As a student, you were invited by the Dean of the Institute of Computing to attend a seminar-workshop on information systems planning with some of the faculty members. In one of the sessions, a discussion of outsourcing came up. You have been asked to present your evaluation about outsourcing the information systems functions of the school.
Required:
You are to take a position- outsource or in-source and justify your position. (3000words)
Given a chance to be invited by the Dean of the Institute of Computing to attend a seminar-workshop on information systems planning with some of the faculty members, I will present an evaluation about Outsourcing. I will discuss to them the benefits about outsourcing, the advantages and disadvantages.
Lets identify first the outsourcing and in sourcing.
Outsourcing vs. In-sourcing
Outsourcing - refers to a company that contract with another company to provide services that might otherwise be performed by in-house employees. Many large companies now outsource jobs such as call center services, e-mail services, and payroll. These jobs are handled by separate companies that specialize in each service, and are often located overseas.
Insourcing - is a business practice in which work that would otherwise have been contracted out is performed in house.
Insourcing often involves bringing in specialists to fill temporary needs or training existing personnel to perform tasks that would otherwise have been outsourced. An example is the use of in-house engineers to write technical manuals for equipment they have designed, rather than sending the work to an outside technical writing firm. In this example, the engineers might have to take technical writing courses at a local college, university, or trade school before being able to complete the task successfully. Other challenges of insourcing include the possible purchase of additional hardware and/or software that is scalable and energy-efficient enough to deliver an adequate return on investment (ROI).
Insourcing can be viewed as outsourcing as seen from the opposite side. For example, a company based in Japan might open a plant in the United States for the purpose of employing American workers to manufacture Japanese products. From the Japanese perspective this is outsourcing, but from the American perspective it is insourcing. Nissan, a Japanese automobile manufacturer, has in fact done this.
Why Outsourcing?.....
Outsourcing in general can be defined as passing of service provision or production to another internal or external party. The chief reason of outsourcing is to reduce capital expenditure over a business process. Also management gets more time to concentrate over core competencies. This also reduces the dependency upon internal resources and increases the flexibility to meet the changing business and commercial conditions.
Outsourcing allows companies to focus on other business issues while having the details taken care of by outside experts. This means that a large amount of resources and attention, which might fall on the shoulders of management professionals, can be used for more important, broader issues within the company. The specialized company that handles the outsourced work is often streamlined, and often has world-class capabilities and access to new technology that a company couldn't afford to buy on their own. Plus, if a company is looking to expand, outsourcing is a cost-effective way to start building foundations in other countries. Outsourcing is an arrangement in which one company provides services for another company that could also be or usually have been provided in-house. Outsourcing is a trend that is becoming more common in information technology and other industries for services that have usually been regarded as intrinsic to managing a business. In some cases, the entire information management of a company is outsourced, including planning and business analysis as well as the installation, management, and servicing of the network and workstations. Outsourcing can range from the large contract in which a company like IBM manages IT services for a company like Xerox to the practice of hiring contractors and temporary office workers on an individual basis.
There are some disadvantages to outsourcing as well. One of these is that outsourcing often eliminates direct communication between a company and its clients. This prevents a company from building solid relationships with their customers, and often leads to dissatisfaction on one or both sides. There is also the danger of not being able to control some aspects of the company, as outsourcing may lead to delayed communications and project implementation. Any sensitive information is more vulnerable, and a company may become very dependent upon it’s outsource providers, which could lead to problems should the outsource provider back out on their contract suddenly.
While outsourcing may prove highly beneficial for many companies, it also has many drawbacks. It is important that each individual company accurately assess their needs to determine if outsourcing is a viable option.
There are many reasons that companies outsource various jobs, but the most prominent advantage seems to be the fact that it often saves money. Many of the companies that provide outsourcing services are able to do the work for considerably less money, as they don't have to provide benefits to their workers and have fewer overhead expenses to worry about.
In this journal, How Outsourced IT Provided Wireless for the Citizens Cut the Crime Rate, and Helped Minneapolis during a Crisis. This explains the relationship's goal was to make IT valuable to the city's agencies and voters. The City of Minneapolis wanted to outsource its IT infrastructure, which eventually included management of its security cameras and 911 applications; everything was past end of life. The city also needed to build a tier-3 data center.
Only a limited number of suppliers responded to the city's original RFP because the city council required the supplier to hire up to 20 of its staff and locate the data center in Minnesota. "Those requirements reduced the number of finalists to two suppliers that could provide the service," says Willenbring.
Outsourcing in general can be defined as passing of service provision or production to another internal or external party. The chief reason of outsourcing is to reduce capital expenditure over a business process. Also management gets more time to concentrate over core competencies. This also reduces the dependency upon internal resources and increases the flexibility to meet the changing business and commercial conditions.
Lessons from the Outsourcing Journal:
• Technology can improve safety and the quality of life in a community. Suppliers become deeply involved in these types of outsourcing relationships because they see the palpable results and take pride in their work.
• Investing in futuristic IT infrastructure helps cities deal with unexpected disasters. Having an outsourcing supplier there to help contributes to a successful intervention.
