Is Outsourcing Profitable?

Transcription

1 Is Outsourcing Profitable? Prof. Paul A. Strassmann George Mason University, March 6,

2 Outsourcing: Rising or Losing? 2

3 What is Outsourcing? 3

4 Definitions Profits Depreciation Interest, Taxes Cost of Sales Outsourcing Operations Overhead Direct 4

5 Financial Profile of U.S. Firms (2004) Standard & Poor's Data for U.S. Corporations with 3.8 Million Employees 5

6 Outsourcing and Corporate Economics Overhead costs now manage not only internal direct labor but also outsourcing work done by suppliers. Computer applications, optimized for enterprise integration have difficulty coping with the suppliers incompatible systems. Unmanaged outsourcing complexity can void labor saving gains. 6

7 Critical Ratios Outsourcing Ratio = Outsourcing / Direct Costs Overhead Ratio = Overhead / Direct Costs 7

8 Distribution of 2004 Outsourcing Ratios Median Outsourcing Ratio for 769 U.S. Corporations = 75.6% 8

9 Outsourcing Not Correlated with Profitability 9

10 Distribution of 2004 Overhead Ratios Median Overhead Ratio for 769 U.S. Corporations = 124% 10

11 Overhead Not Correlated with Profitability 11

12 Summary: Outsourcing and Overhead Ratios Outsourcing now equals 75.6% of corporate direct costs and is rising. Overhead costs now exceed corporate direct costs by 24% and keep rising as direct costs outsourced. Neither outsourcing nor overhead correlates with profitability. Corporate profitability reflects effectiveness of management. 12

13 Was Outsourcing Profitable for GM? A Case Study 13

14 GM Employment and Outsourcing 14

15 GM Outsourcing Increased Overhead Costs 15

16 The Keys to Competitive Advantage Collaboration Costs Coordination Costs Intermediation Costs Transaction Costs Structural Costs Sales, General & Administrative Costs = Overhead Costs 16

17 Do Cuts in I.T. Indicate Success? 17

18 A Comparison of I.T. With Business Indicators 18

19 A Shareholder View 19

20 A Comparison With Competitive Indicators 20

21 While Outsourcing, Market Share Declines 21

22 Summary of GM Case Outsourcing to lower costs did not stop market share erosion. Value-chain did not improve while outsourcing; Despite a decline in employment and outsourcing overhead costs are up; I.T. can not be successful if business is indicators reveal information-related malfunctions. 22

23 Is Outsourcing Damaging? A Case Study: GM vs. Caterpillar 23

24 Employment: GM vs. Caterpillar 24

25 Outsourcing: GM vs. Caterpillar 25

26 Knowledge Value: GM vs. Caterpillar 26

27 Compensation: GM vs. Caterpillar 27

28 Summary of GM vs. Caterpillar Comparison Despite higher wages Caterpillar increased employment. Despite high level of outsourcing Knowledge Value of Caterpillar gains. 28

29 Research Findings 29

30 Highly Profitable Firms Outsource Less 30

31 There Will Always be Outsourcing (2002) 31

32 Outsourcing Ratios Differ by Industry 32

33 Higher Pay Need not Result in Outsourcing 33

34 Summary of Research Findings Outsourcing is essential for the growth of any economy. Whether outsourcing is economically effective depends on the organization of the the valuechain. 34

35 Outsourcing in the Value-Chain Case Study 35

36 Estimated Cost of a Logitech Mouse 36

37 Different Perspectives on Outsourcing 37

38 Distribution of Costs of a Logitech Mouse 38

39 Summary of Case Study The definition of outsourcing depends on the position in the value-chain. The dominant cost in global commerce are transaction costs, not labor costs; Assembly takes place from global sources where technology and logistics dictates sourcing. The greatest damage to the U.S. economy can come from vertical integration that reduces transaction costs. 39

40 Transaction Costs in the Value Chain Supply Chain Distribution Chain Consumer 40

41 Manufacturing Supply Chain Costs 100% 100% 90% All Other Costs 80% 70% 60% Transaction Costs Profit 56% 15.9% 50% 40% 30% 33% 8.1% Purchases 20% 15% 5.8% 10% 0% 4.7% All Other Suppliers Secondary Suppliers Prime Suppliers Manufacturer 41

42 Costs in a Manufacturing Supply Chain 100% 100% 90% All Other Costs 80% 70% 60% Transaction Costs Profit 56% 15.9% 50% 40% 30% 33% 8.1% 20% 15% 5.8% 10% 0% 4.7% All Other Suppliers Secondary Suppliers Prime Suppliers Manufacturer 42

43 The Total Value Chain 160% 140% 127% 158% 24% 120% 100% 100% 23.5% 80% 60% 40% 20% 34% Other Costs Transactions Profits 0% Manufacturers Wholesalers Retailers 43

44 Potential Gains in the Automobile Industry 160% 158% 13% 140% 120% 100% 80% 81% Gain 130% 15% 55% Profits Information All Other 60% 40% 64% 60% 20% 0% Old Value Chain New Value Chain 44

45 A Value Chain View of Information Costs 45

46 A Perspective of the CIO s Job 46

47 Impacts of Information Technologies Information drives an economic arms race. Obsolete assets will be discarded. Collaboration favors global consolidation. I.T. becomes an economic weapon. 47

48 A Case of Value-Chain Superiority 48

49 Outsourcing and the U.S. Economy 49

50 Is the US Economy Off-Shoring Itself? 50

51 Summary Outsourcing is not subcontracting I.T. costs. Outsourcing is not off-shoring. Outsourcing is the distribution of labor and knowledge through specialization. Gains from increases in Value-Added. Losses from divestment of Knowledge. 51

52 Issue: Cut Costs or Lose Knowledge Assets? 52

53 Next GMU Lecture When: April 17,2006 Topic: What is the Worth of Employee Knowledge? Prior lectures available on: 53