LET'S ROCK! CHAPTER 19: OUTSOURCING IN THE 21st CENTURY

OUTSOURCING PROJECTS

Insourcing (in-house development) is a common approach using the professional expertise within the organization to develop and maintain the organization’s information technology system.

Outsourcing is an arrangement by which one organization provides a service or services for another organization that chooses not to perform them in-house.

FORMS OF OUTSOURCING OPTIONS

·         Onshore outsourcing – engaging another company within the same country for services

·         Nearshore outsourcing – contracting an outsourcing arrangement with a company in a nearby country, often this country will share a border with a native country.

·         Offshore outsourcing – using organizations from developing countries to write code and develop systems. In offshore outsourcing the country is geographically far away.

INFLUENTIAL DRIVERS AFFECTING THE GROWTH OF THE OUTSOURCING MARKET

·         Core competencies – outsourcing enables an organization to maintain an up-to-date technology infrastructure while freeing it to focus on revenue growth goals by reinvesting cash and human capital in areas offering the greatest return on investment.

·         Financial savings – typically cheaper to hire workers in China and India than similar workers in the United States.  Technology is advancing at such an accelerated rate that companies often lack the resources, workforce, or expertise to keep up.

·         Rapid growth – an organization is able to acquire best- practices process expertise. This facilities the design, building, training and employment of business processes and functions.

·         Industry changes – high levels of reorganization across industries have increased demand for outsourcing to better focus on core competencies. The significant increase in merger and acquisition activity created in sudden need to integrate multiple core and noncore business functions into one business.

·         The Internet – barriers to entry such as lack of capital, are dramatically reduced in the world of e-business due to the internet. New competitors enter the market daily.

·         Globalization – as market opens worldwide, competition heats up. Companies may engage outsourcing service providers to deliver international services.

OUTSOURCING BENEFITS

1. ·         Increased quality and efficiency of a process, service, or function
2. ·         Reduced operating expenses
3. ·         Resources focused on core profit-generating competencies
4. ·         No costly outlay of capital funds
5. ·         Reduced time to market for products or services
6. ·         Reduced head count and associated overhead expenses

OUTSOURCING CHALLENGES

·         Contract length – most of the outsourced IT contracts are for a relativity long time period. This is because of the high cost of transferring assets and employees as well as maintaining technological investment. The long contract causes three particular issues:

1.    Difficulties in getting out of contract if the outsourcing service provider turns out to be unsuitable.

2.    Problems in foreseeing what the business will need over the next 5 or 10 years, hence creating difficulties is establishing an appropriate contract.

3.    Problems in reforming an internal IT department after the contract period is finished.

·         Competitive edge – a competitive business advantage provided by an internal IT department that understands the organization and is committed to its goals can be lost in an outsourced arrangement. In an outsourced arrangement, IT staff are striving to achieve the goals and objectives of the outsourcing service provider, which may conflict with those of the organization.

·         Confidentiality – the organization must assess the potential risk and cost of a confidentiality breach in determining the net benefits of an outsourcing arrangement.

·         Scope definition – the services required is within the contract scope while the service provider is sure it is outside the scope and so is subject to extra fees.