As a student, you were invited by the Dean of the Institute of Computing to attend a seminar-workshop on information systems planning with some of the faculty members. In one of the sessions, a discussion of outsourcing came up. You have been asked to present your evaluation about outsourcing the information systems functions of the school.
What is Outsourcing?????
What is Outsourcing?????
So, what is outsourcing? Outsourcing is contracting with another company or person to do a particular function. Almost every organization outsources in some way. Typically, the function being outsourced is considered non-core to the business. An insurance company, for example, might outsource its janitorial and landscaping operations to firms that specialize in those types of work since they are not related to insurance or strategic to the business. The outside firms that are providing the outsourcing services are third-party providers, or as they are more commonly called, service providers.
Although outsourcing has been around as long as work specialization has existed, in recent history, companies began employing the outsourcing model to carry out narrow functions, such as payroll, billing and data entry. Those processes could be done more efficiently, and therefore more cost-effectively, by other companies with specialized tools and facilities and specially trained personnel.
Currently, outsourcing takes many forms. Organizations still hire service providers to handle distinct business processes, such as benefits management. But some organizations outsource whole operations. The most common forms are information technology outsourcing (ITO) and business process outsourcing (BPO).
Outsourcing is subcontracting a process, such as product design or manufacturing, to a third-party company.The decision to outsource is often made in the interest of lowering cost or making better use of time and energy costs, redirecting or conserving energy directed at the competencies of a particular business, or to make more efficient use of land, labor, capital, (information) technology and resources]. Outsourcing became part of the business lexicon during the 1980s. It is essentially a division of labour.Out sourcing in the information technology field has two meanings . One is to commission the development of an application to another organization, usually a company that specializes in the development of this type of application. The other is to hire the services of another company to manage all or parts of the services that otherwise would be rendered by an IT unit of the organization. The latter concept might not include development of new applications.
Although outsourcing has been around as long as work specialization has existed, in recent history, companies began employing the outsourcing model to carry out narrow functions, such as payroll, billing and data entry. Those processes could be done more efficiently, and therefore more cost-effectively, by other companies with specialized tools and facilities and specially trained personnel.
Currently, outsourcing takes many forms. Organizations still hire service providers to handle distinct business processes, such as benefits management. But some organizations outsource whole operations. The most common forms are information technology outsourcing (ITO) and business process outsourcing (BPO).
Outsourcing is subcontracting a process, such as product design or manufacturing, to a third-party company.The decision to outsource is often made in the interest of lowering cost or making better use of time and energy costs, redirecting or conserving energy directed at the competencies of a particular business, or to make more efficient use of land, labor, capital, (information) technology and resources]. Outsourcing became part of the business lexicon during the 1980s. It is essentially a division of labour.Out sourcing in the information technology field has two meanings . One is to commission the development of an application to another organization, usually a company that specializes in the development of this type of application. The other is to hire the services of another company to manage all or parts of the services that otherwise would be rendered by an IT unit of the organization. The latter concept might not include development of new applications.
Advantages of Outsourcing
Focus On Core Activities
In rapid growth periods, the back-office operations of a company will expand also. This expansion may start to consume resources (human and financial) at the expense of the core activities that have made your company successful. Outsourcing those activities will allow refocusing on those business activities that are important without sacrificing quality or service in the back-office.
Cost And Efficiency Savings Back-office functions that are complicated in nature, but the size of your company is preventing you from performing it at a consistent and reasonable cost, is another advantage of outsourcing.
Reduced Overhead Overhead costs of performing a particular back-office function are extremely high. Consider outsourcing those functions which can be moved easily.
Operational Control Operations whose costs are running out of control must be considered for outsourcing. Departments that may have evolved over time into uncontrolled and poorly managed areas are prime motivators for outsourcing. In addition, an outsourcing company can bring better management skills to your company than what would otherwise be available.
Staffing Flexibility Outsourcing will allow operations that have seasonal or cyclical demands to bring in additional resources when you need them and release them when you’re done.
Continuity & Risk Management Periods of high employee turnover will add uncertainty and inconsistency to the operations. Outsourcing will provided a level of continuity to the company while reducing the risk that a substandard level of operation would bring to the company.
Develop Internal Staff A large project needs to be undertaken that requires skills that your staff does not possess. On-site outsourcing of the project will bring people with the skills you need into your company. Your people can work alongside of them to acquire the new skill set.
Disadvantages of Outsourcing
Loss Of Managerial Control
Whether you sign a contract to have another company perform the function of an entire department or single task, you are turning the management and control of that function over to another company. True, you will have a contract, but the managerial control will belong to another company. Your outsourcing company will not be driven by the same standards and mission that drives your company. They will be driven to make a profit from the services that they are providing to you and other businesses like yours.
