MGT 300 - CHAPTER 15

Chapter 15 - Outsourcing in the 21th 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 the company in a nearby country

~ Offshore sourcing - using organization from developing countries to write code and develop system

~ 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
• Reduces 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 of capital funds
• Reduced headcount and associated overhead expenses
• 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

1. Difficulties in getting out of contract
2. Problems in foreseeing future needs
3. 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

END CHAPTER 15