Dell evaluating the potential outsourcing of the firms software development services in Russia, Brazil, and UAE - Essay Example

? Dell – evaluating the potential outsourcing of the firm’s software development services in Russia, Brazil, and UAE Executive Summary The development of outsourcing globally is an important phenomenon. Outsourcing has been proved to be the most appropriate solution for reducing operational costs and increase the capability of the organization to respond to its customers’ demands. However, quite often outsourcing projects are not effectively designed or monitored. In the case of Dell, the outsourcing of the firm’s software development services is expected to support organizational effectiveness and increase the firm’s competitiveness in the global IT industry. Three countries have been reviewed as of their potential to host such project. Russia, UAE and Brazil markets have been examined as of their ability to respond to the outsourcing needs of Dell. Russia and UAE seem to have a competitive advantage towards Brazil in regard to the particular initiative. Table of contents Executive Summary 2 1. Introduction 4 2. Dell – analysis of the aspects of outsourcing the firm’s software development services in Russia, Brazil, and UAE 4 2.1 Company characteristics 4 2.2 Industry analysis 5 2.3 Outsourcing as a business decision 6 2.3.1 Benefits of outsourcing 6 2.3.2 Business models 6 2.3.3 Implications and issues for consideration 7 2.4 Country analysis 7 2.4.1 Outsourcing in Russia 7 2.4.1.1 Potential outsourcing partner in Russia 7 2.4.1.2 Explanation of the appropriateness of Russia for outsourcing the firm’s software development services 7 2.4.2 Outsourcing in Brazil 9 2.4.2.1 Potential outsourcing partner in Brazil 9 2.4.2.2 Explanation of the appropriateness of Brazil for outsourcing the firm’s software development services 9 2.4.3 Outsourcing in UAE 9 2.4.3.1 Potential outsourcing partner in UAE 10 2.4.3.2 Explanation of the appropriateness of UAE for outsourcing the firm’s software development services 10 3. Conclusion and Recommendations References 11 Appendix 13 1. Introduction The key priority of firms operating globally is to identify a strategy that could protect them against strong market turbulences and would allow them to achieve a stable growth, a target that is, often, difficult to be achieved. Dell is one of the most important competitors in the global IT industry. The firm has managed to create a powerful network of branches internationally. However, its performance is not stable, meaning that the firm has been proved vulnerable to market pressures, as this problem can be identified in the firm’s financial statements, as, indicatively, analyzed below. The review of the firm’s financial and operational characteristics and challenges has led to the assumption that the outsourcing of the firm’s software development services would significantly strengthen company performance through the improvement of the rate of response to customers’ orders and requests. At the same time, the firm’s position in its industry would be stabilized and strengthened since the firm would be able to achieve an important increase of its profits even in the long term. At this point, the following issue appears: which country would become the firm’s most important supporter, in terms of the promotion of the particular business project. The potential participation of a firm based on one of the following countries: Russia, Brazil and UAE is evaluated in this paper. It is concluded that all three countries have certain advantages for supporting such business project. However, seems that two of them, Russia and UAE would be preferred, as they are proved more ready to support the specific initiatives. The basis of this assumption is presented below. The characteristics of the company and of the industry involved are also explained at the level that they can justify the decision of the firm to outsource its software development services. 2. Dell – analysis of the aspects of outsourcing the firm’s software development services in Russia, Brazil, and UAE 2.1 Company characteristics Dell is a major competitor in the global IT industry. The firm has established its position in the global market; however, still there are issues to be addressed in order for the firm’s performance to be stabilized. For 2011, the profits of the firm are estimated to $11,936 millions, which is a significant increase compared to 2010, when the firm’s profits were $9,261 millions (Graph 1, Appendix). However, for 2009 the firm’s profits reached the $10,957 millions, which means that in 2010 the firm faced a significant limitation of its profits (compared to 2009). This means that the firm is vulnerable to market turbulences and that appropriate strategic options need to be identified so that the organizational performance is secured. Another important characteristic of the firm’s performance is the following one: it seems that there is no effective control of the firm’s liabilities. Indeed, in 2011 the firm’s reached the $30,833 millions, while in 2010 they were estimated to $28,011 millions and in 2009 they reached the $22, 229 millions (Graph 2, Appendix). In other words, the last three years, the firm’s liabilities have been increased at a percentage of approximately 30%. This fact indicates the need for the change of the firm’s existing strategies. The outsourcing of the firm’s software development services, a sector that represents a significant percentage of the firm’s customer base, would help the firm to increase the number of customer orders processed daily. In this way, the profits of the organization could be increased. However, in order for this project to be successful it should be appropriately designed and monitored taking into consideration the market trends and challenges, as explained below. 