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IBM Integrated Supply Chain Case Study

Authors:

Yavor Iliev Belitov

Momchil Emanuilov Elenkov

Georgi Panajotov Aleksandrov

University of Sofia

Faculty of Economics and Business Administration

November, 2008
1 IBM Integrated Supply Chain Case Study – Belitov, Elenkov, Aleksandrov

Abstract

A team of three students from the University of Sofia “St. Kliment Ohridski”, Faculty of
Economics and Business Administration committed themselves to take part in a case study
organized by IBM. As a part of this case study we made a decent scheme on how a software
company called Softi should modify its activities by undergoing some structural and
provisional changes. A decision for the outsourcing of some activities was made. It was based
on an analysis of the Supply Chain Networks. In conformity with the new direction for Softi’s
development we introduced a new service which should be able to satisfy clients’ needs for
entire software decisions. The whole project was divided to theoretical and practical part. The
theoretical part consists of examining supply networks and making decisions about the future
development areas of Softi. The practical part includes examining three options for the work
of data-entry and payroll departments and making a decision about outsourcing them.

Theoretical Part

Performance Objectives

After careful consideration of Softi`s future development strategy, we defined the following
Performance Objectives:

1. The most important performance objective of the company is to increase its revenue in
order to satisfy all shareholders and stakeholders in the company. Achieving the
normal growth for the industry is considered success as Softi is going through a
restructuring process; a lower result will be considered a failure.
2. In order to increase its revenue, Softi has to meet customers’ demands and increase its
customer base as much as possible. In the next year Softi has to retain the current size
of its customer base and possibly attract new customers.
3. Softi has to provide new services to its current and future customers. Softi has a 12-
month deadline to introduce a number of new SaaS solutions. This includes outlining
the approach and technology, performing risk and benefits analysis. Failure to
introduce the services in the planned schedule may lead to losing customers and bad
financial results.
4. Softi has to effectively reallocate employees and resources on the new projects. The
transition has to be performed smoothly while cleaning as much as possible of the
2 IBM Integrated Supply Chain Case Study – Belitov, Elenkov, Aleksandrov

backlog of current projects. Failure of smooth transition may lead to postponing the
launch time of some of the SaaS projects and/or losing existing customers.
5. The marketing team has to work on a strategy of promoting the new services Softi will
offer. An advertising campaign presenting the new services has to be prepared and
launched in 9 months’ time. Bad marketing can be fatal for the project.
6. In the same time Softi has to retain its current customers by continuing to provide its
current services to existing and new customers. Part of Softi’s team will continue
working on the same kinds of projects but Softi will also have to look for suppliers of
similar services that can provide the resources that have been reallocated to the SaaS
activities. The company should find suppliers for its existing services in order to retain
current customers until the new solutions are market-ready.

New services definition – Software as a Service

During the past several years, a new modern tendency is observed everywhere. It now enters
the Bulgarian IT sector with a couple of corporations already using it. Our customers talk
about getting a “solution” rather than just parts of it, and we strongly believe we have found
the exact kind of service they are looking for. It is one of the fastest growing ICT
(Information and Communication Technology) services. Its name is Software as a Service
(abbreviated SaaS, typically pronounced as “sass”). This is a model of software deployment
where an application is hosted as a service provided to customers across the Internet1. “Softi”
has decided to adopt this new kind of service and make it its core activity, dedicating its
resources on migrating existing solutions to the SaaS model. In the following lines we are
going to answer some crucial questions about this decision.

1. What exactly is SaaS at first place?

Software provided as a service by a software vendor to multiple customers and various


markets with the following characteristics:2

· standardization of software - eventually customized for specific customers and


markets

1
”Sofware as a Service” article, Wikipedia – the free encyclopedia.
2
“2005 Software as a Service Taxonomy and Research Guide”, Traudt, Erin; Amy Konary (June 2005), IDC.
Retrieved on 2006-08-25.
3 IBM Integrated Supply Chain Case Study – Belitov, Elenkov, Aleksandrov

· service, including maintenance, support and centralized feature updating


· operations managed from central locations rather than at each customer`s site
· data storage at the SaaS vendor
· Web based – usage over the public Internet ; remote availability

Finally, we should mention that CRM (Customer Relationship Management) is one of SaaS
biggest weapons. However, there are many more horizontal and vertical “friends” such as
ERP (Enterprise Resource Planning), SCM (Supply Chain Management), e-Commerce,
eLearning, HR.

