Group #8



Table of Contents

Executive Summary 2

Overview 3

India 6

China 9

The Boeing Company 16

References 22

Executive Summary

This paper focuses on four topics: offshore outsourcing in general, India as an outsourcing destination, China as a future outsourcing destination, and Boeing as a global company using outsourcing to reduce costs and lead to higher sales.. First, a background on IT outsourcing will give a macroeconomic perspective as why many U.S. firms are choosing to outsource offshore. This trend in growing at an increasing rate. In order for outsourcing to be successful, companies must consider several things. Company objectives must be considered in choosing an IT vendor that will help meet those needs. Processes that are to be outsourced need to be closely looked at. Also, it is imperative to understand that a great deal of control must be released.

Second, a more in-depth focus on India will explain why this Asian country is currently the industry leader. Three major reasons exists: cost savings, quality of work, and the maturity of the market. Also, strong government support in the Software Technology Parks through the country help with the success of India as a outsourcing destination. Wipro is an example of a success IT vendor in India. Its work with Best Buy, the retailer based in the United States, illustrates India’s work ethic and ability.

Third, a focus on China will reveal why this country is on the rise and might in the near future surpass India as the worldwide leader in IT vending. China’s opening of its borders and the many companies that are currently investing in the country will lead to China being a successful IT outsourcing location. Also, its vast population and increasing number of IT graduates from its universities will lead to a fast growing market. The government will play a major role in the success also with its financial and political support.

Last, an insider perspective on Boeing will demonstrate how IT outsourcing not only is a cost-saving tool, but also can be used as a very viable sales tactic. Boeing, a global company, strategically places its outsourcing vendors in places where sales are desired in the future. Boeing uses its outsourcing in its strategic business plan. The company itself has a very unique method of choosing its vendors. Two interviews with Jerry Fear and Richard Navarro, two outsourcing experts at Boeing, give an interesting perspective on the company’s view of outsourcing in general.

According to whatis., IT Offshore Outsourcing is, “The exporting of IT-related work from the United States and other developed countries to areas of the world where there is both political stability and lower labor costs or tax savings (2004).” Many firms across the United States are contracting out all or part of their IT to third-party vendors in countries such as China, India, Singapore, and Malaysia.

Overview

After reading the forthcoming analysis on IT Offshore Outsourcing, readers should have an excellent understanding of all four subtopics covered in the paper. First, a background on IT outsourcing will give a macroeconomic perspective as why many U.S. firms are choosing to outsource offshore. Second, a more in-depth focus on India will explain why this Asian country is currently the industry leader. Third, a focus on China will reveal why this country is on the rise and might in the near future surpass India as the worldwide leader in IT vending. Last, an insider perspective on Boeing will demonstrate how IT outsourcing not only is a cost-saving tool, but also can be used as a very viable sales tactic.

How High Can It Go? According to a study conducted in 2004 by Richard Welke, the outsourcing industry is forecasted to increase by several billion dollars (Welke, 2004). The amount of money companies spend on outsourcing within the United States is forecasted to remain fixed. Conversely, hiring international third-party vendors is forecasted to increase ten-fold in just a seven year span. Another trend, utilizing international labor but keeping ownership rights, or captive offshoring, is scheduled to increase annually at an alarming rate of 26%. The figure one below illustrates these predicted changes.

How Does John Q. Public Feel About IT Offshore Outsourcing? According to a survey conducted by , 68 percent of 1,019 adults feel offshore outsourcing is bad for America. Conversely, 97% of 7300 senior executives in India feel outsourcing is good for America (, 2004). One can understand how the data could be skewed. Average Americans see jobs disappearing, and on the other end of the spectrum, senior executives see saved labor dollars. No matter which position a person takes, there is no denying the fact that this topic will be the focal point of many political debates in the upcoming years.

Should My Company Hop on the Bandwagon? Several reasons exist for why companies are choosing to contract their IT offshore. First, India, which will be further discussed later, year-after-year proves to be a world leader in providing quality IT services. Second, the most obvious reason, cost savings is a huge driver and often times deciding factor in whether firms choose to outsource offshore. Third, time savings can prove to be a valuable by-product of outsourcing offshore. For example, many companies outsource IT services thought to be commodities, in effect allowing more time for a company’s IT programmers to focus more on product innovations or establishing competitive advantages (searchcio., 2004).

As is the case with any venture, potentially fatal pitfalls can be associated with offshore outsourcing. First, the most obvious disadvantage to outsourcing offshore is loss of control. The contracting company is entrusting the hired vendor to perform services or manufacture a product as entailed in the agreed upon contract. The contracting company can easily put its mind at ease with a comprehensive analysis of the prospective vendor before any money or services changes hands. Second, not having outsourcing experience, inadequate planning, and organizational resistance are all potential pitfalls that could deliver a fatal blow to an offshore outsourcing contract. All the same applies with outsourcing domestically, however, when national boundaries are crossed, special care has to be taken to account for cultural differences, time zone complications, and legalities (Welke, 2004).

