CHAPTER 19:
OUTSOURCING IN THE 21st
CENTURY
OUTSOURCING
PROJECTS
§ Insourcing
(in-house development) is a common approach using the professional expertise
within the organization to develop and maintain the organization’s information
technology system.
Outsourcing is an arrangement by
which one organization provides a service or services for another organization
that chooses not to perform them in-house. FORMS
OF OUTSOURCING OPTIONS
· onshore outsourcing – engaging
another company within the same country for services
· Nearshore
outsourcing – contracting an outsourcing arrangement with a company in a
nearby country, often this country will share a border with a native country.
· Offshore
outsourcing – using organizations from developing countries to write code
and develop systems. In offshore outsourcing the country is geographically far
away.
INFLUENTIAL
DRIVERS AFFECTING THE GROWTH OF THE OUTSOURCING MARKET
· Core
competencies – outsourcing enables an organization to maintain an up-to-date
technology infrastructure while freeing it to focus on revenue growth goals by
reinvesting cash and human capital in areas offering the greatest return on
investment.
· Financial
savings – typically cheaper to hire workers in China and India than
similar workers in the United States. Technology is advancing at such an
accelerated rate that companies often lack the resources, workforce, or
expertise to keep up.
· Rapid growth – an organization is
able to acquire best- practices process expertise. This facilities the design,
building, training and employment of business processes and functions.
· Industry changes – high levels of
reorganization across industries have increased demand for outsourcing to better
focus on core competencies. The significant increase in merger and acquisition
activity created in sudden need to integrate multiple core and noncore business
functions into one business.
· The Internet – barriers to entry
such as lack of capital, are dramatically reduced in the world of e-business
due to the internet. New competitors enter the market daily.
· Globalization – as market opens
worldwide, competition heats up. Companies may engage outsourcing service
providers to deliver international services.
OUTSOURCING
BENEFITS
1.
· Increased quality and
efficiency of a process, service, or function
2.
· Reduced operating
expenses
3.
· Resources focused on
core profit-generating competencies
4.
· No costly outlay of
capital funds
5.
· Reduced time to market
for products or services
6.
· Reduced head count and
associated overhead expenses
OUTSOURCING
CHALLENGES
· Contract length – most of the
outsourced IT contracts are for a relativity long time period. This is because
of the high cost of transferring assets and employees as well as maintaining
technological investment. The long contract causes three particular issues:
1. Difficulties in
getting out of contract if the outsourcing service provider turns out to be
unsuitable.
2. Problems in foreseeing
what the business will need over the next 5 or 10 years, hence creating
difficulties is establishing an appropriate contract.
3. Problems in reforming
an internal IT department after the contract period is finished.
· Competitive edge – a competitive
business advantage provided by an internal IT department that understands the
organization and is committed to its goals can be lost in an outsourced
arrangement. In an outsourced arrangement, IT staff are striving to achieve the
goals and objectives of the outsourcing service provider, which may conflict
with those of the organization.
· Confidentiality – the organization
must assess the potential risk and cost of a confidentiality breach in
determining the net benefits of an outsourcing arrangement.
· Scope definition – the services
required is within the contract scope while the service provider is sure it is
outside the scope and so is subject to extra fees.
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