2.2 Industry analysis Software development industry is a promising one, taking into consideration the level of use of IT in all industrial activities globally. However, it seems that the industry has not managed to face effectively the pressures of the global market. This problem is reflected in a report published by IBM in 2008, firms operating in the particular industry tend to review continuously their distribution teams aiming to achieve a competitive advantage towards their rivals (IBM 2008). In other words, it seems that efforts for identifying an effective strategy for managing the software development sector seem to appear in most firms globally, a fact that proves the industry’s challenges in the context of the global financial turbulences. On the other hand, it is noted that new trends have appeared in the outsourcing industry. Once, maintenance was the key priority for a firm’s managers to use outsourcing. Currently, application testing has become a common element of outsourcing (IBM 2008). Other activities, like ‘the Business – process – outsourcing and the IT infrastructure management’ (IBM 2008) are also likely to be part of an outsourcing agreement. In any case, the continuous expansion of firms globally has led to the need of outsourcing as a tool for keeping operational costs at a particular level, in other words for controlling more effectively the firm’s investment on its daily operations. Moreover, under the influence of globalization, outsourcing priorities have been changed; the availability of advanced technologies, consulting and global delivery have become the key targets for managers that are involved in the relevant projects (Global Services 2011), meaning outsourcing projects in various industries. In order to understand the potential form and content of the firm’s outsourcing strategy, if such strategy would be incorporated in the firm’s strategic priorities, it would be necessary to understand the context of the software development industry. In accordance with a report published by Global services in 2011, the software development ‘includes everything from conceptualizing the desired end state software to the delivery of the final product, typically in a structured manner’ (Global services 2011). From this point of view, it is noted that the key priority of software development is to ‘solve problems’ (Global Services 2011). These problems are likely to be common in markets worldwide; however, the strategies chosen by the firm to respond to this need may not be similar. Even if outsourcing is chosen, the processes including and the relevant timeline can be differentiated among firms, depending on certain criteria, such as each firm’s financial strength, its market position and its existing network of strategic alliances. 2.3 Outsourcing as a business decision 2.3.1 Benefits of outsourcing Outsourcing is often chosen as a means for supporting a firm’s operational activities. It has been proved that through outsourcing a firm can be benefited but the level and the type of the benefits are not standardized. Most commonly, outsourcing leads to the limitation of a firm’s daily operational costs, a target that is achieved through the limitation of the firm’s operational units. By outsourcing most or just part of its daily services, a firm can achieved a significant decrease in its operational costs. At the same time, the firm is able to process more effectively the orders and the requests of its customers, which means increase of the firm’s profitability (Langfield-Smith et al. 2000). One of the most important benefits of outsourcing seems to be the limitation of the firm’s expenses in regard to the compensation of its employees. Indeed, if one or more services of the firms are outsourced, then the amount spent on employees’ compensation can be reduced, meaning that the number of the firm’s employees could be decreased (Oshri 2010). Currently, the above benefit is not set as a key priority for managers in order to introduce a project for outsourcing the firm’s services. Indeed, as noted above, the availability of an extended pool of new technologies has become the key benefit (and criterion) of outsourcing instead of cheap labor. Another potential benefit of outsourcing seems to be the following one: through outsourcing a firm develops a strategic alliance with a firm specialized in the particular activity (Power et al. 2006). This firm can be based on a foreign market, as in the case under examination, which means that outsourcing can lead to the development of a firm’s cooperation with its competitors, at national or international level, a fact that can strengthen the firm’s position in its market, either in the short or the long term. 2.3.2 Business models Various methods can be used for developing an outsourcing project. This means that a firm can choose among different strategies for outsourcing one or more of its services. A series of indicative outsourcing models are presented in the Appendix section (Graph 3, 3a, 3b). Each of these models addresses the needs of specific industries. For the software development industry, an alternative model would be chosen. This model would incorporate elements of existing outsourcing models but would also refer to issues related to the particular industry, as explained above. The potential phases of this model would be the following ones: a) market research (country and industry analysis), b) communicating with potential contractors, c) checking compatibility with Dell’s strategic priorities and goals, d) checking ability to meet the terms of the firm’s outsourcing project, e) development of the agreement with the contractor chosen, f) provision to the firm’s employees of the necessary support for participating in the project (as and if required), e) establishment of a mechanism for continuous monitoring of the project and f) evaluation of the project on a regular basis, probably ever 3 months for changing priorities (if necessary) or processes. 