively new trend in outsourcing is employee leasing, in which
specialized vendors recruit, hire, train, and pay their clients' employees, as well as arrange
health care coverage and other benefits.
The most commonly outsourced streams of business include.
• Content Development
• Web Design and Maintenance
• Recruitment
• IT Maintenance
• Logistics
• Manufacturing
• Technical/Customer Support.

Vendors providing outsourcing services are generally grouped into two models: Business
Process Outsourcing (BPO) and Application Service Provider (ASP). In the BPO model,
major resources and assets are transferred from the company to the vendor. Under the
ASP model, on the other hand, vendors concentrate on providing selected services for
multiple clients .Nowadays there is also a wide range of pricing models and options
available i.e. there is a seemingly endless combination of service, pricing, and delivery,
providing a solution for most situations.

Main outsourcing destinations

Top outsourcing countries includes Brazil, Bulgaria ,Chile , China, India, Indonesia,
Malaysia, Mexico, Philippines ,Singapore ,Thailand ,Vietnam , Pakistan , South Africa
,etc.
Global Outsourcing Market
According to McKinsey, the global "addressable" Business Procurement Outsourcing or
BPO market is worth US$122 - US$154 billion, of which: 35-40 retail banking, 25-35
insurance, 10-12 travel/hospitality, 10-12 auto, 8-10 telecoms, 8 pharma, 10-15 others
and 20-25 is finance, accounting and HR.
Advantages of Outsourcing:

Following are the advantages of outsourcing :-

• Reduced Operational and Recruitment costs: Outsourcing eludes the need to hire
individuals in-house; hence recruitment and operational costs can be minimized to a
great extent. This is one of the prime advantages of offshore outsourcing.
• Risk-sharing: one of the most crucial factors determining the outcome of a campaign
is risk-analysis. Outsourcing certain components of your business process helps the
organization to shift certain responsibilities to the outsourced vendor. Since the
outsourced vendor is a specialist, they plan your risk-mitigating factors better.
• Concentrating on core process rather than the supporting ones: Outsourcing the
supporting processes gives the organization more time to strengthen their core
business process.
• Swiftness and Expertise: Most of the times tasks are outsourced to vendors who
specialize in their field. The outsourced vendors also have specific equipment and
technical expertise, most of the times better than the ones at the outsourcing
organization. Effectively the tasks can be completed faster and with better quality
output.
• Lower personnel costs: Some businesses choose to take their outsourcing one step
further by choosing a vendor, located in another part of the world. Doing so typically
saves them more money because they end up paying a much lower wage than would
be necessary in their home country. By outsourcing job duties to non employees, a
business does not have to pay consistent wages or offer additional employee benefits.
The company may pay lower taxes because independent contractors, the people who
complete the outsourced projects, pay their own withholding, social security, and
other taxes. This can add up to substantial savings .
• Outsourcing speeds up production time. Since the third-party vendor will only be
concentrating on one specific task, instead of numerous office duties, actual
production time can be greatly increased.
• Outsourcing gives a business the flexibility to change third-party vendors whenever
necessary. This process is not as time-consuming as the normal employee hiring
process, because they are not screening individuals, they are considering established
companies with proven track records.

The disadvantages of outsourcing :

Some of the major disadvantages to outsourcing include poor quality control, decreased
company loyalty, a lengthy bid process, and a loss of strategic alignment ,etc .Following
are the important disadvantages of outsourcing : -