2. SWOT analysis1

S.W.O.T. Analysis for SaaS model

Strong points and Opportunities

2.1 Lower costs (minimizing costs in terms of global finance crisis)


- it lowers operational costs (fewer applications resources, reduced operational complexity)
and costs for software development and usage (no license fees, no expensive updates)
- there are no costs for maintenance of the application servers for the client
- it efficiently uses software without the customer paying for unused/unnecessary software
models

2.2 Business focus (improving and optimizing processes)


- focus on core business activities and responsibilities (such as full scale integration of
business processes, more flexibility in changing and modifying application services for
business needs, faster-time-to-market, better overview and usage of electronic data and
information)
- increased productivity and better control over ICT (it shortens implementation time for ICT
services and changes; it offers a single point of entrance to business applications via the
Web)

2.3 SaaS offers potential for utilizing advanced ICT technology


- deployment of state-of-the-art technology by SaaS vendors investing for multiple
customers

1
”Software-as-a-Service. Opportunities and risks of SaaS”. Mike Chung, KPMG SaaS presentation.
4 IBM Integrated Supply Chain Case Study – Belitov, Elenkov, Aleksandrov

- usage of energy-efficient technology


- integrated approach to security
- centralized redundancy and fall-back measures

2.4 Taking advantage of SOA


- Much like any other software, Software as a Service can also take advantage of Service
oriented architecture (SOA) to enable software applications to communicate with each other.

Weak points and Threats

2.5 Data confidentiality/integrity


- loss of business data due to inadequate operations by vendor (redundancy, back-ups,
storage)
- theft of business data due to insufficient security measures
- non-compliance due to poor audit ability
- uncontrolled data management by inadequate separation of data between different SaaS
customers
- privacy issues due to insufficient assurance to project confidential and personal data

2.6 Service continuity and availability


- discontinuity or unavailability of services due to no connectivity to the public Internet
- poor performance due to geographical limitations
- loss of business data due to poor connectivity
- abuse with information in unsecured networks

2.7 Service integration


- loss of software functionalities due to constrains in integrating different services
- complexity of the IT environment such as difficulties in executing IT changes and complex
route-cause analysis
- security breaches

2.8 Performance and support


- poor performance of the serviced software due to constrains and limitations at the vendor
(too many customers, insufficient capacity) difficulties in receiving support due to poor ICT
governance at the vendor
- long-lasting incidents and change requests due to complex root-cause analysis
5 IBM Integrated Supply Chain Case Study – Belitov, Elenkov, Aleksandrov

- loss of productivity by unannounced software\interface changes

2.9 Legal and contractual


- difficulties in appointing responsible and accountable parties due to poorly defined
contracts and agreements
- complex contract management due to contracts with multiple SaaS vendors and aggregators
- difficulties in data restoration when changing vendors due to unclear contractual demands
and lack of control form the customer`s perspective labor force.

To make the long story short, we can conclude that SaaS will cut our and customers` costs
while increasing our activities` efficiency. To avoid all the threats mentioned from happening,
we will take preventive measures before SaaS implementation. Our priority now is to pay
attention to each of the mentioned risks in order not to have malfunctioning of the processes.
The most important points of consideration are listed in Table #1.

3. What value will SaaS add to “Softi”?

Broadly speaking, SaaS application maturity can be expressed using a model with four
distinct levels. Each level is distinguished from the previous one by the addition of one of the
three attributes listed above.1(Figure #1), (Table #1)

4. What are SaaS responses up till now, what is its current status and what is its future?

According to Gartner 2, in 2005 5% of all business software spending was for applications,
delivered in SaaS model. Gartner expects the figure to grow to 25% by 2011. So far,
experience shows that SaaS model is being excellent adopted by mid-sized companies. This
positive tendency, we believe, has two major drivers – low basic and present costs and fast
investment return.

In the recent years, SaaS model is skeptically viewed by companies in Bulgaria, despite the
fact that it is widely and mass spreading throughout USA and European Union. It is this major

1
“Architecture strategies for catching the long tail",Frederick Chong and Gianpaolo Carraro Microsoft
Corporation, April 2006.
2
“World finance crisis and ICT industry in Bulgaria”, Saga Technology, November 5 2008
6 IBM Integrated Supply Chain Case Study – Belitov, Elenkov, Aleksandrov

factor that will shoot us far away from our rivalry. The faster we implement and integrate the
technology, the better advantage we will have over our competitors.

The financial crisis is expected to reach Bulgaria next year. Most politicians and economists
believe the IT branch will not be affected. However, as a sector which depends on other
economic segments, there is no way to stay out of the crisis. Fortunately, the crisis is about to
meet the branch in a big rate of its development. According to IDC, the growth rate is 25.5%
for 2007 and expected growth till 2011 is 13.4% annually. The forecast is that the crisis will
not affect all economic segments and if it happens – it will not be drastic for IT branch.1

5. What is our strategy and what are our plans for implementing SaaS?

SaaS will be developed in “Softi” after carefully discussing each of the points listed in Table
#2. It will be an internal development; reselling 3rd party solutions may be an option, as well.
Softi will initially dedicate a few people to start developing the solution. Afterwards, Softi
will announce a deadline for taking on new projects by its internal development teams. After
this particular date no more customers will be serviced directly by Softi. The services will be
transferred to other suppliers, according to Softi’s SCM model and Softi will only coordinate
these projects. There are two major reasons for choosing this action plan:

1. Gathering more and more human resource to join the new team as the orders decrease;

2. No client loss due to refusal of orders. This gives Softi the opportunity to leave no
backlog while transferring the development activities in this new field.

