MGT300 CHAPTER 15


CHAPTER 15 Outsourcing in the 21st 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






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