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Company A has labor costs that are said to be 20 percent of those in your enterprise but once finally calculated are approximately35 percent of those in your enterprise, and Company A has a high enough profile that it has name recognition with most (if not all) CIOs. Conditions in Country A: This country has a neutral stance toward your country, being neither friend nor foe. However, your country s language is either the second or third language for the educated talent pool of Country A. Contribution and/or ownership requirements associated with doing business in this country demand that your partner must have a profitability objective with a reasonable event horizon (perhaps 5 7 years). It may be necessary to buy all supporting hardware, software, and other purchases through Country A based companies or pay a significant tariff or duty on these items being imported into Country A. Last but not least, travel between your country and Country A is only marginally inconvenient.
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Situation 2 Conditions of Company B: A non-multinational that only has offices and operations in Country B. The company culture and its predominant languages are different than your country s languages. Company B can provide outsourcing services only in their home Country B. Company B has labor costs that are said to be 15 percent of your enterprise but once finally calculated are approximately 25 percent of your enterprise. Company B has no real name recognition with most if not all CIOs. Conditions in Country B: This country has a negative political relationship with your country. Your country s language is neither the second nor third language for the educated talent pool of Country B, though that situation is improving. Contribution and/or ownership requirements associated with doing business in Country B make it very difficult to ensure that your intellectual property can be adequately protected. It may be necessary to buy all supporting hardware, software, and other purchases through Country B based companies or through suppliers who import what you need at significant tariff or duty. Travel between your country and Country B is fairly inconvenient. So, which situation is more appealing Which situation makes more sense Which situation would be the better choice It depends. John Valente s view is that outsourcing never saves you money: if you were disciplined enough to do it yourself you could get the same margin of
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chapter 7
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consider the outsource
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savings. Although cost savings may not be sixth on everyone s list, take a closer look if it falls on the top of your list. At this point, a cry of foul might be heard. How can it be that cost savings are not the top reason (maybe the only reason) for outsourcing However, Exhibit 7.6 is legitimate. Many enterprises have been outsourcing for decades for the reasons mentioned earlier in this section. The point made in the first chapter s section called Strategic IT Questions Starting from Scratch applies: learn from your experiences, but remember that what happens in the future will be different in some important respects from your past experience especially because this is such a rapidly growing and maturing practice. The point of Exhibit 7.6 is that there are costs and there is total cost. There is more to costs than just wages and apparent cost of living; to even begin to approach total cost the CIO starts with wages but also has to account for (1) direct and indirect costs, (2) relationship management resources and expenses, (3) program/project management resources and expenses, (4) capital and equipment expenses including export/import and shipping, (5) changes in project scope or requirements or designs, and (6) risk factors that can contribute significantly to total cost. Such risk factors include:11 Geopolitical risk: includes stability of government, corruption, geopolitics, security
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