MGT300 CHAPTER 15

CHAPTER 15 Outsourcing in the 21^st Century

OUTSOURCING PROJECTS

Ø Insourcing (in-house-development) – a common approach using the professional expertise within an organization to develop and maintain the organization's information technology systems

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

                        


Ø Reasons companies outsource

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

Ø Nearshore outsourcing – contracting an outsourcing arrangement with a company in a nearby country

Ø Offshore outsourcing – using organizations from developing countries to write code and develop systems

Ø Big selling point for offshore outsourcing “inexpensive good work”

Ø Factors driving outsourcing growth include:

o   Core competencies

•         Many companies have recently begun to consider outsourcing as a means to fuel revenue growth rather than just a cost-cutting measure.

o   Financial savings

•         It is typically cheaper to hire workers in China and India than similar workers in the United States.

o   Rapid growth

•         an organization is able to acquire best-practices process expertise. This facilitates the design, building, training, and deployment of business processes or functions.

o   Industry changes

•         High levels of reorganization across industries have increased demand for outsourcing to better focus on core competencies.

o   The Internet

•         The pervasive nature of the Internet as an effective sales channel has allowed clients to become more comfortable with outsourcing.

o   Globalization

•         As markets open worldwide, competition heats up. Companies may engage outsourcing service providers to deliver international services

Ø According to PricewaterhouseCoopers “Businesses that outsource are growing faster, larger, and more profitable than those that do not”

Ø Most organizations outsource their noncore business functions, such as payroll and IT

Ø Outsourcing Benefits

include:

o   Increased quality and efficiency

o   Reduced operating expenses

o   Outsourcing non-core processes

o   Reduced exposure to risk

o   Economies of scale, expertise, and best practices

o   Access to advanced technologies

o   Increased flexibility

o   Avoid costly outlay of capital funds

o   Reduced headcount and associated overhead expense

o   Reduced time to market for products or services

Ø Outsourcing Challenges

include:

o   Contract length

•         Most outsourcing contracts span several years and cause the issues discussed above

•         Difficulties in getting out of a contract

•         Problems in foreseeing future needs

•         Problems in reforming an internal IT department after the contract is finished

o   Competitive edge

•         Effective and innovative use of IT can be lost when using an outsourcing service provider

o   Confidentiality

•         Confidential information might be breached by an outsourcing service provider, especially one that provides services to competitors 

o   Scope definition

•         Scope creep is a common problem with outsourcing agreements