Tatyana I, Product Manager at QArea

Prologue

With the acceleration of scientific and technical progress, increasing the information technologies usage, enhancing their impact on the production of technically complicated products, including process of engaging resources from developing countries, as well as the processes of globalization of production distribution, exchange and consumption, the international markets have become more dynamic and of multivariate nature, having lost tight binding to the structure of the traditional comparative advantage.

New age and post-industrial economics claims new approaches for profit generation, business process management and globalization of product value chain design.

Servicification Of Swiss Economy

The National Board of Trade, Swiss governmental agency responsible for issues relating to foreign trade and trade policy, reported the trend of servicification of Swiss manufacturing. Servicification means that manufacturing both buys and produces more services than before, making them the important part of their product value chain.

Generally speaking the product-services prevail significantly over product-goods in modern Swiss post-industrial economy. Between 1991 and 2006 manufacturing’s share of employment has fallen by 29 percent in industrialized countries (from 19.4 to 13.8 percent) and the share of the services industry has expanded. For Swiss the manufacturing’s decline is smaller, but the long-term trend seems clear. Since 1970, Swiss manufacturing’s employment is down by 29 percent and value added by 22 percent. Meanwhile, there is some evidence that manufacturing is being servicified. This means that services are increasingly used as input (such as software) in production, and services also are included in manufacturing’s offerings (such as financing, education and updates related to the product).

In figure 1, some services that may be used in today’s manufacturing are displayed.

It Services Wide Application

Both service providing and production companies are now the part of global competition.

Involvements of the informational technologies (IT) to processes of automation, marketing and sales process, customers’ interaction and other communications, the listing of IT applications is almost endless, becomes one of the most important contribution to long-term strategy of innovative development and services evolution of most looking-to-future companies.

This processes lead to increase of the role of innovative technologies and the amount of people involved in scientific & research and other high-tech activity.

Thus IT consultant, vendor or own IT department becomes an important and necessary part of every modern company that is going to survive in global competition.

Globalization Of Value Chains

Important factors behind the globalization are liberalization of trade and capital, as well as technological advances in areas such as transport and information and communication technologies (ICT). The internationalization of business at the same time means including globalization of value chains.

Swiss manufacturing’s specialization is to a large extent based on Swiss’ comparatively well-educated labor force and extensive research and development. Domestic skills and technologies are in turn positively related to trade, investment and migration. Therefore openness to trade, investment and migration is important. Moreover, it is becoming increasingly important since a firm’s production is increasingly being divided up between firms in different countries and continents.

Swiss technology workers just can't compete price-wise with most traditional outsourcing countries with their $8,000 a year for entry-level IT worker and 30,000 for IT manager. That's because in this countries there is cheaper living cost the those for Europe. But, at the same time, a Swiss technology company must retain its costs low to compete in the global marketplace.

If observing typical value chain it is clearly seen that 80% of value the product can earn on market is added by the R&D, planning and management stages resulting in Know-How development, patents, IP rights and other intellectual values, which in fact takes 20% of human resources to implement; and only about 20% of value the product can earn on market is dedicated to the project realization itself, taking 80% of project resources.

Thus there is no need to try to globally compare by reducing the costs to R&D and Management professionals, moreover in case of wise organizing the software development outsourcing to lower cost contractors the overall costs of the product can decrease in line with constant grows of core professionals salary. By re-orienting the common business processes and software development efforts to approved outsourcing partners company gets free budget to concentrate on innovations and R&D area gaining most valuable results now available. Such approach will allow outperforming the market by new solutions, to dictate company vision to IT evolution and, rather than follow the current circumstances and conjecture.

High Level Analysis Of The Product Value Chain

The company shall handle all three stages to deliver the product to the market. Let’s analyze them more precisely.

Technology – this stage is the most valuable in modern market and company that looking to future success should invest significantly to this step. Also this activity allows participating in various special supporting innovations programs and tenders by EU, UNO and local governments. Moreover this activity accumulates highly professional and creative stuff that will guarantee the success of the company in future.

Production – the process of actually creating/assembling the standard product according to the technology developed during the first stage. This process can be normally outsourced without damaging corporate profit or causing the “leak of brains”. Quite the contrary it can help to save on development, to free local, more expensive resources and to turn them to R&D activity and improvement of business processes and management – all of this will significantly increase the productivity of the company for the same budget, thus will assure the profit increase.

