In today's growing internet world, any organization would like to focus its attention on transferring its internal staff to the environment which can help them to stay competitive and cost-effective in coming future and outsourcing can prove to be one of the critical solutions for this.
IT outsourcing when implemented in a right way can provide lot of benefits for an organization like reduced production cost and implementation time, high quality, core competency, and flexibility. But in order to take advantage of these benefits, organizations have to take lot of factors into consideration while making their outsourcing decisions. These include identifying the type and scope of outsourcing as well taking right outsourcing decisions that completely synchronizes with their business strategy. To analyze the cost benefits, issues and the risk associated with outsourcing decision requires management to construct a framework or a set of criteria which can be used for examining their sourcing decisions. Such framework will allow organizations to examine various key components such as objectives, costs, culture compatibility, technical expertise and capabilities involved in making a right outsourcing decision with the external vendors.
Introduction:
In today's world, outsourcing is defined as the strategic means through which companies make contract with outside vendors to perform various IT functions or services such as data access, data center operations, software testing and maintenance, IT consulting, accounting, call centers and telemarketing, network administration and operations, etc in order to obtain high quality service, reduced production cost and implementation time, rather than just using it as a source for cost-saving to perform some specific functions. Vendors may be individual IT professionals, consulting firms, worker leasing companies, full-service providers as well as CPA firms.
Outsourcing has really redefined the way in which business is done today. The basic rule used today is “Outsource every IT activity that can be outsourced” (King 2007). Today technology is at its forefront and is accelerating at never ending pace. Internet has played a very important role in this technological change. Reliable communication networks which can operate 24*7 at almost zero latency have bridged the gap globally. Thus it makes little or almost no difference in whether IT services are done next door or are they performed 100 thousand miles away.
Outsourcing has become a latest trend adopted by almost every organization big or small and its impact can be seen all over the world. United States is being at the forefront of adopting outsourcing as a business strategy; however outsourcing is also growing rapidly in other regions such as Europe, Asia pacific and United Kingdom.
Information technology is the most popular area to be outsourced, occupying major percentage of overall outsourcing expenditures. In addition to information technology, outsourcing is also making stong headway in other areas such as financial services, human resources, maufacturing, marketing, management and customer services (Old, 1998). In this paper, we demeanor a secure examination of outsourcing decisions made by the companies and the various issues involved in IT outsourcing.
Context to the Problem:
In the present day, the volatility of information technology can swiftly make IT skills obsolete. Software is restructured and replaced very rapidly that by the time an individual invests within and trains its full-time staff, the technology may probably no longer be state-of-the-art. Again fierce competition has led a lot of businesses to restructure and rationalize staffs in an effort to save riches.
To date, most research on information technology (IT) outsourcing concludes that firms choose to outsource IT services as they believe that outside vendors acquire production cost advantages. But so far research shows that the outsourcing decisions made by the firms do not prove to provide 100% cost advantage all the time. The question here is what criteria should be used by individual firm's management team in order to decide on use of outsourcing. So it is necessary to closely inspect the IT outsourcing decisions made by the firms.
Problem Statement and Evidence:
IT outsourcing has been increasing constantly about 20 percent a year right from 1995 when Eastman Kodak started outsourcing its IT services. The amount of IT budget allocated for outsourcing has increased and reached 30 percent per year in 2000. In year 2001 spending on IT outsourcing services reached around $64 billion. Thought these numbers indicates rapid increase in outsourcing, client firms are still not able to figure out the criteria that should be used in order to get maximum value proposition from outsourcing IT services to vendors. A number of studies indicate that the important reason behind outsourcing is the need to reduce the IT operating costs and maximize the profits, followed by the need to improve management focus and access technical talent not available in-house (Casale 2001). Research shows that the expected benefits are not completely materialized and risk involved is significant. For example, one of study says that only 54 percent of the outsourcing agreements realized expected cost savings (Lacity & Willcocks 1998). Again a report from Gartner Dataquest claims that about one out of every three outsourcing contracts which are targeted towards reducing cost failed to match expectations (Caldwell 2002a, 2002b). Additionally, it is also seen that companies are thinking of canceling their outsourcing contracts with vendors and rebuilding their own in-house IS capabilities. Due to this variation in results of outsourcing, it is essential to understand why organizations outsource and what are the criteria's that management team should follow in order to take outsourcing decisions.
Types of Outsourcing:
Even if IT functions are absolutely outsourced, researchers believe that some internal IT capability is required to monitor and manage the outsourced contract. To come up with criteria it is necessary for organization to determine the scope of their outsourcing decisions. This can be done by correctly identifying the type of outsourcing that is suitable for the firm's business as discussed below.
Total Outsourcing:
In this type of outsourcing, company transfers most of its IT functions to provide IT services from within the firm to outside vendors. The firms can decide to use this type of outsourcing when it has large percentage of IT budget allocated for outsourcing. As this is long term type of outsourcing, trust is one of the important elements that client firms have to keep in mind for developing strong relationships with the vendors. Again companies should also keep in mind that termination of these long-term contracts in future due to unknown reasons can prove expensive. In addition, changing vendors or doing in-house IT development after a strategic partnerships fall can also prove costly.
Selective Outsourcing:
In this type of outsourcing a firm may transfer some of its preferred IT functions such as software development, customer support, etc to third-party vendors. It may consist of single or multiple vendors. This is a short term contract of less than 5 years. This type of outsourcing could be very helpful for companies who would like to invest for short term and IT budget allocated for outsourcing is not the major percentage (between 20% to 80%). This kind of outsourcing will help companies to meet customer needs along with minimizing the risks associated with total outsourcing. However, selective outsourcing can also have some disadvantages associated with it such as increase in the cost of transaction linked with multiple evaluations, simultaneous management of contract with multiple vendors and loss of integration and control over multiple sources.