According to , IT is overwhelmingly the most outsourced service among U.S. companies. Almost 60% of companies surveyed are either considering or currently outsourcing their IT. A distant second is administration at just under 40%, followed by human resources, distribution, and retail facilities management (, 2004) It is easy to understand why IT is tops on this list, given the universal binary language of computers, along with the relative ease at which these services can be transported along mediums.

It’s All About the Numbers According to a study conducted by McKinsey in 2003, cost savings from outsourcing to a company located offshore can double a firm’s profit margin (McKinsey, 2004). This figure alone is enough for many firms to choose the offshore route. Also, as figure 2 points out, a company would have to unrealistically double sales to enjoy the same profit margin increase that offshore outsourcing yields. The likelihood of doubling sales would become increasingly difficult after factoring in the second requirement the illustration points out of cutting overheads 20%.

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Researchers at the Meta Group, Gartner Inc., and Forrester Research are all predicting never-seen-before increases in both the number of jobs moved and dollars expended on offshore outsourcing. For example, currently approximately $7 billion dollars is spent by American companies on IT offshore outsourcing (Meta Group, 2003). It is estimated this figure will balloon to roughly $10 billion by 2005. In addition, Gartner Inc. reported that 5% of IT jobs were contracted overseas in 2003. By the end of the decade Gartner is estimating this figure will rise to a staggering 25% (Garter Inc., 2003).

Recipe for Offshore Outsourcing According to the Meta Group, there are four cardinal rules to offshore outsourcing. These rules are generic and can easily be applied to any industry. First, before ever directly contacting a prospective vendor, sit down and establish long-term objectives that will satisfy long-term goals contributing to sustainable success for the contracting company. Second, it cannot be stressed enough the importance of choosing a location that will tailor to the contracting company’s needs. Research not only the vendor, but the country’s political history. Assess risk of political turmoil or corruption, in addition evaluate the likelihood the two cultures will be compatible. Third, reiterating the first step, envision the state of the contracting company five years down the road, with the prospective vendor as a partner along the way. Is the contracting company more profitable than it was five years ago before the contract began (Meta Group, 2003)?

Where Is the Best Value? According to the Software Engineering Institute, value can be illustrated by analyzing both quality of supply and cost. As seen in figure three below, the best value can be found in India. Quality of supply was measured by CMM levels, where a majority of vendors in India have achieved CMM level 4 or 5 status. Coupled with a comparatively lower cost than a majority of countries in the study, India is the clear cut value leader (Software Engineering Institute, 2003). After studying the metric further one could ask which is more likely to occur; low-cost vendors such as those in China raising their standards of quality or vendors in a country such as Singapore lowering their costs? Answers to the former will be addressed later in the paper; however answers to the latter unfortunately fall outside the scope of this analysis.

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India

India has become a major player in the IT outsourcing market world wide. India itself is slightly bigger than one third of the United States, but has a population of over one billion. This huge population has produced a workforce of over 472 million (World Fact Book, 2004). These facts add the reasons for India’s success.

Why India for Outsourcing? So, why is India the number one choice for outsourcing in the world? Three major reasons seem to be driving the market. The main driver behind outsourcing is cost reduction. Companies are interested in India because they believe they can receive high quality services at greatly reduced prices. For example, the salaries of IT professionals in the United States can average $80,286 while the salaries of IT professionals in India can average $8,593 (397,818 Indian Rupees). While the labor cost savings can be very high, executives need to also examine other factors that can drive cost up. A paper written by CSC states that actual savings is around 25 percent instead of the 50 to 80 percent savings that many executives hope to receive (CSC’s Research & Advisory Services [CSC], 2004).

The second major driver behind companies using Indian-based outsourcing providers is the quality of work available. India’s workforce is large and highly educated compared to other countries around the globe. In essence, companies can get similar quality work for back office tasks in India for a fraction of what it would cost them to keep these tasks in-house (Offshore Outsourcing Part1: State of the Industry, 2003, p. 1-4, 1-5). NASSCOM completed a report that benchmarked the performance of the Indian IT industry on ten key issues. Figure four below summarizes these findings. The data was gathered from 53 firms that ranged from 200 to 2000+ employees in 35 countries. Senior and middle managers were invited to participate. The results showed that Indian companies rated very high in quality, customer satisfaction, and people satisfaction (NASSCOM, 2004, p. 1-6).

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The last major reason many companies choose to outsource to India is the maturity and experience of the companies in India. In a report published by Sourcing Interests Group Research, Offshore Outsourcing Part 1: State of the Industry, 85-90 percent of the offshore revenue in the world goes to Indian companies (2003, p. 2-1). As mentioned earlier, this is partly due to the many English speaking, highly educated work force. India also has a telecom infrastructure that is already in place. Companies want to feel secure that the information being moved between offices is safe and the lines used to transmit the information are reliable. Many companies in India have also evolved into one-stop-shops. Companies can find a service provider that will offer everything including application outsourcing, ITOs, BPOs, product development, and contact centers (2003, p. 2-2).

