9-204-144REV:JULY11,2005________________________________________________________________________________________________________________ProfessorWilliamE.Fruhan,Jr.preparedthiscase.Thiscasewasdevelopedfrompublishedsources.HBScasesaredevelopedsolelyasthebasisforclassdiscussion.Casesarenotintendedtoserveasendorsements,sourcesofprimarydata,orillustrationsofeffectiveorineffectivemanagement.Copyright©2004PresidentandFellowsofHarvardCollege.Toordercopiesorrequestpermissiontoreproducematerials,call1-800-545-7685,writeHarvardBusinessSchoolPublishing,Boston,MA02163,orgoto—electronic,mechanical,photocopying,recording,orotherwise—withoutthepermissionofHarvardBusinessSchool.OffshoringatGlobalInformationSystems,Inc.TheOpportunityEarlyinthefirstquarterof2004,JaneHardingwasconsideringaproposaltoshift3,000well-compensatedcomputerprogrammingjobsfromtheUnitedSatestoexistingcompanylocationsinChina,India,andBrazil.HardingwastheseniorvicepresidentforHumanResourcesintheGlobalServicesDivision(GSD)ofGlobalInformationSystems,Inc.(GIS).GIShad2003revenuesofnearly$90billion(Exhibit1).GSDaccountedforabouthalfofGIS’stotalrevenuesandanequalfractionofitstotalprofits.Italsoincludedmorethanhalfofthecompany’s315,000worldwideemployees.BackgroundAsignificantportionofGSD’sbusinesscamefromcustomersoutsourcingtheirbusiness-processneeds.GSDsignedmultiyearcontractswithcustomers.Mostoftheselong-termcontractswerewonthroughhighlycontestedcompetitiveproposalsagainstfirmssuchasAccenture,Ltd.,ElectronicDataSystemsCorp.,ComputerSciencesCorp.,andPerotSystems(Exhibit1).Themultiyearbillingsofsomecontractstotaledinexcessof$1billion.Pretaxprofitmarginsatthedivisionlevelwerecloseto10%.Inordertopresentthemostattractivevaluepropositiontopotentialcustomers,GSDsoughttocutcostsandimproveperformanceby“offshoring”certainactivities.Thecombinationofhugecapacityexpansionandsimilarlylargepricereductionsintelecommunicationsmadeithighlyefficienttoestablishcustomerservice/callcenters,softwaredevelopmentcenters,engineeringdesigncenters,andback-officeaccountingcentersinlow-costareasoftheworldthathadbeenorwerenowdevelopingpoliticallyandsociallyreliableinfrastructures.InIndia,forexample,exportsofinformationtechnologyservicesgrewfivefoldbetween1997and2002.PurchasedbyAshleyMatcheck(amatcheck@gmail.com)onFebruary23,2012204-144OffshoringatGlobalInformationSystems,Inc.2TableAIndia’sITBoomExportsofSoftware,ITServices0246810199719981999200020012002*20.4%Inbillions17%13.8%10.6%7.6%4.9%Source:India’sNationalAssociationofSoftware&ServicesCompanies.*FiscalyearendsinMarch.Multinationalfirmsheadquarteredinmanyofthedevelopedareasoftheworldwereparticipatinginthistrend.InFebruary2004,Siemensannouncedthatitwasmoving15,000softwareprogrammingjobsfromWesternEuropeandtheUnitedStatestoIndia,China,andEasternEurope.1Ofthe30,000programmersSiemensemployedworldwide,3,000werealreadyemployedinIndiawhentheannouncementwasmade.Thecompetitivelandscapeforsomeofthelargerbusiness-processoutsourcingcompaniesintheUnitedStatesandEuropeisshownbelow.1TheBostonGlobe,February17,2004,p.C2.ShareofIndiasexports$PurchasedbyAshleyMatcheck(amatcheck@gmail.com)onFebruary23,2012OffshoringatGlobalInformationSystems,Inc.204-1443TableBBusiness-ProcessOutsourcingProvidersBusinessServiceProviders,VerticalServiceProvidersConsultantsITServiceProvidersProcessSpecialistsPure-PlayBusiness-ProcessOutsourcersSupportServicesEmployeasePwCIBMPaychexXchangingHaysNetLedgerCapGeminiErnst&YoungEDSADPExultSercoMarlboroughStirlingAccentureCSCCerdianArinsoCapitaKPMGSBSSpherionLiberataHewittAccentureConvergysXansaSource:Adaptedfrom“BusinessProcessOutsourcing,”SchroderSalomonSmith-Barney,November8,2002.CompanyEconomicsofOffshoringInordertoaccommodategrowthinitsbusiness,GSDhadpreviouslyestablisheditsownprogrammingcentersinBangalore,India;ShanghaiandDalianinChina;andSumare,Brazil.NowGSDwouldbegoingastepfurther—insteadoftakingbusinessgrowthoffshore,thenewproposalwouldbeginreducingtheU.S.headcountforprogrammersinvolvedinthisactivityandmovingexistingU.S.jobsoffshore.Thecostsavingsfromtheproposedmovepromisedtobedramatic(Exhibit2).AU.S.programmerwithatotalemploymentcost(salaryandallbenefits)of$112,000peryearwouldbereplacedbyanoffshoreprogrammerwithatotalemploymentcostof$25,000peryear(line3,Exhibit2).Grossedupfor3,000people,thecostsavingwouldamountto$261millionperyear.Ofcourse,othercostsassociatedwithrunningthisactivityoffshorewouldconsumeasignificantfractionofthesavings.Additionaltelecommunicationsandmanagementcostwouldconsumeover35%ofthesavings(line7,Exhibit2),andseverancecostsintheUnitedStateswouldamounttoslightlyover$25,000perpersondisplaced.Transitioncosts(line9,Exhibit2)wouldresultinalossof$19millionin2004,thefirstyearoftheprogram(line10,Exhibit2).By2005,however,theprogramwouldshowanetsavingsof$40million.By2006,onceallthetransitioncostshadbeenabsorbed,thesavingswouldbeabout$168millionperyear.PoliticalSensitivit