• Risk of exposing confidential data: When an organization outsources HR, Payroll


and Recruitment services, it involves a risk if exposing confidential company
information to a third-party.
• Hidden costs: Although outsourcing most of the times is cost-effective at times the
hidden costs involved in signing a contract while signing a contract across
international boundaries may pose a serious threat.
• Lack of customer focus: An outsourced vendor may be catering to the expertise-
needs of multiple organizations at a time. In such situations vendors may lack
complete focus on your organization’s tasks.
• Synchronizing the deliverables: In case you do not choose a right partner for
outsourcing, some of the common problem areas include stretched delivery
timeframes, sub-standard quality output and inappropriate categorization of
responsibilities. At times it is easier to regulate these factors inside an organization
rather than with an outsourced partner.
• Undesirable results :One of the biggest disadvantages of outsourcing is undesirable
results. This is especially true when a company hires a third-party vendor to mass
produce a product. In the event that the finished products do not meet quality
standards, the manufacturing process must be repeated by a different vendor. Not only
is this a waste of time and materials, it can also be very costly for the company who
outsourced the project. They are essentially paying twice for the same job. In addition
there is always the possibility that the company may lose sales, during this same
period because of the lack of available product.
• Unemployment :Another disadvantage of outsourcing is a loss of jobs. Many times
work is outsourced simply as a means to save money. Outsourcing to a foreign
country typically saves a company a great deal in wages. So, the choice is made to
reduce their local workforce, at the expense of the laid-off employees.In turn, it can
cause community uproar and even a decrease in business and profits. This happens
when local consumers make the decision to shop elsewhere, as a way to voice their
disdain.
2.Content and context
Description of Brazil as an outsourcing destination :
Brazil is today South America’s leading economic power and a regional leader. The
country has large, well-developed agricultural, mining, manufacturing and service
sectors. Its economy outweighs that of all other South American countries and Brazil is
expanding its presence in world markets. Highly unequal income distribution remains a
pressing problem. Three areas of its economic program include a floating exchange rate,
an inflation-targeting regime and a tight fiscal policy, all of which have been reinforced
by a series of IMF programs. When searching for a suitable offshore location, client
organizations need to scrutinize a comprehensive set of indicators, including labor costs
and political, economic and social risks, among others. For Brazil to stand out as the
"right decision," following are the important points:-
Geographical Proximity:
• Brazil's proximity to the US makes it distinctly more accessible than more distant
Asian locations.
• Qualifies as a "nearshore" location for the US market.

Political : There is a major divide between the rich and the poor; good national IT
policy in place. Brazil is the largest and most populous country in South America;
instability within its political system;
• Difficult climate.
• Government is unusually supportive in developing IT outsourcing however results
of it remain to be seen.
• Government in Brazil is showing his eagerness to attract foreign investors. The
government is keen to contribute to the development of Brazilian off shoring ,
• Security is a major issue in Brazil. Social inequality, gun crime and drug dealing
are sad realities on the streets of the big centers like Rio de Janeiro and Sao Paulo,
and should show up in the risk management assessments of any offshore program.
• Despite the newly launched efforts, Brazil has been challenged to make changes
and compete at the incredibly rapid pace of offshore growth. This will continue to
be a challenge; outdated labor laws and a slow-moving official bureaucracy
continue to reduce the agility and flexibility of businesses.
Conclusion: Outdated labor laws are still a sizable hurdle, and although currently under
debate, they are not expected to change significantly in the short term. However, the
country has made important forward strides in the past two years. Additionally, non-
government organizations and IT-sector constituencies have become more proactive and
aggressive to get the government to enact change — and the results are beginning to be
meaningful.
Global and Legal factors:
• The legal system is complex and overburdened. Brazil was ranked very low by the
World Bank for ease of doing business (122 out of 178).
• Conversely, the country is increasingly open to global issues. An increasingly
broader portfolio of trading partners opens the country to global practices, and
global concerns like the environment, mature fast.
• IPR is a big issue in Brazil.
• Government laws are fair.
• Most cases of piracy in the world; largest losses by copyright industry
• Inadequate enforcement.
Conclusion :Brazil's legal system, while slow and complex, is compatible with modern
Western democracies, and the continuity of commercial contracts is respected.
Regulatory changes in the economy are minimal
Cultural issues:
• Originally a Portuguese colony, the country has been the destination of several
waves of immigration from different areas, most notably Italy, Germany, Japan,
the Middle East and other Latin America countries.
• Business practices are influenced by American and European multinationals;
several multinational shared services and development centers are established in
the country.
• Language is a major barrier, and English proficiency on the whole is poor. Modest
English skills
• Very innovative society.
• Development of top innovation parks. Language is a major barrier, and English
proficiency on the whole is poor.
• Close physically and timewise to the U.S.
Conclusion: Brazil is well-connected to the world. Immigration has resulted in cultural
diversity. The culture in general, and business practices in particular, are influenced by
U.S. and Western European practices.
Economic /cost advantage:
The economy of Brazil is the world's eighth largest by nominal GDP and ninth largest by
purchasing power parity. Brazil has moderately free markets and an inward-oriented
economy. Its economy is the largest in Latin American nations and the second largest in
the western hemisphere. Brazil is one of the fastest-growing major economies in the
world with an average annual GDP growth rate of over 5 percent. In Brazilian reais, its
GDP was estimated at R$ 3.143 trillion in 2009. The Brazilian economy has been
predicted to become one of the five largest economies in the world in the decades to
come.Brazil is a member of diverse economic organizations, such as Mercosul, Unasul,
G8+5, G20, WTO, and the Cairns Group. Its trade partners number in the hundreds, with
60 percent of exports mostly of manufactured or semimanufactured goods. Brazil's main
trade partners in 2008 were: Mercosul and Latin America (25.9 percent of trade), EU
(23.4 percent), Asia (18.9 percent), the United States (14.0 percent), and others (17.8
percent).