While many reasons to choose India exist, it is also important to note the many challenges can arise when companies choose India as their outsourcing destination. The biggest challenge facing foreign companies in India is the Indian culture. Indians do not like to deliver bad news and have different meanings for common U.S. body language. This can cause communication problems if the issue is not addressed. The distance from the United States also causes problems occasionally. Indians working in call centers often must work at night (5:30 p.m. to 9:30 a.m. in India) to be available to their American counterparts during the regular work days (Offshore Outsourcing Part 1, 2003, p. 2-8,9). The Indian government also has a very challenging legal system where it can take years to resolve disputes.

India’s Secret: Software Technology Parks Another reason that India has been so successful as an offshore outsourcing destination is that the IT companies have a very strong government support system. Software Technology Parks of India (STPIs) were set up in 1991 by the Ministry of Information Technology to promote software exports. All of the STPIs adhere to the ISO 9001 certification standard and play very important roles in the success India’s IT industry. Some of these roles include providing office space and an infrastructure, acting as an interface between the Indian government and the IT industry, training professionals, and encouraging new design and development. Below in figure five is a map of all the STPI locations in India. Notice how they are spread evenly throughout the country (stpi., 2004)

India’s Suppliers India has hundreds of companies that can offer IT services, but only one will be discussed in depth in this paper. Some of these providers include Wipro, Infosys, Tata Consultancy Services (TCS), Satyam, and S2tech. One of the largest providers in India is Wipro. According to Wipro’s website, ,

“Wipro Technologies is the global, technology services division of Wipro Ltd. With over two decades of IT experience, we have pioneered the offshore delivery model. Combining extensive capabilities in technology with deep domain expertise, we deliver seamless solutions that bring tangible business value to leading organizations around the world.”

The company is based out of Bangalore, India, but has offices in Europe, the United States, Canada, Asia Pacific, and throughout the rest of India (). The CEO of Wipro is Paul Vivek and the company employees 32,000 employees worldwide. According to Yahoo Finance, Wipro trades under the symbol WIT and had total revenues of $1,346,391 in the fiscal year ending March 31, 2004.

As a company, Wipro provides five major services to companies including enterprise application, product design services, business process outsourcing, technology infrastructure services, and consulting services. The company has over 15,000 consultants and is among the largest offshore product design service providers in the world. The company was also India’s first to reach the CMM level 5 status. Its website describes what they do by saying, “We are differentiated by our full-service portfolio that allows us to address diverse customer needs and deliver an integrated, one-stop solution…”

Wipro has performed its services for over 300 customers worldwide including Microsoft, Sony, GM, and Nokia. One customer that particularly was impressed with Wipro’s services is Best Buy, “the number one specialty retailer for consumer electronics, personal computers, entertainment software and appliances ().” Best Buy wanted to find a strategic IT partner that could integrate their enterprise systems and help IT to meet business objectives. Wipro provided a solution that developed an “electronic subscription capture,” a system application used for selling services and plans. It also provides tracking of Internet, Direct TV, broadcast TV, digital services, and cell phone service plans and helps make Best Buy’s services a one-stop shop that is easy to use for customers. Wipro also helped Best Buy in consolidating many of its business practices and set up an offshore development center. After just two years of working together, Best Buy named Wipro as its best IS partner in 2002 ().

China

Just as India is currently the world leader in outsourcing, China is an up-and-coming force that has the potential to take over as the leader. The market in China, with its huge capacity at a fast sustained growth rate, has been absorbing a huge inflow of foreign direct investment (FDI) to China. Huge cross border trade, mainly with large economies, are bringing about large scale IT demand for FDI to China, especially from the U.S., European Union, and Japan. As the scheduled opening of other main industries in China such as banking, finance, insurance, and other services industries is approaching, surging huge IT demand from FDI to China is predictable. Being the important investors in FDI to China, multinational enterprises (MNEs), the most sophisticated clients in global IT outsourcing market and the main beneficiaries of IT consumption, will turn their IT demand resulted from competing for local end users in China into imperative purchasing power in the market place.

The IT industry in China as a whole can satisfy such IT demand with good quality at a lower price than its Indian counterpart. Offshore IT outsourcing to China will become significant in the world market, although at the first stage, India IT vendors who have a business presence in China will take the biggest market share when local Chinese IT vendors are maturing. At the second stage, when local Chinese IT vendors have matured, Chinese vendors, just as local Chinese manufacturing industry does in the world market, will develop into an equal influential market player as their India counterparts. The following analysis will help support these predictions

Long-lasting Fascination of China Market to FDI Headcounts, GDP size, and market growth are the three criterions to judge whether the market capacity is sufficient. Statistics of those three aspects about China market are impressive. The China market has the largest market population in headcount due to its 1.29 billion consumers in 2003. In GDP, currently, China was ranked seventh in the world in 2003. From figure six one can see China’s 1,409 billion GDP is close to those traditional main economies such as Italy, France, and the U.K. which have developed under a free market system for hundreds of years. China ranked fourth in the total value of imports and exports in 2003 within which FDI to China played the most significant role, contributing 54.83% to China’s exports as shown in figure seven.