Total Insourcing:
In this type of sourcing a firm may retain major percentage of its IT budget (around 80%) for in-house development of IS capabilities rather than transferring them to other vendors after evaluating the IT services market. It may just buy-in vendor resources to meet temporary need. This type of sourcing can give large firms strategic advantage that is competent enough to replicate vendors' manufacture cost advantages in-house. The customer retains responsibility for the delivery of IT services, since outside vendor resources supplement internally managed teams.
The Challenge of Outsourcing
In general, many researchers say that the primary reason for the failure of the outsourcing is improper outsourcing decisions taken by the management and failure to clearly define the criteria and expectations within the outsourcing contract itself.
While analyzing the outsourcing decision one critical factor which is often overlooked by the management is that though outsourcing can act as a source for dealing with issues related to perform some specific IT functions or service by external vendors but organization still has the responsibility of acting as mentor for managing those services with the vendor and is still accountable for outcomes that helps to achieve success from that relationship.
Criteria for Outsourcing Decision:
Compatibility:
Analyzing the cultural compatibility has been always considered as an important consideration while making a sourcing decision. In order to work together, it is necessary for organizations to have a certain degree of cultural ad strategic compatibility between them. The advantages of working with an organization which has compatible culture and mode of operation cannot be denied. Though it is difficult to take a decision based on the compatibility as differences in culture and mode of operation between client and vendor are likely to emerge as collaboration proceeds but having a certain degree of compatibility can prove to be of great support in able to identify any kind of such differences and resolve them quickly.
Furthermore, deciding on use of outsourcing also requires careful analysis of potential strengths and weaknesses of suppliers. Again analyzing the strategic business intent of the potential supplier is important as the possibility of compatible outsourcing partner becoming tomorrows future competitor cannot be excluded.
Key questions
* Do both collaborating organizations have cultural compatibility between them?
* Is supplier capable enough to meet all the requirements of client?
* Has the company considered about the potential strengths and weaknesses of suppliers?
* Is there a possibility of supplier to become future competitor?
Technology:
To remain competitive in today's market it is necessary to have access to latest technologies. So the decision of which technologies should be developed in-house and which should be outsourced is very critical. Management needs to focus its attention on the technologies which are in high demand in market and are providing distinctive products and services. Again close comparison of technological performance of the firm against its competitors must be considered. If there is a wide difference then it might not be possible to bridge that gap by in-house development alone. In such cases it may be good idea to outsource that technology to some external vendor.
Key questions
* What technologies are in high demand in market?
* Is the supplier capable of providing this technological support along with future development changes?
Expertise:
Management team who is involved in taking sourcing decision should have managerial and technical expertise. It is always recommended to have individuals experienced with outsourcing in team because of their past experience and success rate (Klepper and Jones, 1998). So it is very important that the team taking the outsourcing decisions consist of experienced managerial and technical staff. However, if company lacks sufficient technical expertise associated with the outsourced project, it is better to make an outside consultant part of the team who will be able to provide necessary support. In other words, selection of the team must be done depending upon what is to be outsourced and the scenario in which outsourcing decision is to be taken.
Key questions
* Do the team members involved in making outsourcing decisions are identified.
* Is there a need of outside consultants?
Objectives:
Outsourcing must be implemented properly with predefined set of objectives. It is important that management not use outsourcing just to manage improperly managed or costly functions but also consider the merits that can be obtained from that outsourcing strategy.
Key questions
* Is there a clear understanding of the objective behind the outsourcing decision?
Human Resources:
Employees of the organization are very important component of the sourcing decision. It is very important that managers take outsourcing decision by keeping the job security of employees in mind. Also management should take efforts to involve internal staff in outsourcing process by updating and motivating them at all the stages of outsourcing process.
Key questions
* What effect will outsourcing decision have on internal staff?
Costs:
Cost is another key component which has to be examined thoroughly while making an outsourcing decision. All businesses like to achieve the lowest cost which fits with their business strategy. A good outsourcing decision can make a major contribution in reducing the overall cost involved in performing the outsourced IT function. In order to have proper cost analysis it is important to deeply examine both implicit and explicit cost associated with all the components as well as the comparing it with the services provided by them (Jennings, 1997).
Key questions
* Are there any “hidden costs” involved in the offer made by supplier and how consistent is it?
* Is the price quoted by supplier is feasible to the current prices in market?
* Will this outsourcing decision will be able to at least pay-off all the cost associated with this outsourcing agreement?
Capabilities:
Capability is again one of the principle criteria involved in making an outsourcing decision. So it is important to examine whether the prospective partner is capable of delivering the required results. This includes analyzing the past success rate of vendors in handling situation similar to which organization want to go ahead with. , time frame required for completion, technology infrastructure to meet the functional requirements.
Key Question:
*How capable is the supplier in handling the outsourced IT functions?
Solution:
Rapid advancement in technology over past few years has made companies to think on use of outsourcing. By considering the complexity and risks involved in outsourcing, it is important that the outsourcing decisions are taken in organized and structured manner by considering the above discussed key components.
Apart from above mentioned key components, additional components can also be taken into consideration which helps in deciding on the use of outsourcing. Also management should constantly re-examine their outsourcing decisions especially when market conditions, technology are changing at a rapid rate. In other word it is important to see that the decision to outsource is a continuous analysis process and should support the overall business strategy of the organization.
CONCLUSION
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