Softi’s solution will be implemented using a centralized authentication system. This means
that the provider manages a central user account database that serves all of the application's
tenants. Each tenant's administrator is granted permission to create, manage, and delete user
accounts for that tenant in the user account directory. A user signing on to the application
provides his or her credentials to the application, which authenticates the credentials against
the central directory and grants the user access if the credentials are valid.2(Figure #2 and
Figure #3)

1
“World finance crisis and ICT industry in Bulgaria”, Saga Technology, November 5 2008
2
“Architecture strategies for catching the long tail",Frederick Chong and Gianpaolo Carraro Microsoft
Corporation, April 2006.
7 IBM Integrated Supply Chain Case Study – Belitov, Elenkov, Aleksandrov

Softi will emphasize on the integration of the following application areas: Customer
Relationship Management (across Marketing, Sales and Services), human resources,
accounting, web content management, e-Commerce and e-mail.

Supply Network Strategy

As set, the goal of Softi’s management is ”to define the boundaries of your future
development areas, to draw a plan on how to organize the operations within the company and
to make sure your strategy will lead “Softi” in the right direction.” In order to accomplish this
transformation we explore some basic questions and below is the answer to one of them,
concerning the Supply Network Strategy. To understand the meaning of Supply Network
Strategy (SNS) one has to acquaint themselves with the term Supply Chain Management
(SCM):

Scientific text concerned with the SCM give several viewpoints over the term. One of them is
that “SCM encompasses all organizations and activities associated with the flow and
transformation of goods from the raw material stage, through to the end user as well as the
associated information flows.”1 Another definition is that “A supply chain is a set of three or
more companies directly linked by on or more of the upstream and downstream flows of
products, services, finances, and information from a source to a customer.”2

Theoretical point of view branches the idea of Supply Chain as follows: A basic Supply chain,
An extended supply chain and An ultimate supply Chain. Figure #4 gives an appropriate idea
of what these terms represent.

A third definition of supply chain is: “SCM is a network consisting of suppliers,


manufacturers, distributors, retailers and customers“3

The basic supply chain is rapidly evolving into what is known as a Supply Chain Network.
This can be viewed as a result of the technological development – the advancement of
wireless and internet networks. A network represents a lateral and horizontal exchange,
between independent partners, of resources and communication (Powell, 1990). The

1
“Fairtrade coffee-from berry to cup” - Stockholm School of Economics, Institute of International Business
Master Thesis, Spring 2008, Authors: Madeleine Engström, Victoria Slivo
2
Ibid.
3
Ibid.
8 IBM Integrated Supply Chain Case Study – Belitov, Elenkov, Aleksandrov

definitions of networks are grouped around two key concepts: i) a model of interaction based
on exchange and relationships, and ii) a flow of resources between independent units (Jones et
al., 1997).1 Authors have emphasized the network character of SCM and proposed the
analytical integration of SCM and the theory of networks approach. This approach, integrates
a set of horizontal inter-firm relationships that are sequentially organized through vertical
inter-organizational links throughout the production and distribution chain.(Figure #5). This
method of multi-dimensional networks that encompasses multiple tiers and supports a variety
of business models can help Softi to open up a wide range of improvement opportunities.

As Figure #6 one shows, an integrated view can help a firm see supply chain from
different perspectives.

· A horizontal standpoint - you can see power shifting from the traditional OEM
(original equipment manufacturer) to lower tiers in the chain.
· A vertical standpoint - dependencies within a tier (possible bottlenecks affecting
downstream activities).
· A diagonal standpoint - adjacent players who may have capacity to offload work from
suppliers who are over capacity.
Using integrated approach will be facilitated if applying some techniques for better
work and coordination2:

1. Driving alignment of supply chain and business strategy. Many critical decisions that
ultimately affect supply chain costs and service levels are made very early in the product
lifecycle. Careful thinking about how to align your supply chain network strategy with your
business strategy can drive improved performance down the road. For example, supply chain
considerations such as tax planning, design and reuse commonality, and low-cost country
sourcing can each affect how well your supply chain meets the needs of the business.