Figure 6 Selected GDP in the world 2003

|Country |GDP |Rank |

| |(billions) | |

|State owned companies |1380.3 |31.49% |

|Foreign invested companies |2403.4 |54.83% |

|Domestic collective owned companies |251.3 |5.73% |

|Domestic Chinese owned companies |347.5 |7.93% |

|Other types of companies |1.2 |0.02% |

|total |4383.7(110 to HK) |100% |

, viewed Oct.1, 2004.

China has had recorded fast economic growth in the last three decades after it opened its market (mainly, manufacturing industry) to FDI, a growth which has brought about a huge market capacity matched to the markets in the main economies in the world. Impressively, China has focused on economic development only in the last 3 decades and its economic growth is still leading over other main developing economies in the world.

Huge cross-border trade between China and the world intimately links China with the global market, especially with main markets in the traditional developed economies, such as the U.S., E.U., and Japan (Chart I-6). FDI from the U.S., E.U., and Japan play a significant role in China international trade. Japan, E.U., and the U.S. ,which were among the top 4 investors in accumulated investment in China by 2002 (mofcom.), were the top 3 trading partners of China in 2003, contributing 44% of China total international trade (Gao, 2004).

Multinational Enterprises in China As a result of a soon fully-open services industry in China, which consumes huge IT, a surging demand for IT resulting from FDI, especially from MNEs, is reasonable because IT is vital in building up their competitive advantage in competing for local end users. MNEs are most capable of turning such demand into imperative purchasing power in the market because they are the most sophisticated consumers of IT.

Huge cross-border trade between China and main economies will bring about huge IT demand for overcoming systems difference, distance and time zone differences, especially when MNEs have been involved. By 2003, 400 MNEs in Fortune 500, an influential force in global IT outsourcing market, had had direct investment in China (Que, Y 2004).

Being the main consumers and beneficiaries in IT, MNEs have more imperative demand for IT than others, especially for competing for local Chinese end users when banking industry, financial industry, insurance industry, telecom industry, and wholesale and resale industry, where IT is vital for the up-building of competitive advantage, are scheduled to be fully open to FDI (see appendix for schedule).

Business Presence of International IT Vendors in China The number of businesses opening in China that are international IT vendors is growing every year. By 2003, the top 4 American consulting firms already have a presence in China. Besides outsourcing contracts brought from their clients all over the world, they bring about expertise in outsourcing contracts development and domain knowledge.

The main offshore IT outsourcing Indian vendors used by Americans are in China. Top 4 India IT vendors, TCS, Infosys, Satyam, and Wipro, and other medium India software companies have direct business presences in China. Top 2 India IT training companies, NIIT and APTECH opened business in China as well. They bring about specific experience in serving clients in North America, specific skills in software development, and excellent teachers in IT. Their sufficient track record and high SEI CMM level make India IT vendors the most influential force in serving IT outsourcing to China. Currently, the surging inflow of Indian IT vendors to China is one of the most important factors for attracting outsourcing contracts to China.

As more international IT vendors open business in China, the country quickly overcomes the previously existing gaps in the number of qualified IT vendors, track record, IT expertise, and in domain knowledge between China IT market and IT markets in main economies around the globe

.

Strong supports from local Chinese IT industry Being one of the most important factors attracting outsourcing contracts to China, supports from local Chinese IT industry can not be ignored. As cheap as 15-20% or 40% less than the labor cost in India justifies local purchases of IT services. A 300,000 person unexploited local IT talent pool plus the current annual supply of 62,000 IT graduates from local universities provides sufficient labor for satisfying a potentially huge IT demand in the Chinese local market. 4,700-5,000 local Chinese IT companies, which have been trained in serving manufacturing clients from Japan, South Korea, and local large manufacturers, and which have experience in serving local service industries such as banks, insurance, security, telecom, government, etc., make them a good aide in supporting those reputed foreign IT vendors (, ).

India IT Vendors In China Resulting from the huge value in offshore IT outsourcing market, well-built track record, well-developed capability in software development, and high SEI CMM levels give an overwhelming advantage for local IT subsidiaries of Indian IT vendors. Combining the cheaper local IT talent pool with sufficient supply, local subsidiaries of Indian IT companies will be the undisputable dominant force in China (, ).

From figure eight, the performance of the IT industry in China in the global IT outsourcing market is far behind its India counterpart. The building up of a good track record heavily relies on large volume of contracts, which can get both sides, clients and suppliers, familiar with each other and lay a good foundation for further cooperation in the future. Lack of a track record is one of the most serious barriers for the development of local Chinese IT vendors because local Chinese vendors have few chances to develop their skills, learn domain knowledge by doing, and get necessary financial resource to upgrade their SEI CMM level.

The choosing of outsourcing clients for China is the main issue in question. The small size of the total contracts and the low level IT work outsourced greatly limit the development of local Chinese IT vendors in improving technical capability, creating a track record, and achieving higher CMM levels due to the small profit gained from those contracts.

