CHAPTER 15

Outsourcing in the 21st Century

OUTSOURCING PROJECTS

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

⧭ Outsourcing – an arrangement by which one organization provides a service or

services for another organization that chooses not to perform them in-house

⧭ Reasons companies outsource

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

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

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

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

⧭ Factors driving outsourcing growth include:

🔼Core competencies

Many companies have recently begun to consider outsourcing as a means to fuel

revenue growth rather than just a cost-cutting measure.

🔼Financial savings

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

🔼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.

🔼Industry changes

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

🔼The Internet

The pervasive nature of the Internet as an effective sales channel has allowed clients to

become more comfortable with outsourcing.

🔼Globalization

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

🔼According to PricewaterhouseCoopers “Businesses that outsource are growing

faster, larger, and more profitable than those that do not”

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

Outsourcing Benefits

🔺 Outsourcing benefits include:

➷Increased quality and efficiency

➷Reduced operating expenses

➷Outsourcing non-core processes

➷Reduced exposure to risk

➷Economies of scale, expertise, and best

practices

➷Access to advanced technologies

➷Increased flexibility

➷Avoid costly outlay of capital funds

➷Reduced headcount and associated overhead

expense

➷Reduced time to market for products or services

Outsourcing Challenges

➤ Outsourcing challenges include:

➸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

➸Competitive edge

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

➸Confidentiality

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

➸Scope definition

➢Scope creep is a common problem with outsourcing agreements