Marketing and Distribution – this stage dictates the final price we can ask for the product at the market, and adds the final value to the product. As it is normally connected to company name and brand, this stage is of vital importance and can not be transmitted to third party, the same as for technology stage.

On the basis of these facts we can conclude that outsourcing the second stage activities of the value chain to third party companies allows increasing budgeting of the technology stage that would lead to evolution and new innovations development, and of Marketing and Distribution stage, that can increase company income and thus the tax fee this company pays to locals.

Core Benefits Of Outsoutcing Partner

In the global market can be clearly seen the long trend to outsource IT functions and this practice has positively become more and more used. We can conclude that with the IT outsourcing European countries have got a positive results, for example, using remote employment appeared to be the most effective method to save on the office cost and space, stuff management related and HR costs, and, as second advantage, this reliefs the companies from maintaining a working routine. Firms that move on to hire high-tech professionals from Ukraine, Russia and from other east European areas do support their effectiveness and market attractiveness with every new IT outsourcing partner. Subcontracting of work has seen an enlarged evolution of European countries economy and is definite to take even more great results for Swiss economy.

The tendency of European outsourcing of IT works can be ordered as follows:

  • Project Based outsourcing: This type is most common for most cases of subcontracting IT works happen in Europe. This means that an IT company-vendor is hired by outsourcing company to handle fully or assist in implementation of a specific IT project.
  • Dedicated Development Center (DDC): It is the mainly strategy that European companies with significant and permanent budget for IT follow in outsourcing. Being low-cost, this outsourcing strategy is most suitable for long-term cooperation approach. Herein, full-time working developers perform exclusively for client on every researches and projects during a sustained period of time. The main idea is that officially these developers work for the IT company-vendor that proposes their services (working capabilities) to client. It is similar to having a virtual addition of the client organization in the nearshore area.
  • Captive operations: In this case the company by itself establishes own offshore office in chosen location, most often in the eastern European countries. Company hires local workers, but this new office is operated under management team of the company and holds all the organizational peculiarities of the mother-company. Even though heavily risky strategy if assuming investment costs required, as well as organizational issues and operational efficiency, this outsourcing strategy is good for big multinational IT companies.

If to observe the IT outsourcing efficiency for Europe we must admit the incredible financial benefits. Subcontracting IT works has not only organized the expenses connected with various IT developments but also assured the realization of the project with a high quality and to deadline specified. Following the business demands of the client to issue the deliverables within fastest possible time, many European firms have been successful in addressing the direct requirements, and deliver the best solutions to their clients.

Based on the discussion above, manufacturing firms in industrialized countries are expected to increasingly specialize in high value-added manufacturing and services activities. This includes expansion of in-house production of services. Less complex services activities with lower productivity potential may be candidates for outsourcing or offshoring, along with low-skill-content intermediate goods more cost-efficiently produced abroad. More complex activities may be kept in-house or bought-in externally, depending on outsourcing and offshoring costs as well as agglomeration forces involve.

In modern Europe the IT outsourcing become a huge business. Seeking to implement the cost-cutting solutions, many Western European firms have been transferring tech projects eastward. For example, Deutsche Bank has some of its software developed in Ukraine, Siemens possess R&D center in Romania. Europe Outsourcing has produced outstanding results and henceforward they are increasing them in numbers.

References

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  • Avadikyan, A. and S. Lhuillery (2007). “Innovation, organisational change and servicisation: a micro data level analysis in five European countries”, draft paper at DIME Workshop in Nice, 15-16 November 2007.
  • Barba Navaretti, G., Venables, A. J. and B. Frank (2005). Multinational Firms in the World Economy, Princeton University Press, Princeton.
  • Barrar, P. and R. Gervais, eds. (2006). Global Outsourcing Strategies: An International Reference on Effective Outsourcing Relationships, Glower.
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  • Lewin, A. Y., Massini, S., & C. Peeters (2008). “Why are companies offshoring innovation? The emerging global race for talent”. Journal of International Business Studies, Vol 40, p. 901-925.
  • Martinez, V., Neely, A., Ren, G. and A. Smart (2008). “High Value Manufacturing: Delivering on the Promise”, Executive Briefing, AIM Research, Cranfield School of Management.
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  • Robert Lee, The boon and Rise of IT Outsourcing in Europe, Articlebase.com, Posted: Jan 04, 2011

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