2.3.3 Implications and issues for consideration When having to design a strategy for outsourcing one or more of the firm’s services, managers need to take into consideration certain issues: a) a thorough examination of the targeted market needs to be developed; since outsourcing is going to support the firm’s daily operations, at a high or low level (Oshri 2010), b) the terms under which the specific outsourcing project will be developed needs to be carefully examined, meaning that the particular project will be feasible, as of its deadlines, the funds required and the expertise/ skills of personnel involved (Power et al. 2006), c) a mechanism should be developed for monitoring the project periodically; by implementing an outsourcing strategy a series of risks may appear: lack of effective communication between the staff, failure of the coordinator (the target firm) to meet the expectations of the firm’s managers in regard to the specific project, delays and excess of costs involved and so on (McIvor et al. 2009), d) in any case, the performance of an outsourcing project cannot be considered as guaranteed; also, it is possible that the benefits of the project appear after a particular period of time, i.e. not immediately (Oshri 2010), especially in cases that turbulences appear in the target market, meaning the market where the contractor is based. 2.4 Country analysis 2.4.1 Outsourcing in Russia 2.4.1.1 Potential outsourcing partner in Russia In case that Dell would decide to outsource its software development services in Russia, there would be no particular difficulty for the firm’s managers to identify an appropriate contractor. Arcadia Software Consulting has been chosen as a potential outsourcing contractor at the level that this firm’s activities are expanded, covering different organizational needs, as explained in the corporate website (Arcadia Software Consulting 2011). Moreover, the particular firm is well established in the Russian market, which means that Dell would acquire a key ally in the local market, a fact which would be important in case that the firm would decide to expand its activities in Russia, an effort which has been already developed through the initiative for the development of the Engine X, a project in which Dell has participated even not directly (Rus Soft 2011). 2.4.1.2 Explanation of the appropriateness of Russia for outsourcing the firm’s software development services One of the key advantages of Russia seems to be the significant prospects of its economy. Indeed, through the continuous increase of investment on all industrial activities, Russia has managed to become one of the most powerful economies worldwide. In a report published recently by PriceWaterHouseCoopers the potentials of emerging economies are represented in a graph (see graph 1 below). The graph shows the expected performance of certain emerging economies (compared to the economies of countries of the west) up to 2050. It is clear that in Russia the availability of capital for the support of entrepreneurial activities is high. Through this point of view, the development of strategic cooperation with firms operating in Russia would be a promising business decision for MNs. Dell could be also benefited in case that the firm’s managers would decide to promote the outsourcing of the firm’s software development services in Russia. In accordance with a report published by the World Bank, for 2011 the growth of the Russian economy is expected to reach the 4.4%, while for 2012, a growth of 4% is expected (World Bank 2011), a fact proving the ability of the country to face the challenges resulting by the global market pressures, which are still strong. Especially regarding the software development sector, this seems to be quite important for Russian economy. Indeed, in the 12th of October 2011 it was announced that ‘Russian venture Fund Runa Capital and two partners have invested $3 million in the development of project Engine X (nginx), the world’s third used server’ (Rus Soft 2011). The entrance of Dell in the Russian market, through developing an outsourcing agreement with Arcadia Software Consulting, as explained above, could significantly benefit the firm’s position in the global market. Graph 1 – GDP forecast up to 2050 (Source: the Economist 2011) 2.4.2 Outsourcing in Brazil 2.4.2.1 Potential outsourcing partner in Brazil Rayssoft could effectively respond to Dell’s outsourcing needs. Even if the firm operates in the Brazilian market only for 5 years, it can provide a range of software development services. The high advantage of the firm is its potential to offer solutions based on advanced technology. Also, the firm is able to respond to current outsourcing trends, such as the need for software testing and for Web development (Rayssoft 2011). 