1
“From Supply Chain Network Orientation to Supply Chain Network Management” by Ana Maria García Pérez
and Marian García Martínez - Paper prepared for presentation at the I Mediterranean Conference of Agro-Food
Social Scientists. 103rd EAAE Seminar ‘Adding Value to the Agro-Food Supply Chain in the Future Euro-
Mediterranean Space’. Barcelona, Spain, April 23rd - 25th, 2007
2
From “Out of the shadows: Why supply chain strategy should be at the top of the corporate agenda” –
Deloitte
9 IBM Integrated Supply Chain Case Study – Belitov, Elenkov, Aleksandrov

2. Integrating multiple supply networks. A different supply chain, with diverse goals and
performance requirements, normally supports each business model. A single supply chain that
serves all businesses will likely under-perform on both cost and service objectives.

3. Aligning and integrating supply chain planning. Effective supply chain planning requires
tight coordination and integration of demand plans, inventory plans, and production schedules
to drive the required outputs (both costs and service levels). Driving alignment requires
conscious decisions on use of capacity, target inventory levels and customer service rates.

4. Strategically managing the supply network. Businesses must manage multiple linkages and
dependencies within a network to gain flexibility and competitive advantage. To do so, data
(such as capacity, constraints, concentration of profits, bottlenecks) is gathered from tiers
throughout the supply chain and then is used to provide visibility to critical improvement
areas.

5. Mitigating tiering risks. As visibility has shifted away from OEMs to Tier 1, supply chain
managers must increase their focus on those Tier 2 and Tier 3 players that have dropped
below the radar.

Each business has specific competitive drivers, such as cost, performance and service levels,
which in turn require different supply chain capabilities.

To summarize the above theoretical deductions we are going to illustrate how the processes in
a network should be coordinated. There are several bound up options for this to be performed:

· coordinating data sharing and information systems;


· coordinating logistics processes and operations;
· coordinating financial and system tradeoffs;
These three pillars illustrate how a company can walk the way from short-run(coordination of
data) to long-run(coordination of finances) use of networks.

At Table #3 you can see some coordination models that can be used in choosing specific
suppliers for the activities of Softi that the firm would like to outsource in a result of the new
strategy with using SaaS. A few previously in-house activities will be assigned to external
executors. They will be given information about:
10 IBM Integrated Supply Chain Case Study – Belitov, Elenkov, Aleksandrov

· Expectations and orders;


· Expected financial flows;
· Provision of ITC(Instrumental trans-communication - communication through any sort
of electronic device such as tape recorders, fax machines, television sets or computers)
connectivity;
Particular method for applying the above techniques for using supply network strategy as
means of efficient outsourcing for Softi is the implementation of the so called Supplier
Relationship Management.

Supply relationship management (SRM) is a business process for managing all contacts
between an organizational and its suppliers. Supplier in SRM is used generically: It refers to
any organization that sells something to the organization that has the SRM application. Thus,
in this generic sense, a manufacturer is a supplier to a distributor. SRM software is especially
relevant to finding and assessing vendors. Some SRM applications have features to search for
product sources and to find evaluations of vendors and products.1 (Figure #7)

The SRM application also possesses the following features:

1. Request of information, proposals of would-be suppliers


2. Management of the approval workflow
The activities and the vendors for Softi external activities are chosen according to the SRM
application model. They include:

· Hardware supply from IBM, Dell, etc.


· Infrastructure supply from Interoute, ITD, Euro.net, etc.
· Web design supply from a few small companies
· Supply of custom software solutions from a few small companies
These activities and companies are put into a supply chain as Figure #8 shows.

Expected impact on Softi

As a result of the decisions made on the future of Softi, the company should be able to
provide a number of new services to its existing customers. By diversifying the product range

1
David Kroenke`s textbook “Using MIS”, University of Washington
11 IBM Integrated Supply Chain Case Study – Belitov, Elenkov, Aleksandrov

and satisfying customer demand, Softi is going further on the value-added chain. This way the
company should be able to gain a significant advantage over its local competitors.

In the short run, Softi will have to undergo certain restructuring which may lead to worse
financial results – investing in a new project is expensive; by outsourcing some activities, the
company loses a significant part of its profit. In the long run, though, the investments in SaaS
should provide the possibility for higher growth and greater customer base. By implementing
SaaS and succeeding in the supply chain management process, Softi will be able to focus on a
single core activity and this specialization will reduce development costs. Softi will create
standardized, high quality products, which will cut operational costs as well.

Overall, Softi is expected to achieve great financial results in the long run. The new types of
services provided will create the opportunity for becoming one of the leading software
companies in Bulgaria. The SaaS market is expected to grow dramatically in the next few
years and Softi will be one of the leaders on this emerging market.

Practical Part

Evaluation Criteria and Payroll Department Characteristics

In order to evaluate the three options for the Payroll/Data Entry departments, we decided to
establish our own evaluation criteria. Each one has a different weight according to its
importance. We are trying to make the system as objective as possible – the best option will
receive the maximum points. If another option has slightly worse evaluation according to a
certain criterion, it will get one point less than the maximum. After we evaluate each of the
options according to the criteria, we will make a decision regarding Softi’s payroll
department. The criteria total to 25 points, each criteria having a different weight. (Table #4)

Why are these criteria important in making the decision?