Thus, the current poor position of local Chinese IT industry in the global market, shown in figure eight and figure nine is unavoidable due the contracts source and nature. The advantage of the Indian suppliers is currently too obvious due to the benefit from its main clients from the U.S. Therefore, local subsidiaries of India IT vendors will have undisputed large share in the outsourcing to China in the near future.

Figure 8

|Country |Provided IT services |Clients |Suppliers |

|India |High-level IT work: |U.S. |IBM, Electronic Data Systems Corp. and |

| |Custom development and support, BPO, (systems integration, | |Accenture, SAP, Oracle ; Tata, TCS, Wipro,|

| |network and infrastructure management and system planning and| |and Infosys |

| |design work) | | |

|China |Low-level IT work: |Japan |IBM, HP, SAP, Accenture, Microsoft, CSC, |

| |Maintenance and porting (software testing, codes composing, | |Oracle, etc; Lianxiang, Dongruan, |

| |etc) | |Zhongruan, Jindie, Yongyou, etc; top 4 |

| | | |India IT vendors |

Sources: ,

, ,

; ,;

, ,



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Figure 9 SEI CMM difference between India and China *

Future Offshore IT Outsourcing to China In the long run, local Chinese IT companies will not only take back their deserved market share, but also play an important role in global IT outsourcing market due to its current advantage over India vendors and the feasibility of fast improvement in qualification.

Besides the sufficient supply of talents, lower labor fee, and experienced talents and local vendors--even though not as experienced in all IT fields as China’s Indian counterpart, China has two vital advantages. First, China has a surging domestic IT market (figures 10, 11, 12). In this market, no single vendor (Chart III-4) can dominate. It offers local Chinese vendors a valuable opportunity to gain resources for maturity, including profit to strengthen their financial position to recruit and train talents, buy in necessary expertise and domain knowledge in fulfilling outsourcing contracts, apply for high CMM level, and hire top marketing firms in main IT outsourcing market to directly gain contracts to boost their profit margin.

Figure 10

Composition of China IT services market

|  |2002 |2003 |Growth Rate |

|Telecom |74.74 |91.6 |22.6% |

|Finance |80.31 |98.58 |22.7% |

|Government |43.62 |62.81 |44.0% |

|Manufacturing |55.05 |69.89 |27.0% |

|Energy |37.04 |45.82 |23.7% |

|Circulation |26.09 |32.31 |23.8% |

|Others |112.45 |142.99 |27.16% |

|Total |429.3 |544 |26.7% |

Source：CCID Feb. 2004

Figure 11

Domestic Software Industry in China and India 2003

China

• Total Revenue: U.S.$ 19 billions- only 10% exported

• Annual growth rate:30%

India

• Total Revenue:U.S.$16 billions—80% exported

, Sept.17, 2004

Figure 12

A second advantage china has is the promise of strong government support. Governments at all levels in China supply full range supports for local IT. China’s government is reforming its IT education orienting it to real market requirements at the university level to guarantee sufficient and qualified IT supply. A huge government budget is invested in upgrading China’s telecommunication infrastructure in accordance with the rest of the world. Taxes and financial benefits are given to high tech IT vendors in software parks all over the country. The government is funding local IT vendors to buy in expertise, to buy domain knowledge, to market their services in main economies, and to apply for higher CMM levels.

Feasibility of fast improvement in qualification

Due to the non-core nature of jobs in offshore IT outsourcing, technical expertise and domain knowledge can get transferred by buy-in from reputed consulting firms under China government funding support. This expertise will be directly passed to local Chinese IT vendors and be used in training college students majoring in IT-relevant fields.

The needed expertise can also be acquired from the training by the two India IT training companies. Also, Chinese local vendors can get those expertise by cooperating with local subsidiaries of foreign IT vendors.

Funding is an vital issue in applying for CMM. With the support from China’s government, such issue is expected in an more efficient way.

Contract size and high-tech contracts are necessary for fast creation of track records. Government support in marketing in main economies is good practice in gaining contracts while the actual effect is left for observing.

Predictions After analyzing the data available, several predictions can be made. With the gradual full-open market in China, IT demand from FDI to China will have record growth. Market share of outsourcing to China will grow significantly in the world market and local subsidiaries of Indian IT vendors will benefit most from the surging IT demand. Local Chinese vendors will play a supporting role to those foreign vendors’ local business and grow fast due to both transferred expertise bought by the government and learning from the cooperation with foreign vendors.

Local Chinese vendors will not only take back their deserved market share in the outsourcing to China but also gain footholds in main economies around the world. After the necessary track record has been built and high CMM levels have been gained, the marketing efforts funded by China’s government will take effect. Chinese vendors will gain good profit margin from contracts gained in main economies and develop direct and broad business relations with clients in main economies. More and more contracts regarding serving the Chinese market from FDI will be transferred to Chinese vendors because of the reputations built.