• Second-generation outsourcing contracts often attack strategic projects after the first generation tackled the tactical issues.
Here are other advantages of outsourcing that go beyond money. Here are the top seven advantages of outsourcing.
1. Focus On Core Activities
In rapid growth periods, the back-office operations of a company will expand also. This expansion may start to consume resources (human and financial) at the expense of the core activities that have made your company successful. Outsourcing those activities will allow refocusing on those business activities that are important without sacrificing quality or service in the back-office.
Example: A company lands a large contract that will significantly increase the volume of purchasing in a very short period of time; Outsource purchasing.
2. Cost And Efficiency Savings
Back-office functions that are complicated in nature, but the size of your company is preventing you from performing it at a consistent and reasonable cost, is another advantage of outsourcing. Economies of scale save money when unit costs go down as volumes increase. External service providers can achieve economies of scale unavailable to individual firms when they combine the volumes of multiple companies.
In manufacturing, for example, an external vendor may have a shop that specializes in a certain type of machining. The machinery represents a significant capital investment. If larger machines are more efficient, and if they can be used to produce any sort of parts for any customer, then this vendor may very well produce parts at a lower cost than a firm could by setting up such a shop internally.
Economies of scale are not limited to physical processes. Other precious assets -- including money, relationships, and people -- may be shared.
The pharmaceuticals industry can be used to illustrate economies of scale in relationships. Clinical trials of experimental drugs require just the right patients -- healthy in most all respects but the one indication being treated, and willing to submit themselves to experimentation. It takes a significant investment of time and money to develop relationships with the hospitals and clinicians (and the triage nurses in their emergency rooms) that supply patients for the trials.
Clinical trials also require just the right medical investigators -- doctors and medical researchers who are well respected in their industries. Again, it takes size to attract the best investigators. The most sought-after investigators look for organizations that can supply them with interesting and publishable research projects and with support services (such as data collection and well-managed processes) that make their jobs easier and their results more reliable.
And so a lucrative outsourcing industry has evolved to manage clinical trials of experimental drugs for pharmaceutical companies. [The author thanks Patricia Seymour, Covance Biotechnology Services, Research Triangle Park, North Carolina, for this case study.]
To be specific, there are three conditions that must be met before outsourcing saves money:
1. Economies of scale must exist. That is, there must be some economic advantage to larger size or greater numbers before outsourcing can pay off; for example, unit costs must drop as volumes increase.
2. The economies must be accessible across corporate boundaries. That is, savings only occur if outsourcers can combine the volumes of multiple clients.
For example, it's easy for many companies to share the huge fixed costs of a telecommunications infrastructure owned by long-distance carriers. Laying one's own fiber or leasing a private satellite channel is unlikely to be economic, so outsourcing is an obvious choice.
However, outsourcing an IT computer center may not work as well, since hardware may not offer significant economies of scale and many software licenses are corporation-specific.
3. The savings must be sufficient to outweigh the additional cost of paying other shareholders a profit.
Some executives have said that at least a 20% savings (after vendor profit margins) is necessary to compensate the firm for the legal costs and the risks of long-term dependence on people you can’t control.
Example: A small doctor’s office that wants to accept a variety of insurance plans. One part-time person could not keep up with all the different providers and rules. Outsource to a firm specializing in medical billing.
3. Reduced Overhead
Overhead costs of performing a particular back-office function are extremely high. Consider outsourcing those functions which can be moved easily.
Example: Growth has resulted in an increased need for office space. The current location is very expensive and there is no room to expand. Outsource some simple operations in order to reduce the need for office space. For example, outbound telemarketing or data entry.
4. Operational Control
Operations whose costs are running out of control must be considered for outsourcing. Departments that may have evolved over time into uncontrolled and poorly managed areas are prime motivators for outsourcing. In addition, an outsourcing company can bring better management skills to your company than what would otherwise be available.
Example: An information technology department that has too many projects, not enough people and a budget that far exceeds their contribution to the organization. A contracted outsourcing agreement will force management to prioritize their requests and bring control back to that area.
5. Staffing Flexibility
Outsourcing will allow operations that have seasonal or cyclical demands to bring in additional resources when you need them and release them when you’re done.
Example: An accounting department that is short-handed during tax season and auditing periods. Outsourcing these functions can provide the additional resources for a fixed period of time at a consistent cost.
6. Continuity & Risk Management
Periods of high employee turnover will add uncertainty and inconsistency to the operations. Outsourcing will provided a level of continuity to the company while reducing the risk that a substandard level of operation would bring to the company. Internal staff has a history with the firm that provides them with a better understanding of clients' businesses, strategies, people, cultures and politics. And with the expectation of continuity, people know they'll be around to deal with the consequences of their actions. All else being equal, this results in improved partnerships, which pay off in both greater client satisfaction and improved strategic alignment.
Example: The human resource manager is on an extended medical leave and the two administrative assistants leave for new jobs in a very short period of time. Outsourcing the human resource function would reduce the risk and allow the company to keep operating.
