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Defining Outsourcing Topic 1
In this Topic we will understand What is Outsourcing? History and Types Why Outsource (the business driver) What are the problems
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Today's Agenda
What is Outsourcing? History and Types Why Outsource (business driver) What are the problems
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Outsourcing as example Strategic Change
I.T. Outsourcing A decision taken to contract-
out or sell the organisation’s IT assets, people and/or activities to a third party supplier…over agreed time period
Enabled by Technology, changes structure and culture.
Externalisation of employment – changing world of work
Professional (vs) secondary workers
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Defining Outsourcing
‘Outsourcing’ is an act of subcontracting a part, or all, of an organization’s work to external vendor(s), to manage on its behalf.
‘Outsourcing’ is the transfer to an external supplier of the technical, process and human resources of a function that includes the management for the transferred staff.
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Outsourcing Information Systems Functions: Two Driving Forces
Focus on core businesses that adds value to end product or service– Global competition in 1980s-2012 have forced efficiencies.
Shareholder value: Companies ‘priced’ based on shareholder value– With focus on short term profits.– Some tendency for this to be a specific feature of US/UK.
This implies management must stress value, they must consider outsourcing for their non-strategic functions.
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Outsourcing is not a passing fad but is main-stream
80% of large companies outsource at least one function or service– 40% outsource two or more functions– 20% annualised growth
Most companies even in these credit crunch times expect to outsource in the next two years– Focus on cost savings may actually receive an extra impetus (especially
public sector) Still many large deals being struck…
– … focus on second generation deals and selective sourcing
The issue of why/what to outsource is largely settled how to improve the operational performance of outsourcing is centre stage
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At the start focus was on the mega single source
IT outsourcing– Single outsourcer
Big bang (common pre-1990)– Sell IT assets to outsourcer– Move personnel to outsourcer– Get fixed costs off books and change to variable costs – Outsourcers took loss for 2 years and then got economy of scale to
keep costs down– Many problems with transition and culture shock of ex-employees being
treated like ‘temps’
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Outsourcing Alternatives
Transitional outsourcing (common early to mid 1990s)– Single outsourcer
Stopgap outsourcing for a one-shot specific need– Y2K– Need to transition to new tech frame
Two strategies:– Outsource maintenance of legacy systems to focus on building new
systems in new frame (C/S or Internet) – Or outsource development while maintaining legacy and then transition
with turnkey system
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Outsourcing Alternatives
Best-of-breed outsourcing (common mid to late 1990s)– Multiple outsourcers– Choose each outsourcer based on their expertise– Alternatively, could be ‘collaborative outsourcing’
Prime contractor and subcontractor system
Business process outsourcing (late 1990s)– Buying radical innovation in processes via IT
Is risky and sometimes risks and rewards are shared in joint ventures (but not common)
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Early signs of risks in Outsourcing showed control a key issue
Risks/Rewards of outsourcing:– IS Management loses an increasing amount of control– Vendors take more risk to win the deal – Vendors’ margins improve by simplifying service– Choosing the right vendor very important– Organizations lose learning and often intellectual property from
innovation– Organizations lose management control (cannot demand immediate
help, etc.), quality control, and loyalty
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Other sourcing approaches also emerged
Application service providers (ASPs)– Software services for rent in remote location (e.g., no temps working in
house)– Primarily with an Internet interface– Pay by the transaction– Can integrate company externally and someone else provides and
maintains hardware and software
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Outsourcing alternatives such as shared services also common
Shared services– Insourcing within organization– Across large organization, create centralized service unit that deals with
services of all sorts– A spin off company that has its own management and autonomy and in
some cases is legal corporate entity– Specialties within types of service (like IT or mailroom or legal) have
autonomous subunits within service unit Shared service group can become prime candidate for outsource
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A whole new vocabulary sprang up
Out-sourcing In-sourcing Back-sourcing Competitive sourcing Off-shoring Near-shoring Right-shoring In-shore
The cheesy term Rightshore ™ is a trademark of Cap Gemini Ernst & Young, with a filing date of May 27, 2003.
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Define what you think is meant by total outsourcing?
Can you suggest advantages/disadvantages? How would you measure the benefits of an outsourcing decision
once it was completed?
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An active market attracted new entrants
Consultants (Accenture, PWC)– FM as entry to high value activities such as Business Process
Outsourcing System Houses (Atos, EDS)
– Long term provision of custom/package software– IT & project management
Hardware vendors– Diversifying to avoid margin trap
Ex IT departments– Operational IT (FM focus)
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Suppliers diversify to gain more of the market potential
Their different backgrounds mean they have specific competences to offer but the go-to-market position is they can do everything
Strategic & tactical
Application development
Operational IT/IS
Hardware
Co
nsu
ltancies
HW
Ven
do
rs
Ex IT DepartmentsSystem Houses
Margin
Traditional IT vendors acquiring consultancies to get up the value chain
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What is important in vendor choice?
Think about the vendor decision in an outsource bid
Reflect on what would be the key factors you would use when selecting a vendor
Rank you criteria in order and justify your choice
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Important Factors
Probably the most important is specific expertise in the technology or process being outsourced
Others:– Sector specific competence (demonstrable)– Scale and scope in outsource area– Ability to deliver savings– Culture match (to service delivery people)– Good transition management capabilities– …
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The Myths of Outsourcing
Costs Savings
Provide scarce IT skills
Better quality service
Assist cash flow
Over what time period?Could do this anyway?
At what price?In the contract?
Continuity?How measured?
Paid for later?
Focus on core competence
What is core?Reliability of service?
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More Myths…
Flexibility
Utilises spare capacity
Accountability
Increases management control
In the contract at what price? True availability?
Shared services?Switching costs?
Clear contracting? Detailed SLA’s
Different type of skills required to manage vendor
Manage demand variabilityOver what range and at what price?
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Reshoring/near shoring became more attractive due to labour arbitrage but...
Customers in US rated off-shore call centres 26 points lower than on-shore.
First time call resolution ‘dramatically’ lower offshore.
Evident contextual gap in language use.
Potential risk to customer experience and loyalty– 50% customers ready to
change over poor experience.
Emphasises the need to do proper due diligence
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Assessing the Myths and Issues of Outsourcing
Desired Cost reduction and control Focus on core competencies Access to staff and technology Performance improvement
But Mixed evidence, hidden costs Problems pinning down a core
competence, time invested in managing outsourcing contracts
Complaints that supplier does not staff well and pinches own best
Evidence of serious or difficult service-level problems
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What is happening here?
What do you think that some of these issues are really telling us?
Discuss in your groups what could be the explanation for these problems– Suggest remedial actions