2.4.2.2 Explanation of the appropriateness of Brazil for outsourcing the firm’s software development services Brazil is one of the world’s leading emerging economies (see Graph 2, below). This means that the rate of its growth is significant. However, its ability to respond to the needs of the global market may be doubted. More specifically, the development of corruption across the country is so quick that in the last ten months six ministers of the government have been replaced (Paulo 2011). The country, despite the prospects of its economy, would not be an ideal target for the development of Dell’s outsourcing project since the risks involved are many. Graph 2 – Rate of GDP growth in Brazil (Source: Economy Watch, 2010) 2.4.3 Outsourcing in UAE 2.4.3.1 Potential outsourcing partner in UAE In UAE there are many firms offering outsourcing solutions in regard to software development. However, the specific industry has been rather recently developed in UAE, so that the potential lack of experience on complex outsourcing projects would be a risk in case that Dell would decide to develop an outsourcing project in UAE. Verbanet would be an ideal contractor for handling the outsourcing needs of Dell (Verbanet 2011). The firm focusing on new technologies and on the quality of its work, meaning that it could meet deadlines and cost limits, as included in the outsourcing project of Dell. 2.4.3.2 Explanation of the appropriateness of UAE for outsourcing the firm’s software development services UAE is a country with a significant position in the global economy. The oil and gas resources of the country have been the basis for the growth of the national economy. For 2008, the country’s GDP has been estimated to $53,400, which is quite high considering the similar figures of western countries (USA Department of State 2011). In accordance with a recent report, the economic freedom score of UAE is estimated to 67.8, a figure that can be characterized as quite satisfied (2011 Index of Economic Freedom). On the other hand, the level of corruption in UAE is quite low, a fact that can be considered, among with the strength of the economy, as the country’s advantage. 3. Conclusion and Recommendations In accordance with the issues developed above, by choosing outsourcing managers in Dell could significantly support their firm’s performance. It has been made clear that Russia and UAE would be more capable of supporting such project, due to the stability of their economy, their prospects for the future and their position in the global market. Moreover, these two countries seem to have a better control over the management of capital both in the private and the public sector, a fact which is considered as their advantage compared to Brazil where the important prospects of the economy are often eliminated due to the high level of corruption as explained above. Moreover, if managers in Dell would decide to outsource the firm’s software development services, they would have to follow a specific process, as presented earlier, ensuring that control on all the phases of the project would be continuous. References Arcadia Software Consulting, 2011. Corporate website Available at < http://www.offshore-software.ru/> [Accessed on 28 October 2011] Dell, 2011. Corporate Website. Available at < http://www.dell.com/> [Accessed on 28 October 2011] Economy Watch, 2010. Brazil Economy. Economy Watch [online] Available at < http://www.economywatch.com/world_economy/brazil/> [Accessed on 28 October 2011] Global services, 2011. The future of software development, [online] Available at < http://www.globalservicesmedia.com/Experts/Home/The-Future-of-Software-Development/30/27/0/GS1109235910068> [Accessed on 28 October 2011] IBM, 2008. Global software development and delivery: Trends and challenges. IBM, [online] Available at < http://www.ibm.com/developerworks/rational/library/edge/08/jan08/fryer_gothe/index.html> [Accessed on 28 October 2011] Langfield-Smith, K., Smith, D., Stringer, C. (2000). Managing the outsourcing relationship. Sydney: UNSW Press, 2000 Sydney McIvor, R., Wall, A., Humphreys, P. (2009). A Study of Performance Measurement in the Outsourcing Decision. Oxford: Butterworth-Heinemann Oshri, I. (2010). Global Sourcing of Information Technology and Business Processes: 4th International Workshop, Global Sourcing 2010, Zermatt, Switzerland, March 22-25, 2010, Revised Selected Papers. New York: Springer Paulo, S., 2011. Corruption in Brazil. Out on penalties. The Economist, [online] Available at < http://www.economist.com/blogs/americasview/2011/10/corruption-brazil> [Accessed on 28 October 2011] Power, M., Desouza, K., Bonifazi, C. (2006) The outsourcing handbook: how to implement a successful outsourcing process. London: Kogan Page Publishers The Economist, 2011. The race ahead. The Economist, [online] Available at: [Accessed on 28 October 2011] Rays Soft, 2011. Software development services in Brazil. Corporate website Available at < http://www.rayssoft.com/software-development-brazil.html> [Accessed on 28 October 2011] Rus Soft, 2011. All about software outsourcing in Russia. Rus Soft [online] Available at [Accessed on 28 October 2011] World Bank, 2011. Securing Stability and Growth: Russian Economic Report #25. The World Bank, [online] Available at [Accessed on 28 October 2011] USA, Department of State, 2011. United Arab Emirates [online] Available at [Accessed on 28 October 2011] Verbanet, 2011. Corporate Website. Available at [Accessed on 28 October 2011] 2011 Index of Economic Freedom, 2011. United Arab Emirates, [online] Available at [Accessed on 28 October 2011] Appendix Graph 1 – Financial results of Dell for 2009 up to 2011 (Source: Corporate website, financial statements) Graph 2 – Liabilities and equity of Dell (Source: Corporate website, financial statements) Graph 3 – Outsource delivery model (Source: http://www.reasonsoft.com/outsourcing.htm) Graph 3a – Outsourcing model – the case of QP management group (Source: http://www.qpmg.com/outsourcing_management.html) Graph 3b– Example of outsourcing, the case of OECD (Source: http://flatclassroom10-1.flatclassroomproject.org/Globalization+and+Outsourcing) Read More