1. Knowledge of Law/Procedures: This is probably the most important criteria in


evaluating all the options for the Accounting and Data-Entry department positioning
of Softi Ltd. Poor knowledge of the law or the procedures may lead to government
sanctions, may cause additional expenses or completely block all company activities
due to a state-ordered audit.
2. When the company is mostly customer-focused important deals may be threatened by
slow response time – if any invoice or contract is not processed in time the company
12 IBM Integrated Supply Chain Case Study – Belitov, Elenkov, Aleksandrov

may eventually lose money or clients. State-required documents will also have to be
processed according to the established deadlines. Any disruption of the normal
documentation flow is incurring loses to the company.
3. The salary expenses are a constant burden on the company budget. Any money spent
for salaries will not be available for other company activities – including developing
new technology, renewing company equipment and so on.
4. Softi cannot afford losing sensitive information (e.g. personal data about employees or
clients). Confidentiality and data security are crucial for protecting the company’s
reputation.
5. Cultural and language barriers may prevent the communication and data-processing
process. This may lead to hidden expenses (paying for translation services or language
education). Also, the company culture may not be easily adopted or educated to people
that do not work in-house.
6. Communication expenses include the price for Internet connectivity, phone bills,
traveling expenses that may arise when performing these kinds of services.

Before choosing a Payroll/Data Entry Solution for Softi we should make a virtual scheme of
these departments in order to take a clear picture for the possible options. The first option is to
keep the activities within the company and to face the costs, accepting the fact that some other
operations may get lower funding.Considering this option, we should be clear as to what are
the well-defined outlines of the departments. The payroll/data-entry departments generally
include the following characteristics:

· The information necessary about the evaluation of the salaries is collected on a


monthly base and so is the way the salaries are paid. This information is mainly
received electronically.
· Specially programmed files are necessary to put all needed data for the evaluation of
remunerations. This prevents the company from mistakes and lack of incoming data.
Some of the documents have to be kept on paper – copies of contracts, additional
agreements, patient’s charts and certificates of previous employers.
· The people working in the department have to possess knowledge about various types
of contracts – labor relations, control and management, civil contracts – and different
schemes of remuneration – “gross to net salary”, “net to gross salary”, various bonus
13 IBM Integrated Supply Chain Case Study – Belitov, Elenkov, Aleksandrov

systems – cash payments and payments in kind, additional payments according to


labor code and evaluation of salaries negotiated in foreign currency.
· The general monthly-based recapitulation is given to the accounting department – it is
not worked out in details about employees and includes only general sums and data.
· The outgoing detailed monthly information should be given to one authorized person.
· The payroll department should prepare the verifications that National Insurance
Institute and National Statistical Institute require about the salaries on a monthly, ¼
year and per year base.
· Part of the payroll department obligations is the payment of the salaries itself.
· The payment of the net salaries as well as the relevant taxes and insurance fees should
be accomplished electronically – via special employee’s account opened only for the
salary’s payments and not for running trade payments.
· External relations with qualified tax and law experts who can help with hard payment
causes are needed.

First Option: Operating an In-House Payroll System

Sometimes keeping payroll operations in-house is viewed as the less expensive option.

Keeping this function inside “Softi” might also provide the company with greater flexibility
as to when the payroll is run and how payments are made to employees. There might also be
relevant expertise and capacity for current staff to prepare the salaries of the employees,
particular if the same persons or department also handle the company’s accounting and
bookkeeping functions.1

So, examining Softi’s options for the departments mentioned above we would use the SWOT
analysis.

S.W.O.T. Analysis for in-house payroll/data-entry departments

1. Strong points

1.1. Quickness of reactions – the time for bringing a document to the management is less
when having own data entry and payroll employees

1
http://www.completeformations.co.uk/running-payroll.html
14 IBM Integrated Supply Chain Case Study – Belitov, Elenkov, Aleksandrov

1.2. Preciseness of data – the information losses and damages are reduced to minimum
1.3. Better look at the firm’s environment – the detailed documents demand good
understanding of the processes in the company. In the case of in-house departments this
can be easily achieved
1.4. Greater flexibility as to when the payroll is run and how payments are made

2. Weak points

2.1. Softi is required to employ administrative staff and resouces to run the system
2.2. In-house departments may suffer from lack of knowledge and expertise that external
suppliers can ensure
2.3. Shortage of specialization – the in-house employees may not have the specialized
features of doing a particular task with no mistakes and delays