Hidden CostsYou will sign a contract with the outsourcing company that will cover the details of the service that they will be providing. Any thing not covered in the contract will be the basis for you to pay additional charges. Additionally, you will experience legal fees to retain a lawyer to review the contacts you will sign. Remember, this is the outsourcing company's business. They have done this before and they are the ones that write the contract. Therefore, you will be at a disadvantage when negotiations start.
Threat to Security and ConfidentialityThe life-blood of any business is the information that keeps it running. If you have payroll, medical records or any other confidential information that will be transmitted to the outsourcing company, there is a risk that the confidentiality may be compromised. If the outsourced function involves sharing proprietary company data or knowledge (e.g. product drawings, formulas, etc.), this must be taken into account. Evaluate the outsourcing company carefully to make sure your data is protected and the contract has a penalty clause if an incident occurs.
Quality Problems
Quality Problems
The outsourcing company will be motivated by profit. Since the contract will fix the price, the only way for them to increase profit will be to decrease expenses. As long as they meet the conditions of the contract, you will pay. In addition, you will lose the ability to rapidly respond to changes in the business environment. The contract will be very specific and you will pay extra for changes.
Tied to the Financial Well-Being of Another Company
Since you will be turning over part of the operations of your business to another company, you will now be tied to the financial well-being of that company. It wouldn't be the first time that an outsourcing company could go bankrupt and leave you holding-the-bag.
Bad Publicity and Ill-Will
The word "outsourcing" brings to mind different things to different people. If you live in a community that has an outsourcing company and they employ your friends and neighbors, outsourcing is good. If your friends and neighbors lost their jobs because they were shipped across the state, across the country or across the world, outsourcing will bring bad publicity. If you outsource part of your operations, morale may suffer in the remaining work force.Tied to the Financial Well-Being of Another Company
Since you will be turning over part of the operations of your business to another company, you will now be tied to the financial well-being of that company. It wouldn't be the first time that an outsourcing company could go bankrupt and leave you holding-the-bag.
Bad Publicity and Ill-Will
Reasons Companies Outsource
Improve company focus
Outsourcing sets up a framework for an outside expert to assume responsibility for operational details, allowing management to focus on the more important business issues associated with meeting customer needs.
Obtain access to world-class capabilities
Obtain access to world-class capabilities
Because of the nature of their specialization and their own core activities, outsourcing providers bring extensive world-class capabilities, including leading-edge technology, to help companies satisfy the needs of their customers and become more productive.
Accelerate reengineering benefitsAn organization can realize the anticipated benefits of reengineering quickly if it contracts with an outside organization - which is already reengineered to world-class standards - to take over the process.
Share risksOutsourcing enables management to turn over to its suppliers certain classes of risks - such as demand variability and capital investments. Unlike the buyer, the outsourcing provider can spread these risks over multiple clients.
Free resources for other purposesOutsourcing permits and organization to redirect its resources from non-core activities to ones that have the greatest impact on the business.
Make capital availableContracting out certain functions as operational expenses can reduce the competition for capital since the outsourcing company provides the capital investment as part of its overhead.
Obtain a cash infusionOutsourcing sometimes involves the sale of assets to the provider, which the customer realizes typically as some combination of cash and loan.
Reduce and control operating costsAccess to the outside provider's lower cost structure, which may be the result of greater economies of scale, is one of the most compelling tactical reasons for outsourcing.
Obtain resources not available internallyOutsourcing is often a viable option for companies experiencing rapid growth, expansion into a new geography, or spin-offs from the parent company - where normally required resources are not readily available.
Function difficult to manage or out of controlControl problems are cited as a reason for outsourcing. However, there may be underlying causes - such as unclear management expectations or difficulty in measuring performance - for which outsourcing alone is not the solution. Management in this case should work with outsourcing providers to define requirements.
For me, I will go for OUTSOURCING because allows companies to focus on other business issues while having the details taken care of by outside experts. This means that a large amount of resources and attention, which might fall on the shoulders of management professionals, can be used for more important, broader issues within the company. The specialized company that handles the outsourced work is often streamlined, and often has world-class capabilities and access to new technology that a company couldn't afford to buy on their own. Plus, if a company is looking to expand, outsourcing is a cost-effective way to start building foundations in other countries.
While outsourcing may prove highly beneficial for many companies, it also has many drawbacks. It is important that each individual company accurately assess their needs to determine if outsourcing is a viable option.Sources:
http://en.wikipedia.org/wiki/Outsourcing
http://www.wisegeek.com/what-is-outsourcing.htm
http://www.sourcingmag.com/content/what_is_outsourcing.asp
http://operationstech.about.com/
http://www.horizontech.net/toptenreasons.htm
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