7. Develop Internal Staff
A large project needs to be undertaken that requires skills that your staff does not possess. On-site outsourcing of the project will bring people with the skills you need into your company. Your people can work alongside of them to acquire the new skill set.
Well-managed outsourcing can enhance the development of employees. Two strategies can accomplish this:
1. Contractors can be used to off-load less interesting "commodity" or end-of-life work, or to handle peak loads. This leaves staff free to pursue new, developmental opportunities.
On the other hand, contractors should never be used to perform new, growth-oriented activities while internal staff is left with obsolescent work. This would deny staff learning opportunities, while building dependence on the vendor. Perhaps worse, it sends a message to staff that the company is not willing to invest in their professional growth.
2. Consultants and vendors can be used to bring in new ideas and to train internal staff.
It might be useful to distinguish two terms: External "consultants" transfer their skills and methods to improve employees' effectiveness; they teach staff, often while working together on real projects. Consultants may be used by anyone whenever justifiable, since the benefits are lasting.
There are many cases that meet these four criteria where outsourcing pays off. But each case must be examined carefully to make sure the fundamentals are there. Remember: Paying other shareholders a profit margin makes outsourcing inherently more expensive. It's only worthwhile if these other benefits compensate the firm for its added costs.
Example: A company needs to embark on a replacement/upgrade project on a variety of custom built equipment. Your engineers do not have the skills required to design new and upgraded equipment. Outsourcing this project and requiring the outsourced engineers to work on-site will allow your engineers to acquire a new skill set.
If the outsourcing disadvantages outweigh the advantages of outsourcing, then you should avoid outsourcing those operations.
Disadvantages of Outsourcing
• Lose of control
• Quality problems
• Slow response time
• Can't understand foreign accents
• >Slow resolution times
• Can't produce desired results
• Reduced sales
• Irritated customers
• >Irritated employees, unions, people within community
1. Loss Of Managerial Control
Whether you sign a contract to have another company perform the function of an entire department or single task, you are turning the management and control of that function over to another company. True, you will have a contract, but the managerial control will belong to another company. Your outsourcing company will not be driven by the same standards and mission that drives your company. They will be driven to make a profit from the services that they are providing to you and other businesses like yours.
2. Hidden Costs
You will sign a contract with the outsourcing company that will cover the details of the service that they will be providing. Any thing not covered in the contract will be the basis for you to pay additional charges. Additionally, you will experience legal fees to retain a lawyer to review the contacts you will sign. Remember, this is the outsourcing company's business. They have done this before and they are the ones that write the contract. Therefore, you will be at a disadvantage when negotiations start.
3. Threat to Security and Confidentiality
The life-blood of any business is the information that keeps it running. If you have payroll, medical records or any other confidential information that will be transmitted to the outsourcing company, there is a risk that the confidentiality may be compromised. If the outsourced function involves sharing proprietary company data or knowledge (e.g. product drawings, formulas, etc.), this must be taken into account. Evaluate the outsourcing company carefully to make sure your data is protected and the contract has a penalty clause if an incident occurs.
4. Quality Problems
The outsourcing company will be motivated by profit. Since the contract will fix the price, the only way for them to increase profit will be to decrease expenses. As long as they meet the conditions of the contract, you will pay. In addition, you will lose the ability to rapidly respond to changes in the business environment. The contract will be very specific and you will pay extra for changes.
5. Tied to the Financial Well-Being of Another Company
Since you will be turning over part of the operations of your business to another company, you will now be tied to the financial well-being of that company. It wouldn't be the first time that an outsourcing company could go bankrupt and leave you holding-the-bag.
6. Bad Publicity and Ill-Will
The word "outsourcing" brings to mind different things to different people. If you live in a community that has an outsourcing company and they employ your friends and neighbors, outsourcing is good. If your friends and neighbors lost their jobs because they were shipped across the state, across the country or across the world, outsourcing will bring bad publicity. If you outsource part of your operations, morale may suffer in the remaining work force.
Another disadvantage is that outsourcing can also prove to be a threat to the security and confidentiality of issues of a company. If your company is outsourcing business process such as payroll, confidential information such as salary will be known to the outsourcing service provider. Therefore one must be very careful in choosing which business process to outsource and which one not.
Outsourcing may also result into the possible loss of flexibility in reacting to changing business conditions, lack of internal and external customer focus and sharing cost savings. Loss of internally generated talent is yet another problem associated with the outsourcing as it may hamper the growth of an employee by depriving him from the experience he would have gained by handling the business issue himself then by passing it over to some other external party.
Thus before a company decides to outsource its business process, it must examine all the factors carefully. It may not happen that outsourcing becomes a reason for company to regret later.
http://www.wisegeek.com/what-is-outsourcing.htm
http://whatis.techtarget.com/definition/0,,sid9_gci1185946,00.html
http://www.softwareprojects.org/disadvantages-outsourcing.htm
http://search.yahoo.com/search?p=disadvantages+in+sourcing&fr=yfp-t-152&toggle=1&cop=mss&ei=UTF-8&fp_ip=PH