GDP $2.023 trillion (nominal)


$2.182 trillion (PPP)

GDP growth 7.6% (2010)

$11,220 (2009) (nominal; 60th)


GDP per capita

$11,514 (2009) (PPP; 75th)


GDP by sector agriculture: 5.5% industry: 28.7% services: 65,8%
Inflation (CPI) 4.44% (Aug 2010)

Highly unequal income distribution remains a pressing problem .The country has large,
well-developed agricultural, mining, manufacturing and service sectors .Its economy
outweighs that of all other South American countries .Brazil is expanding its presence in
world markets .Brazil’s economy is expanding its presence in world market partially due
to outsourcing. The challenge is to maintain economic growth over a period of time to
generate employment and make the government debt burden more managable.
Infrastructure risk:
• Brazil is South America's largest telecommunications market. It has more than 40
million installed fixed lines and more than 150 million mobile subscribers.
• Internet user penetration is above 25% (12 million connections and 45 million
unique addresses), and the market is forecast to grow at a compound annual rate
of 12%. This is partly due to government efforts to enhance accessibility and a
recently launched government-sponsored program to provide low-cost computers
to public school students.
• Internet users: 14 million
• Major companies, including GE, Goodyear and Xerox, have partnered with
Brazilian outsourcing companies.

IT Competency risk:
• Good project management; excellent technical and management experience
• highly skilled IT workers and growing sophistication of expertise in software and
new technologies
• Application development and maintenance is the specialty of Brazilian IT
programmers very good
• BPO: Excellent
• System Writing Project R&D: Average

Human capital factors:


• Big country with high turnout of graduates; huge labor availability.
• Overall education needs to be improved.
• The total workforce is estimated to be around 80 million.
• The availability of educated workers is very high labor force of 83 million.
• Labor Pool with a population of 182 million growing at 1.1% per year.
• Brazil has an estimated educated workforce of 83 million.
• The country clearly has a substantial labor pool, potentially a major strength when
many offshore locations are rapidly "overheating."
• Characteristics of flexibility, creativity and client empathy, in addition to specific
domain skills (especially in the financial, insurance and communications
verticals), make Brazilian resources attractive in the IT services market. A larger
percentage of workers have good business acumen and knowledge of business
practices. These qualities, in particular, are leveraged by local service providers to
create differentiation.
Conclusion: With the largest labor pool in Latin America, Brazil still shows
availability of labor resources at reasonable costs. The IT services industry growth is
driving global and local providers alike to look for additional resources in second-tier
cities.

