Is/it Outsourcing

By: Tony

Information Outsourcing
Definition and Scope

The management and operation of part of an organization IT services by an external service at the agreed service levels to an agreed cost formula over an agreed period.

Variants of outsourcing
i.Body shop: Use of contract/temporary staff to assist with specific tasks e.g computer programmer or data entry clerks.

ii.Project Management: Use of outsiders e.g. management consultants to assist in the management of a specific project.

iii.Full scale outsourcing: A significant part of the IS/IT function is given/taken over by outsiders. This is the current view of outsourcing.

Typical scenarios: those which tend to be outsourced.
i.Management of telecommunications/Network infrastructure
ii.Management/operation of the computer center, this covers the custody of hardware and running of the application systems.
iii.System development.

The deal may also entail shifting of physical resources from one location to another, it can also involve taking over/inheriting the clients IT staff. Most outsourcing deals tend to take a fairly lengthy period, usually 4-10 years.

Origins/motives of outsourcing
a)The general philosophy behind outsourcing usually is “let us outsource that which we are not good at and concentrate on our core business”. This is the core competency argument which has been popularized by management experts (gurus) in the last decade.

b)Reaction to efficiency Imperative i.e. desire to be more efficient, both in terms of cost and service delivery. Outsourcers on the other hand promise the client guaranteed service levels cost containment.

c)The need to acquire resources, the third reason often cited for outsourcing is to acquire new resources such as machine upgrades, additional personnel or even money. An outsourcing deal may enable a client to acquire such resources in 2 ways;
i.The outsourcer may promise to provide the additional resources at a lower cost.
ii.The outsourcer may acquire these resources for the 1st time.

d)Declining values of IT in the eyes of management, with increased expenditure on information system and technology, some managers have come to feel that such expenditure does not generate adequate returns. Its' value to the enterprise appears questionable and hence the inclination to hand it over to an outsourcer. IT seems to have no strategic value to such managers.

e)A reaction to the bandwagon; the early cases of outsourcing were highly publicized perhaps because there were large sums of money involved and the concept of outsourcing was still relatively new. In addition the benefits appeared to be so obvious and hence other companies were tempted to join the bandwagon.

f)The desire to get rid of a troublesome function; in some enterprises the IT function acquires the unfortunate image of being a constant source of headache. There are perpetual calls for more money, Infrastructure seems to break down so often, unresponsive IT staff e.t.c. in such cases it becomes sensible to consider outsourcing the IT function.

g)Enhance credibility:-In some cases outsourcing evaluations have been used to enhance personnel or departmental credibility. Since senior managers don’t fully value the services of the IS department, they may not value the contribution of the people who run the function. Studies have shown that some people make the outsourcing decision to enhance
their credibility by showing they are willing to outsource their “kingdom” for the good of the company, they prove to the management that they are corporate team players.

h)Avoidance of building in-house skills, this is more common with small and low technology organizations.

i)Strategic Alliance Argument: Finding a strong partner to compliment an area of weakness gives an organization an island of stability in a turbulent world. Strategic alliances can allow a firm to leverage a key part of the value chain by bringing in a partner that compliments its skills. Such a partner may create an opportunity to innovate synergistic- ally in which the whole is greater than the sum of the parts.

Benefits
1.Cost savings : The outsourcer may be able to deliver such cost savings for the following reasons.
Tighter overhead control of fringe benefits; the outsourcer tends to run much leaner overhead structures than many of their customers.
More aggressive use of low cost labour pools through creative use of geography. Frequently the outsourcer moves data centers to low cost areas. Modern telecommunications makes this possible.

Tough world class standards applied to the organization’s existing staff all of whom have to re-qualify for appointments at the time of outsourcing. Frequently employees may have become lazy or are unskilled in leading edge IT management practices.

More effective bulk purchasing and leasing agreements for all aspects of hardware and software configuration, through discounts and better use of capacity.

Better management of excess hardware capacity, the outsourcer can sell or utilize underused hardware that would otherwise be idle by combining many firms work in the same operation center.

The ability to run a leaner management structure, because of increased competence and critical mass volumes of work.

2.Reduced risk and uncertainty.
This arises through guaranteed service levels, reduced worry about hardware lock in by suppliers, or reduced risk about technology going obsolete.

3.Reduced headache over IT staff issue
The outsourcer takes over the firms IT staff, then the firm does not have to bother with all the Human Resource issues pertaining to such staff.

4.It offloads the system maintenance burden to the supplier, this has cost implications in addition to simplifying management agenda.

5.The client gets the opportunity to experiment with or apply new technologies safely. The client can take advantage of the suppliers superior skills and technology to experiment with new ideas.

6.Improved quality of service, an outsourcing contract normally guarantees certain service levels, which would translate to more efficient operations better customer service e.t.c.

7.If only part of the IT function is outsourced, then the arrangement provides competition for the IS Department. This may enable the firm’s own staff to become more productive.

Drawbacks
1.Draining cost efficiency.

2.The organization’s own IT staff may feel unappreciated by the management.

3.Organization secrets may leak out.

4.The IT staff may become less competent

5.Limited flexibility, an outsourcing contract like any other contract imposes certain limitations on the client e.g. the client may use the opportunity to use radically different approaches to IS.

6.Unacceptable quality of service, even though the outsourcer may promise to deliver specified quality of service, there are many reasons why this may not always hold true. Even though the client may have the liberty to terminate the contract on the basis of poor quality service a lot of frustration may need to be endured along the way.

7.Predicament of the internal IT staff; A number of staff related problems may arise e.g.
The IT staff may pass a vote of no confidence with their management.
The outsourcer may dismiss the clients former IT staff on the basis of redundancy
The firm uses IT expertise which may constrain its future flexibility.

8.Increased vulnerability and risk; this may arise due to an outsourcing deal gone bad, leading to loss of control to a single supplier, security and confidentiality of information being under outside control, lock in to a single supplier who may dictate future price rises/increases

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