3. Opportunities

3.1. Many young university students expect to take a diploma in accounting as these
financial subjects have become very popular in Bulgaria recently. This will lead to cheep
and professional labor force.
3.2. Other departments of Softi can develop or buy software which supports payroll
characteristics – this will lower the requirements about the possessed knowledge and the
level of salaries.
3.3. The competition in the Bulgarian finance sector is raising and as a result this will
raise prices offered by possible suppliers
3.4. The world economic crisis can damp the relations between companies and suppliers
which can result in more in-house activities with less information expenses

4. Threats

4.1. Possible employees of high quality for other departments may prefer to be hired by a
company using well-known payroll and data-entry supplier with high reputation.
4.2. The career-development desire of Softi’s payroll stuff may make them gain some
experience and leave to search for more complicated job.
4.3. The level of specialized education in accounting is still not a high one so
inexperienced personnel may cause some implicit costs.
15 IBM Integrated Supply Chain Case Study – Belitov, Elenkov, Aleksandrov

Based on the SWOT analysis and the evaluation criteria, we can make the following
evaluation of the in-house option

Evaluation criterion Based on Points From total points

Knowledge of Law/Procedures 1.2., 2.2., 3.1., 4.3. 4 5

Expected Response Time and 1.1., 3.1. 5 5


Continuity of Service

Salary or Contract Expenses (This 1.4., 2.1., 3.2., 3.3. 2 5


includes office rental costs)
Data Security and Confidentiality 1.3., 2.2., 4.2. 4 5

Cultural and Language Barriers 1.1., 3.1. 3 3

Communication Expenses 1.1., 2.3., 3.4., 4.1. 2 2

Total 1.*, 2.*, 3.*, 4.* 20 25

Second option: Outsource Payroll activities to Vietnam

Outsourcing “Softi” `s payroll and accounting data activities to Vietnam is the second option
put into consideration. In the following lines we are going to fully analyze this case with all
its advantages and disadvantages.

1. The first step of making an industry analysis is to identify the key elements of the
industry`s structure. Corporations and industries in which they operate are connected
in a broad environment which impacts greatly both of them. It has influence on their
competitiveness and efficiency. That is why first we make Vietnam outsourcing
industry overview. The most important facts are:
· Government policy – there is no indication that the policy situation in Vietnam may
undergo any distinctive changes in the next few years1. The outsourcing industry has a
strong government support which consists of software parks (HCMC, Danang Softech,
Hanoi IT park), tax incentives, private IT universities and policy that allows 100%
foreign ownership for start-up companies and businesses.

1
“IBM Integrated Supply Chain”, Vietnam case study file
16 IBM Integrated Supply Chain Case Study – Belitov, Elenkov, Aleksandrov

· Financing – The sector is financed by a few local banks and by investment funds such
as IDG, IFC, MEF, Dragon Capital
· Customers – Except the domestic customers there are foreign ones which primary
purpose is outsourcing (USA, EU, Japan)
· Targets to 2010 – The government needs $150 billion to support its economic growth
targets until 2010 and 35% of that is expected to come from foreign investors.The
government of Vietnam is targeting an average gross domestic product (GDP) growth
of 8-8.5% from 2007 to 2010, and it is counting on foreign direct investments to
achieve that goal, according to a senior government official1
· Already outsourcing in Vietnam – IBM, Oracle, Microsoft, Sony, NEC, Hitachi,
Lucent, Sanyo, Intel, Fujitsu, Nortel
· Outsourcing payroll – It is a relatively new concept in this country. HR2B has been
professionally serving customers since 2005. According to their web site, in 2007,
HR2B served over 100 clients with accurate and on time employee payroll services

2. The second step is the strategic planning method SWOT analysis and evaluation of the
option. According to the facts in step 1, we can classify the advantages and
disadvantages.

S.W.O.T. Analysis for outsourcing payroll/data-entry departments in Vietnam

1.Strong points

1.1. There is a good supply of intelligent people


1.2. Young and cheap work force
1.3. Low attrition and low cost
1.4. No need to recruit and train specialists

2.Weak points

2.1. Cultural differences


2.2. Risky consumer and mobile phone applications, due to a traditional lack of respect for
intellectual property
2.3. No knowledge of Bulgarian Law system

1
“Vietnam targets $52.5 billion in FDI”, Rita Raagas De Ramos, FinanceAsia.com, 1st November 2007
17 IBM Integrated Supply Chain Case Study – Belitov, Elenkov, Aleksandrov

2.4. Poor communication skills


2.5. Slow and expensive Internet

3.Opportunities

3.1. Demand for low cost offshore resources


3.2. Rising costs in competitive countries (e.g. India)
3.3. Gaining a lot of time in the absence of payroll activities
3.4. Compliance monitoring in Vietnam is increasing