The Boeing Company

The Boeing family of products and services provides customers with comprehensive solutions for the air- transport industry that is more dynamic than ever before. Boeing has many organizations (see figure 13) but the two focused on in this analysis are IDS (Integrated Defense Systems) and BCA (Boeing Commercial Airplanes). IDS include military airplanes, missiles, and other defense products. BCA are Boeing Commercial Airplanes such as the 777 or the new 7E7. For clarification purposes, all Boeing Business units are listed below.

Figure 13

■ Air Traffic Management (ATM)

■ Boeing Capital Corporation (BCC)

■ Commercial Airplanes (BCA)

■ Connexion by Boeing

■ Integrated Defense Systems (IDS)

■ Phantom Works (PW)

■ Other Divisions

• Shared Services Group (SSG)

• Washington D.C. Operations

• World Headquarters (WHQ)

The blue section of the pie graph represents BCA or Boeing Commercial Airplanes. The green and red sections represent IDS (Integrated Defense Systems). Revenues in 2003 were $52.2 billion. Boeing has customers 145 countries and employees in 62 countries and are the world’s largest military and commercial aircraft manufacturer. Boeing is also NASA’s largest contractor. Independent research from various company Web sites indicated current market share shown below in figure 14.

Figure 14

Boeing world headquarters is located in downtown Chicago. Boeing’s CEO, Harry Stonecipher, and CIO, Scott Griffin, are focused on global growth strategies that include locating Boeing facilities in countries where they do sales. Financial goals and performance are another goal they hope to achieve by the year 2015. In 2015, the company will be 100 years old so they are basing several major company goals on this milestone year. One financial goals include dramatically cutting costs everywhere they can. Another 2015 vision is the sharing of best practices and technologies across Boeing businesses worldwide. They specifically want to consolidate 2500 business systems to perhaps as few as 500 (Rick Stevens, president shared services group). Consolidating down to 500 business systems across the globe has several advantages. This leads to less money spent on maintenance of systems, more consistent processes throughout the company, and less training. Boeing has recently reduced 3500 significant line of business applications down to 2500. Vision 2016 will try and produce 500 applications.

Boeing Interviews The main scope of this project included two important interviews. The first interview with Richard Navarro provided great information. Richard Navarro is the Boeing director of information technology and the chief architect of business systems. He is a Boeing offshore expert and a University of Missouri-St. Louis Professor. He also teaches at Washington University and Webster University in his spare time.

The interview conducted by Tim Wahlquist lasted for about an hour. When asked how much Boeing spends on IT as part of their sales revenue, his reply was, “About $2 billion.” This is roughly four percent of the $52.2 billion revenue which is inline with what many companies commit to their IT departments.

Richard mentioned that the whole range of IT is outsourced. This includes re-hosting, support, and development. One of the main reasons is because of cost. It’s nearly one-third the labor rate to outsource than to keep these in house. He really stressed the importance of cost. Boeing sells expensive products and it costs a lot of money to make these products so cost reduction is important to the overall strategy.

He offered three reasons for Boeing to offshore: to expand globalization and global reach, for cost and quality, and to meet offset requirements. Boeing is a global company. To be global, a company must go global. They have many commercial sales outside the U.S. In-fact, 70 percent of BCA sales take place outside the United States. Boeing has many worldwide customers. They are locating offshore to expand globalization and global reach.

His second point was for cost and quality. He explained the CMM certification and how important this was for vendors to stay competitive. Richard mentioned India and CMM 5. CMM 5 is the highest level obtained. Vendors in India are competing based on this level so it is easy to recognize the importance of this certification. He mentioned that India is very cheap and has good quality. He lastly mentioned that avionics in St. Louis is a CMM 5 and Business Systems is a CMM 4.

Offset requirements include selling to a foreign country and locating the Boeing business there. Richard mentioned that if you put the business there, they will buy from you. He referred to several examples such as design work in Moscow, F-18 parts and a software development house in Malaysia. Offset requirements also help a country’s community. It provides jobs, and in the words of Boeing, will help sales. This interview was very important to establish why Boeing is in other countries. They are specifically in other countries to expand globalization and global reach, for cost and quality, and to meet off-set requirements.

The second Boeing interview was with Jerry Fear. He works alongside Richard Navarro and is a Boeing IT product manager and an offshore expert. The first question discussed was Boeing’s biggest challenge. The biggest challenge is deciding what’s core and non-core. What does Boeing keep in-house and what do they outsource. Jerry mentioned that core includes high-end design and engineering systems integration. Boeing is focusing on high-end design. They have many suppliers around the world. They outsource the small stuff to the suppliers while focusing on the large core items. A Quote on the Boeing Website states, “…We don’t want a third party managing our information systems for us, because information is critical in the marketplace. If you lose it, it’s no longer a strategic advantage. So the Enterprise Help Desk is a critical element of the Boeing Company. We still benchmark its performance, but we need to keep in-house. That’s an example of something that is critical. It’s fundamental to how we run our business (Rick Stevens, president shared services group).”