Labor Costs:
• Brazil has relatively competitive salary rates among the various countries in Latin
America.
• The cost differences between Tier 1 and Tier 2 cities can reach 50% in the three
biggest cost areas for IT services — salaries, facilities and telecommunications —
demanding extensive due diligence from providers and clients alike.
• The Brazilian currency has been steadily appreciating and now floats around 1.8
per U.S. dollar, which represents a 25% increase in two years in costs for
American buyers of Brazilian services. To counter that effect, the government
presents a portfolio of different export incentives and tax breaks (for exports in
general, IT services in particular and for innovation).
Conclusion: Despite the steady appreciation of the Brazilian real against the U.S. dollar,
the country still offers competitive service costs. Brazil is very competitive among Latin
America countries and against many African, Middle Eastern and Asian destinations.
Relatively competitive costs, coupled with strong business acumen, solid infrastructure
and high international business exchange structure, highlights Brazil's overall
attractiveness .Brazil is cheaper than almost all other South American or European
countries, with a 30% salary advantage cost over the US. However it is not the cheapest
option, with Indian locations benefiting for an additional 30% cost advantage.
Advantages to outsourcing to Brazil :

Brazil is worth considering as an alternative outsourcing site. Brazil offers many


advantages including a lower turnover rate, a "Western" business culture and
synchronized business hours. Brazil is one of the largest IT industries with $18 billion
and has a large and experienced work force. Brazil offers competitive billing rates. The
U.S. dollar is very strong versus the Brazilian Reals with a current Exchange Rate of
approximately 1 U.S. dollar to 2.2 Reals. Following are the advantages of outsourcing to
Brazil:-

• Time zone: Our development center is located just one time zone east of New
York. This geographical proximity translates into easier access, better
communication and lower costs. Brazil is conveniently located in a time zone
between North America and Europe. With minor shifts, we can maximize the
number of hours in which both our teams and our clients' are at work.
• Distance facilities: Unlike most outsourcing locations, Brazil is just one
overnight flight from the U.S., usually with no need for connections. Airfare to
and from Brazil is moderately priced. Direct flights connect us to the major
foreign airports, making frequent meetings less costly and improving project flow.
• Proven capacity: the Press, research institutes, and consulting firms have been
publishing very positive reviews on Brazil and its outsourcing advantages.
• Faster and more responsive: Working hours are quite similar, making contact
between Paradigma’s staff and its clients much faster and more flexible.
• Cultural similarities: Westernized Brazilian business culture and values are very
similar to the American way of doing business, lowering the risk of cultural issues
and improving team integration. Brazilian IT professionals are highly trained,
speak fluent English, and are easy to work with on a personal level.
• Superior infrastructure: Brazil has an underlying infrastructure that is clearly
superior to that of most developing countries. Energy stability, political and
economic safety, and reliable network connections provide excellent conditions
for a technology company.
• Low risk: Brazil is a country that is historically untouched by natural disasters or
terrorist attacks (read U.S. economy at risk).

Disadvantages of outsourcing to Brazil :

Cost :Cost is perhaps one of the major concerns for companies when choosing between
Brazil and other outsourcing countries. While the cost of hiring a Brazilian programmer is
about half the cost of hiring one from the U.S., it is still relatively more expensive.

Language :Although Brazilians share similar culture values like the Americans, they
don’t share the same language .English is the second most spoken language in the
country, however, it still lags in the amount of IT professionals that are English proficient
and that can actually talk. The Brazilian government apparently realizes the problem.
More training programs have been created to help Brazilian professionals improve
English skills.

Crime :Crime remains an issue in Brazil. Due to social inequality triggered by


widespread poverty, gun crime, drug dealing are common in favelas and big cities.
According to one survey which rates the 25 most dangerous cities for offshore
outsourcing.

Outlook :Despite some of the issues, Brazil remains a strong contender to be the next IT
outsourcing “power house”. The Brazilian government led by President Luiz has been
putting in effort to attract foreign investments into Brazil and create social programs to
combat social inequality. Big players in IT services such as CPMBraxis, Datasul, DBA,
Itautec and Politec have joined forces and formed BRASSCOM, which promotes the
export of IT services among 3,265 IT firms across the country.5 The future of IT
outsourcing in Brazil looks bright and promising.