4.Threats

4.1. Confidentiality issues with people, systems and space (sharing too much, mails with
unprotected information, keeping salary data on shared drives, inexperienced staff, leaving
payroll data unlocked for a period of time, etc)
4.2. Severe competition from countries like China and India
4.3. Slow Internet improvement

As a conclusion, we can say that the objective of outsourcing these Softi`s activities in
Vietnam is attainable as an option. Based on the SWOT analysis and the evaluation criteria
the following evaluation of the Vietnam option can be made:

Evaluation criterion Based on Points From total points

Knowledge of Law/Procedures 2.3. 1 5

Expected Response Time and 2.2., 2.4., 2.5., 3.3., 4.3. 3 5


Continuity of Service

Salary or Contract Expenses (This 1.1., 1.2., 1.3., 1.4., 5 5


includes office rental costs) 2.5., 3.2.

Data Security and Confidentiality 2.2., 2.5., 3.4., 4.1., 4.3. 3 5

Cultural and Language Barriers 2.1., 2.3., 4.1. 2 3

Communication Expenses 1.3., 2.4., 2.5., 4.3. 1 2

Total 1.*, 2.*, 3.*, 4.* 15 25


18 IBM Integrated Supply Chain Case Study – Belitov, Elenkov, Aleksandrov

3. In the process of looking for a outsource partner it is very important to evaluate all the
risks, costs and service provided.
Our current payroll costs consist of number of employees and their salaries, training staff,
office rental and utilities costs, parking, transport, computer hardware and software whereas
Vietnam option unites them in two costs – paying for the service and communication cost.

Third option: Using Bulgarian specialized suppliers` services

When considering the option of outsourcing the Payroll activities to a specialized Bulgarian
company, there are a few things that the management of Softi should pay attention to. The
economic fluctuations will probably affect both Softi and their partner and they may not be
that relevant in evaluating this possible scenario. An external company will add up relatively
cheap expertise to Softi’s operations and may significantly cut costs as a contract for Payroll
service for a medium-sized company is currently worth around 1500-2000BGN/month.

If Softi chooses to hire an external Bulgarian accounting company to handle all accounting
issues for it, the company will probably face the following conditions:

S.W.O.T. Analysis for outsourcing payroll/data-entry departments to a Bulgarian


company

1. Strong points

1.1. Bulgarian companies specialized in providing Payroll services are supposed to have
good formal knowledge of the established procedures and laws.
1.2. Softi will not be required to pay salaries for two whole departments and can utilize all
resources (salaries, computers, office space) that the current payroll/data-entry departments
are using. Softi can invest more resources to its core activities this way.
1.3. All documents will be processed by native speakers and presented in a professional
form to all institutions
1.4. The contract with the external company will include proper data security guarantees
and non-disclosure agreements.
19 IBM Integrated Supply Chain Case Study – Belitov, Elenkov, Aleksandrov

2. Weak points

2.1. Softi may be required to employ a minimal administrative staff and resouces in-house
to that may serve as a “bridge” to the external company in order to provide timely services
2.2. Communication expenses will be higher than in the in-house option – phone
conversations, faxing or e-mailing documents, etc.
2.3. An external company may have a slower response time and may not be able to
properly prioritize issues as an in-house employee is supposed to do
2.4. Data security may be an issue – Softi will have minimal control over the document
storage and processing processes in the external company

3. Opportunities

3.1. Having a professional payroll/accounting company working for Softi will not require
the provisioning of proper, qualified staffing which may be slow and expensive nowadays.
3.2. Another Bulgarian company’s price levels are expected to fluctuate in the same way as
of those of all other companies which makes Bulgarian payroll providers a desired partner.

4. Threats

4.1. The transition period may create issues with supplying the documents and performing
the payroll activities on time which may affect proper operations.
4.2. The competition in the Bulgarian finance sector is raising and as a result this may raise
prices offered by possible suppliers
4.3. The world economic crisis can damp the relations between companies and suppliers
which can result in more in-house activities with less information expenses

Based on the SWOT analysis and the evaluation criteria, we can make the following
evaluation of the “Outsource in Bulgaria” option:

Evaluation criterion Based on Points From total points

Knowledge of Law/Procedures 1.1., 1.3. 5 5

Expected Response Time and 1.3., 2.3., 3.1., 4.1. 4 5


Continuity of Service
20 IBM Integrated Supply Chain Case Study – Belitov, Elenkov, Aleksandrov

Salary or Contract Expenses (This 1.2., 2.1., 3.2., 4.2. 4 5


includes office rental costs)
Data Security and Confidentiality 1.4., 2.4. 4 5

Cultural and Language Barriers 1.3. 3 3

Communication Expenses 2.2., 4.3. 1 2

Total 1.*, 2.*, 3.*, 4.* 21 25

Our Decision – Outsourcing to Bulgaria

Based on the established criteria and the analysis and evaluations performed, our choice is to
outsource the Payroll activities to a Bulgarian company. Using a highly specialized provider
is currently a more efficient option than keeping excessive internal departments or
outsourcing to Vietnam. The main problems identified in Vietnam are mostly geographical
and cultural. Despite the fact that Vietnam is the cheapest solution for contract prices, the
hidden expenses that may occur and the level of risk make it not a suitable option for Softi.

