Good Hopes For Global Outsourcing

Case Analysis

Global Sourcing Global sourcing is the procurement of

products or services from foreign suppliers

Global sourcing has become a major international business activity.

A firm can outsourc from independent suppliers, company-owned subsidiaries and affilates, or a combination of both.

Drivers of Global Sourcing1) Technological advances, particularly Internet

connectivity and broadband availability

2) Decrease in transportation and communication costs

3) Increased access to information and a rise in connectivity between suppliers and their customers

4) Entrepreneurship and rapid economic changes in emerging markets.

Characteristics of Global Sourcing Services are more difficult to outsource than

manufacturing Difficult to judge quality of services Need to develop a trusting relationship

Location decision Eastern Europe, India, China & Latin America

Main motive of outsourcing is to cut costs, however it often is more costly than planned

International laws do not fully protect

confidentiality of customer information

The Firm: Good Hope Hospitals Chain of nine hospitals in California

Needs to significantly cut operational costs. To avoid laying-off workers, management wants to outsource certain business processes.

Outsourcing goals: Reduce labor costs Allow Good Hope to focus on activities that are

most critical to their value offerings. Increase organizational efficiency, revenues

and the quality of service offerings.

Background Good Hope

Wants to outsource data processing for accounts receivable and accounts payable, some customer service applications, transcription of medical records, and some data processing

Researched the risks of global outsourcing

Consulted with an outsourcing broker Recommended BangSource, a supplier in India Claimed that Good Hope would save $1.4 million

annually 25% annual employee turnover rate

Problem #1 Financial costs of outsourcing were higher

than expected Processing of accounting and other data more

complicated than expected. BangSource is less efficient in answering

customer inquiries, which resulted in more telephone time and phone calls to address customer needs

Fluctuations in the rupee and dollar exchange rate inflated the cost of BangSource

Problem #2 Outsourcing has decreased customer

satisfaction, putting Good Hope’s reputation on the line. Customer complaints about hard-to-understand

accents Poor infrastructure, partly due to new contracts Late in performing promised services due to

shortage of workers.

Alternative #1: Captive Operation in Mexico Good Hope would own its offshore facility in Mexico Criteria for choosing Mexico:

Financial structure of Mexico Availability and skills of people Nature of the business environment Proximity to California

Costs High initial costs Bureaucracy and regulation increases with FDI Higher energy and transportation costs Quality of infrastructure is low, which will increase

costs.

Alternative #1: Captive Operation in MexicoBenefits Complete control of outsourced activity

Control over reputation, brand equity and customer service Control of key technologies and processes Protection of intellectual property

Enhanced customer service for Spanish-speaking customers Enhanced communication between Head office in California

and outsource facility because Mexico is close to the US, and it is in the same time zone

Labor costs are low Access to qualified personnel abroad Enhanced employee morale and commitment among

employees in Mexico. Faster corporate growth because outsourcing allows Good

Hope to focus on key activities. Increase production efficiency, maximize resource utilization Possibility of access to new markets

Alternative #2: Outsource only Backoffice Activities to BangSource Customer service affects reputation and

brand equity, especially in the service industry.

If customer service is considered an important key activity it should not be outsourced.

Alternative #2: Outsource only Backoffice Activities to BangSource

Costs Savings will not be as substantial BangSource lacks quality workers BangSource has a high turnover rate of skilled employees, Absence of strong protection of intellectual property in India Exchange rate fluctuations between the rupee and the dollar Higher energy and transportation costs Quality of infrastructure is poor Conflicts and misunderstandings between Good Hope and

BangSource due to cultural differences Process of accounting and other data is still complex Bureaucracy, legalities and regulation is still complex

Alternative #2: Outsource only Backoffice Activities to BangSourceBenefits Control of most customer service

activities, which preserves reputation Faster corporate growth because allows

Good Hope to focus on key activities, such as customer service.

Sheds unnecessary overhead. Increases production efficiency

Alternative # 3: Maintaining Status Quo with an Enhanced Relationship Outsourcing fails because focal firm and

the supplier do not spend enough time in the beginning establishing a relationship and setting boundries

Good Hope needs to collaborate closely with BangSource in co-development and co-design activities.

Alternative # 3: Maintaining Status Quo with an Enhanced RelationshipCosts Lack of quality workers with adequate knowledge. Regulation and bureaucracy is complex, however

by maintaing a close relationship with BangSource, Good Hope will have an easier time.

Exchange rate fluctuations between rupee and dollar

Higher energy and transportation costs Quality of infrastructure is poor, resulting in

electricity blackouts

Alternative # 3: Maintaining Status Quo with an Enhanced RelationshipBenefits Less conflicts/misunderstandings Enhanced employee morale and commitment

among employees Good Hope will gain negociating power and better

control of the value chain Faster corporate growth because outsourcing

allows Good Hope to focus on key activities Productivity and service improvement Production efficiency due to giving BangService

specialized tasks Faster responsiveness to evolving customer needs

Shedding unnecessary overhead

Alternative #4: Terminate All Outsourcing ActivitiesCosts Lay off workers, which may lead to eroding employee

morale Reduction in competitiveness Cost effieciency reduction Not focused on key activities Spending unneccessary overhead

Benefits Control over value chain Maintain reputation, brand equity, and customer service Protection of intellectual property Good infrastructure

Recommendations Alternative #1, Captive Operations in Mexico,

preserves reputation and increasing customer service quality However, increase costs – lay-off some employees.

Alternative # 3, Maintaining Status Quo with an Enhanced Relationship, Risky: May or may not work. Good Hope and BangSource have different priorities

Alternative #4, Terminate All Outsourcing Activities Better customer service However costs would increase once again – lay-off employees

Alternative #2, Outsource only Backoffice Activities to BangSource Best option. Reduce costs and preserves customer service Lay-off some employees This option would preserve customer

service quality and Good Hope’s reputation.