Thoughts : Selecting the right country may just be as important as selecting the right
outsourcing partner. Since every country has its own advantages and disadvantages in
outsourcing, managers need to spend the time to create “rules of engagement” before
jumping ship to an outsourcing partner in a foreign country.

Key Findings
1.Brazil software and service exports are estimated to grow at a CAGR of 35.72% from
2007 to 2010.
2.Hardware industry in Brazil climbed up at a CAGR of 18.93% from 2004-2006.
3.Low cost outsourcing services and qualified talent pool are driving the industry.
4.The burgeoning IT industry provides opportunities to consultancy firms, R&D centres
and ICT industry.
5.With the development of IT outsourcing industry, enormous opportunities emerge in
the ICT industry and education service market for the global as well as domestic players.

Opportunities for outsourcing in Brazil :Brazil "one of the most sought-after


destinations" for outsourcing and recommended the country be considered for "a wide
range of services."Brazil's effectiveness as an offshoring home rated the country "very
good" for infrastructure and cultural compatibility.Brazil has enough capacity for growth
in IT sector. Brazil-with its 250,000 IT professionals, 23,000 annual IT graduates, and
infrastructure capable of supporting double-digit growth-is at the heart of the IT services
supply chain in the Southern Hemisphere.That's on top of the $19 billion that local
companies will spend on IT consulting services.
In fact, most major U.S. players including HP, Accenture and Unisys have an escalating
presence in Brazil, which has been largely unaffected by the recent global economic
slump. In June, IBM announced plans for its first South American research center,
located in Brazil, as part of its strategy to sell technology and services to large, fast-
growing emerging nations.

Brazil has been showing signs of becoming a serious contender in recent years. Aware of
the opportunities of tapping into offshore demand, in 2009, the big national players in the
IT service industry in Brazil (CPM, Datasul, DBA, Itautec, Politec and Stefanini) created
BRASSCOM with the main objective of promoting the export of IT services among its
current roster of 3,265 IT firms. The Brazilian Association of Software and Services
Export is a clear attempt to emulate the Indian success story (though, if the organization's
Web site is any indication, the effort is an anemic one).

The global outsourcing service providers and software firms have a strong presence in
Brazil and many are already serving their global client bases. Companies such as IBM,
Unisys, HP, EDS, Accenture, Deloitte, Motorola, Intel and Nokia all have offshore
centers in Brazil. In addition, TCS, the largest of the India offshore players, has plans to
create a new global development center in the state of Sao Paulo, in addition to an
existing center in Brasilia.

As the offshore market continues to evolve, Brazil appears to be well placed to compete. It won't
provide the lowest prices. Brazil has a mix of capabilities that, in particular, position it to provide
nearshore services to the US. It also has the beginnings of a track record in ITO and BPO. It
appears unlikely they'll ever displace the current market leader, India, but by the time of the next
World Cup in 2010, Brazil may well be one of the leading runners up.

Market opportunity:

Population growth: 1.11%

Global Competitiveness: Average

Comparison of Brazil with other countries :


Conclusion : Brazil will become a major outsourcing center for U.S. industry, especially
with the further integration of North and South America. Brazil has a larger IT-capable
labor pool with a growing consumer markets. Brazil has a huge labor pool, good people
skills and availability; quality human capital; good player in offshore outsourcing in
South America; the country must focus on controlling its overall economy.

References :
1. http://www.articlesbase.com/management-articles/outsourcing-the-advantages-
and-disadvantages-of-outsourcing-536182.html#ixzz1AVkjvVYL
2. Outsourcing - advantage, benefits, disadvantages, cost, Advantages of
outsourcing, Disadvantages of outsourcing, Steps in successful outsourcing
http://www.referenceforbusiness.com/small/OpQu/Outsourcing.html#ixzz1AVkJa
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