Keeping the in-house departments happens to be too costly. Potential human resources
problems are also a risk for the continuity of operations.

The best option identified seems to be outsourcing to a specialized Bulgarian company. This
happens to be one of the most common solutions used in mid-sized IT companies like Softi.
There are again a few risks and weak points but those are compensated by the expertise and
experience that a specialized payroll company can provide for Softi.
21 IBM Integrated Supply Chain Case Study – Belitov, Elenkov, Aleksandrov

Appendix

Figure #1 - “Architecture strategies for catching the long tail",Frederick Chong and
Gianpaolo Carraro
Microsoft Corporation, April
2006

Figure #2 - “Architecture
strategies for catching the
long tail",Frederick Chong
and Gianpaolo Carraro
Microsoft Corporation,
April 2006
22 IBM Integrated Supply Chain Case Study – Belitov, Elenkov, Aleksandrov

Figure #3 -
“Architecture strategies for catching the long tail",Frederick Chong and Gianpaolo Carraro
Microsoft Corporation, April 2006

Figure #4
23 IBM Integrated Supply Chain Case Study – Belitov, Elenkov, Aleksandrov

Figure #5 - From “From Supply Chain Network


Orientation to Supply Chain Network
Management” by Ana Maria García Pérez and
Marian García Martínez - Paper prepared for
presentation at the I Mediterranean Conference
of Agro-Food Social Scientists. 103rd EAAE
Seminar ‘Adding Value to the Agro-Food Supply
Chain in the Future Euro-Mediterranean Space’.
Barcelona, Spain, April 23rd - 25th, 2007

Figure #6 - From “Out of the shadows: Why supply chain strategy should be at the top of the
corporate agenda” – Deloitte

Figure#7 - from David Kroenke`s textbook “Using MIS”, University of Washington


24 IBM Integrated Supply Chain Case Study – Belitov, Elenkov, Aleksandrov

Figure#8

SaaS four levels of maturity

• Level 1 – Moving from customized versions of hosted applications to SaaS. It


typically requires the least development efforts and reduces operating costs by
consolidating server hardware and administration. (Ad Hoc\Custom)

+ configurability =

• Level 2 – Achieving greater program flexibility through configurable metadata.


The result is that a lot of customers can use separate instances of the same
application code. This allows the vendor to meet the different needs of each
customer through detailed configuration options, while simplifying maintenance
and updating of a common code base. (Configurable)

+ multi-tenant efficiency =

• Level 3 – A single program instance serves all customers. This enables more
efficient use of server resources. Still, the process is limited in its scalability.
(Configurable, Multi-Tenant-Efficient)

+ scalability =

• Level 4 – This is the final SaaS maturity level where scalability is added through a
multitier architecture supporting a load-balanced farm of identical application
instances, running on a variable number of servers. The system's capacity can be
increased or decreased to match demand by adding or removing servers, without
the need for any further alteration of application software architecture.
(Configurable, Multi-Tenant-Efficient, Scalable)

Table #1 – SaaS four levels of maturity


25 IBM Integrated Supply Chain Case Study – Belitov, Elenkov, Aleksandrov

Important points of consideration before implementing SaaS

1. The major factors in Bulgarian IT branch

2. The world finance crisis and its present and expected future impact on
Bulgarian IT sector

3. ROI (return of investment), TCO (total cost of ownership) analysis, MRPII


(material requirements planning, second edition)

4. Depreciation of existing software and software services

5. Single or multi-vendor solutions

6. Standardized or customized services

7. Several pricing models possible

8. Identity and Access Management

9. Logging and monitoring

10. Security, avoiding risks and protection

Table #2 – Important points of consideration before implementing SaaS

Table #3 - - From “Network Master & Three Dimensions of supply network coordination: an
introductory essay” by James. B. Rice, Jr and Richard M. Hoppe - Integrated Supply Chain
Management (ISCM) Program at the MIT Center for Transportation Studies.
26 IBM Integrated Supply Chain Case Study – Belitov, Elenkov, Aleksandrov

Criteria Weight

Knowledge of Law/Procedures 5 points

Expected Response Time and Continuity of Service 5 points

Salary or Contract Expenses (This includes office rental costs) 5 points

Data Security and Confidentiality 5 points

Cultural and Language Barriers 3 points

Communication Expenses 2 points

Total 25 points
Table #4- Evaluation Criteria for choosing Accounting/Data Entry solution for Softi Ltd.