Jerry mentioned that BCA offshores more than IDS. Boeing uses a Global Software Subcontracting Management internal service (GSSM). It’s a Boeing internal Seattle organization. It is a vendor selection and management process, or a way to pick an offshore vendor. The Seattle organization has picked Boeing’s five top vendors. Most of these vendors are located in India.

He mentioned that export controls are a big deal. No proprietary information is outsourced. Software development can be done offshore but the proprietary information known as “Data” stays on-shore. He did mention however, sometimes the software can be proprietary. The Indian vendors don’t have enough information to gather from the software development, they just make it. Jerry finally mentioned that a lot of coding and testing is done offshore. He said “that’s the blue-collar work of the IT profession”.

Again, cost per hour was mentioned. Cost per hour is a big deal. That’s the main reason why we went with offshore software developers. Jerry provided a great example of the vendor TCS in India. I will mention this in the Indian section. He went on to say that Boeing is largest exporter in the United States. Seventy percent of airplane sales are from other countries.

The final interview topic included political issues. Offsets are also known as industrial participation. This is a better term to use. It’s an “Easy sell” to workers when there is a lot of controversy about off- shoring jobs. The Boeing company is very open and honest. They simply explain to their workers that it’s necessary and beneficial to locate to countries where sales are trying to be obtained. In the end, this helps the Boeing company gain sales and gain more revenue. In reality, only a small fraction of jobs are being outsourced. This is actually the reality in any company. Outsourcing and off-shoring have been a political debate for the last five years. However, people fail to realize, it’s really a small portion of jobs.

The Boeing company is honest and of high integrity. A Seattle online Website said,

“The Company makes no excuses for sending work to South Africa, Italy, China, Russia and other far-flung parts of the Globe. But unlike the new breed of outsourcers, Boeing isn’t only hunting for cheaper labor, it places work in countries where it’s trying to sell planes. They spread the risk of new projects by farming out work to foreign suppliers. Officials are drawn to cheap labor, but sales are more important” ().

Boeing Country Analysis Design centers are playing a more important role in the company. A very good example includes the new 7E7 aircraft that will go into production in 2006 and in service by 2008 (). It’s been 14 years since Boeing’s last flagship 777 airplane. The new 7E7 is a dramatic shift in how Boeing builds airplanes. The goal is to design the 7E7 for half the cost of the 777. Boeing is going to use Dassault Systems, a software company that has built a program that actually moves parts around on the computer screen to best design the new airplane. The software can move parts such as ailerons, rudders, elevators, flaps, sheet metal, and right down to the screws. This new software will enable Boeing to do rigorous design work. This will enable the best design at the lowest cost. Boeing does not have to build the airplane and then start over. They can simply design and test through the software. They’re looking for the best design and lowest cost. They will pass the software through engineers around the globe to develop the new airplane. The picture below illustrates the new Dreamliner 7E7 (Seattle Weekly).

India

Boeing rates India right at the top among the 20-25 regions and countries selected as part of its globalization strategy. The idea of improving Boeing’s position in India was driven by the company’s interest in unveiling itself to the Indian technological development and to exploit the lower cost of work (Business Line, Friday November 21st 2003). Engineering components are being designed by Indian software companies. Indian software giants are expanding this segment of the business.

Infosys, L&T, and TCS are Boeing Indian vendors. IDS had a pilot project in Southern California in the Long Beach manufacturing plant. The manufacturing system ran on obsolete hardware. Boeing wanted to move the software to other hardware platforms. They looked to internal estimates and had consultants come in to estimate 80,000-100,000 man-hours to complete the project. They needed a different language to work on modern equipment. IDS tagged into the GSSM (Global Software Subcontracting Management) internal Boeing organization in Seattle. They did a pilot project in phases. Jerry Fear explained the importance of doing a pilot project in phases. This allows you to keep a better budget allocation on the project. So far, everybody at the Long Beach manufacturing plant is happy.

I found a very interesting article about the Wipro Indian vendor. This article was from the Hindu Business Line, “We are seeing aggressive growth in this area and it is crucial to our overall growth,” says president of Wipro product design (Hindu Business Line Friday November 21st 2003). The president was referring to the jump in the design and engineering segment. Wipro entered the design and engineering segment two decades ago. Employees have grown 40 percent since 2003. TCS also expects big growth in engineering and product design. Seven percent of revenue comes from design (Business Line, Friday November 21st 2003). The article summarized that it will be a while before India is responsible for the bulk of design work.

Russia

Boeing turns to a Russian programming talent in a massive database project. ADADS (Automated Drawing Accountability and Distribution System) is a database to electronically store drawings and blueprints of aircraft, parts, systems and equipment. It is a 25 year-old system that needed modernization. The CIO Scott Griffin said “The ADADS system was of high-quality but out of date” (Enterprise Systems Article). This system includes more than one million drawings as well as systems used by engineers and designers to update existing designs and construct new ones.

The goal was to cost effectively conferred the legacy drawing system into a new modern system. The evaluation requirements included low-cost, quality of programming, and the ability to meet Boeing software engineering Institute quality standards. The solution was not to use in-house talent but contract with a Russian offshore software developer named Luxoft.

The new system provided greater flexibility and expandability. The conversion improved system stability, reliability and access says CIO Scott Griffin. It also reduced cycle time, increased flexibility, and lowered maintenance cost. In the end, cost savings were not realized. It was a Stage Two pilot project. That means, it was over budget but they got the work done. Unforeseen communication, travel and management cost used more resources than Boeing originally anticipated. Russian programmers cost about $25 per hour compared to $115 per hour in the United States. Unfortunately, Boeing did not recognize this cost savings in the end.

Boeing’s lessons learned concluded that it takes a strong commitment to offshore outsourcing that involves far more communication and management they would be expected at first. This includes taking into account time differences, language differences, and differing cultures. Over time, this can always be worked out, but takes time and energy for a strong relationship to be built (Enterprise Systems Article).

Boeing Near-Shore

Lastly, after looking at offshore outsourcing, a brief analysis of a near-shore vendor makes for a good comparison. Fujitsu is a Japanese vendor that won Boeing supplier of the year award in 2001. They moved their location to Canada to better serve Boeing. Boeing originally selected Fujitsu from over 5000 providers in the non-production category (Outsourcing Information ). Fujitsu exceeded service level agreements. They had 100 percent on-time delivery on all contracted software development projects.

Fujitsu’s integrated business and IT system Macroscope became Boeings wide-standard for application development and maintenance. They were responsible for the maintenance and decommissioning of Boeing’s legacy human resource system. Boeing’s COBOL mainframe was replaced by PeopleSoft HR system.

Fujitsu’s benefits to Boeing included the move to Canada. They decided to locate to Canada to better serve the Boeing Company. This reduced cost and improved delivery efficiency. The better exchange rates and lower Canadian salaries reduced the cost. One big improvement was communication. I cannot stress the importance of communication. Communication is literally the reason why the Luxoft deal went sour. Fujitsu can better serve Boeing through better communications. Boeing and Fujitsu can communicate through email, teleconferencing, and telephones at nearly the same working hour. In India for example, the beginning work hour must be carefully planned with the ending work hour. It’s hard to talk to somebody in India because they might be sleeping.

This IT outsourcing project was very interesting. The main focus for Boeing’s offshore initiatives is to locate work in countries they want sales. They are expanding globalization and global reach, improving cost and quality and meeting offset requirements. Boeing is the largest exporter in the United States. They are an extremely large company with sales revenues of $52 billion. Boeing is a very good example of a company that strategically uses vendors to minimize IT cost. It’s important to remember, that only a small percentage of jobs are actually exported overseas. Boeing’s reputation for cutting jobs was directly correlated to the hit our country took on September 11th 2001. Boeing was forced to cut American jobs because our customer base dropped out. In the recent years, Boeing has hired many people back. The outlook for foreign sales looks great. China is predicted to be the second-biggest airplane market in the next 25 years. Boeing continues to produce the products that our proud military uses every day.

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References

Baseline Research, CIA World Fact Book, , viewed November 8, 2004

. , viewed October 7th 2004.

Business Line, Friday November 21st 2003. http;2003/11/21/stories/2003112102560500.htm, viewed October 5th 2004.

CSC’s Research & Advisory Services. “Offshore outsourcing: Cheaper, Faster, Better or a Cheap, Fast, Bet?” , February, 2004.

, viewed Nov.1,2004

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Fear, J. IT Product Manager of Boeing Company, interviewed in person by Tim Wahlquist on October 10, 2004.

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Gao, H. “Toward A Financial Achievement In East Asia: A Proposed Roadmap and China’s Perspective” Chapter V China & World Economy Vol.12, No.3, May-June 2004

, viewed Oct.20, 2004

Key Operational Excellence Challenges in ITES-BPO. NASSCOM. P. 1-2. . Viewed November 10, 2004.

McKinsey, “Why Sourcing is So Effective”, June 21, 2004

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Navarro, R. Boeing Director of Information Technology, interviewed by phone by Tim Wahlquist on October 15, 2004

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Figure 7 FDI contribution to China exports 2003

estimated from 2003 CIA World Factbook and World Development Indicators database, World Bank, September 2004

Countries

Number of SEI Capability Maturity Organizations

China

0 (3*)

2 (4*)

Russia

0

1

India

28

46

Level 4

Level 5

World

73

69

Size and Growturity Organizations

China

0 (3*)

2 (4*)

Russia

0

1

India

28

46

Level 4

Level 5

World

73

69

Size and Growth of China IT Services Market during 1999-2000(In 100 Million Yuan）

Source: CCID Feb. 2004

26.7%

32.9%

24%

34.2%

27.5%

Growth Rate

544

429.3

323.1

259.8

193.6

Market Size

2003

2002

2001

2000

1999

2003 $52.2 B

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35%

50%

14%

STPI Centers in India

stpi.centers_map.html

STPI Centers in India

stpi.centers_map.html

McKinsey, 2004

Figure 1

Figure 2

Figure 3

Figure 4

Figure 5

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