Information Systems

Outsourcing
Chapter 7
Index
⚫ Introduction
⚫ What is IT outsourcing?
⚫ Offshoring
⚫ Insourcing
⚫ The hidden costs of outsourcing (Phases):
⚫ Vendor search and contracting
⚫ Transitioning to the vendor
⚫ Managing the outsourcing effort
⚫ Transitioning after outsourcing
⚫ Reasons to outsource
⚫ Advantages and Disadvantages of outsourcing

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Index cont.
⚫ Outsourcing methodology
⚫ Service Providers
⚫ Selective Sourcing
⚫ Related issues:
⚫ Social responsibility
⚫ Staff turnover
⚫ Company knowledge
⚫ Security
⚫ Quality risks
⚫ Conclusion

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Introduction
⚫ In 1989, outsourcing became a legal management
strategy by CIOs.

⚫ Drivers: Focus and Value

⚫ clothing companies no longer cut, sew, or manufacture.
⚫ Publishers no longer manufacture books.

⚫ Outsourcing is not an IT issue, it is a business issue

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 What is IT Outsourcing
⚫ Outsourcing: is where a company contracts with a
third party to do some of the company's work on its
behalf.
⚫ Offshoring: the outsourcer do the work in another
country.
⚫ Insourcing: doing the work within the company.
⚫ IT outsourcing: is a company's outsourcing of
computer or Internet related work to other
companies.
⚫ It is used in reference to Business Process Outsourcing or BPO, which is
the outsourcing of the work that does not require much of technical skills.

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What is IT Outsourcing cont.
⚫ The most common processes outsourced by IT
Outsourcing are software development, system
maintenance, core systems hosting, systems
management (data center, networks, communication
infrastructure).
⚫ IT outsourcing taking almost 28% of the total
outsourcing market.
⚫ Many firms that were outsourcing IT later decided to
bring some or all of their IT activities in-house
because of the hidden outsourcing costs.

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The Hidden Costs
1. Vendor search and contracting:
⚫ Find, negotiate and complete an appropriate contract.
⚫ Generate list of requirements
⚫ Identify potential vendors
⚫ Select one
⚫ Sign the contract

⚫ Outsourcing arrangement might arrive to 3% of the

total cost of outsourcing ($500,000 in some cases).
⚫ Lowering this cost might include: clearly specified
business requirements, precisely wording and
writing the contract, and selecting a trustworthy
vendor.
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The Hidden Costs Cont.
2. Transitioning to the vendor:
⚫ Moving form complete control to having a vendor
providing all the services is a long and complex
process
⚫ The transition period of one year is not unusual for
large organizations.
⚫ Cost of lost productivity while training the vendors’
staff.
⚫ Lowering the cost by working hard to retain the
helpfulness of the IT employees.

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The Hidden Costs Cont.
3. Managing the outsourcing effort
⚫ Ensuring that the vendor is providing service as
agreed upon, and that they met the client needs.
⚫ Single vs. multiple vendors.
⚫ Ex. One company that manages relationships with
four vendors, found it was costing about $2 million
per year (primarily salaries) to manage contracts
worth %12 million per year (about 20%).

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The Hidden Costs Cont.
4. Transitioning after outsourcing
⚫ Three options:
⚫ Renew the contract
⚫ Bring outsourced activities back in-house.
⚫ Move to another vendor.
⚫ Costs of either the latter two options will be
significant.
⚫ Lowering this cost can be done by including contract
terms of rehiring the IT employees who were
transferred to the vendor, or by retaining a core group
of IT employees internally.
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Reasons to Outsource
⚫ Organizations that outsource are seeking to
realize benefits or address the following issues:
1. Cost savings: lowering of the overall cost of the service
to the business, by:
⚫ defining quality levels,
⚫ re-pricing,
⚫ access to lower cost economies through offshoring.
2. Focus on Core Business. For example often
organizations outsource their IT support to
specialized IT services companies.
3. Improve quality.

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Reasons to Outsource cont.
4. Knowledge. Access to intellectual property and wider
experience and knowledge.
5. Contract. Services will be provided to a legally binding
contract with financial penalty ‫ ﻋﻘﻮﺑﺔ‬and legal redress
(‫)ﻏﺮاﻣﺎت‬. This is not the case with internal services.
6. Operational expertise. Access to operational best
practice that would be too difficult or time consuming
to develop in-house.
7. Reduce time to market. The acceleration of the
development or production of a product through the
additional capability brought by the supplier.

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Advantages of Outsourcing
1. Less capital expenditure: For example, by
outsourcing information technology requirements, a
company does not have to buy expensive hardware
and software.
2. Less management headache: For example, by
outsourcing business process such as accounting, a
company no longer has to hire and manage
accounting personnel.
3. Focus on core competencies: Outsourcing non-core
related processes will allow a business to focus more
on its core competencies and strengths, giving it a
competitive advantage.
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Disadvantages of Outsourcing
1. Less managerial control: It may be harder to
manage the outsourcing service provider as
compared to managing its own employees.
2. Outsourcing company goes out of business: If
the outsourcing service provide goes out of business
transition to a new service provider or take the
process back in-house.
3. May be more expensive: Sometimes it is cheaper
to keep a process in-house as compared to
outsourcing.
4. Security and confidentiality issues: If the
company is outsourcing business processes, such as
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Outsourcing Methodology
⚫ The process of deciding whether outsourcing is
authorized involves numerous steps or phases.
⚫ Just as applications development activities should be
guided by a written, explicit methodology, the effort to
consider and possibly implement outsourcing should be
systematically conducted and documented.
⚫ The phases to follow are:
1. Planning Phase. The objectives and scope of the
outsourcing idea are defined and the feasibility of
outsourcing is determined before a decision to proceed. The
effort is planned in terms of time, budget and resources
needed.

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Outsourcing Methodology cont.
2. Analysis Phase. Baselines are determined and the
service levels required of vendors are specified.
Relationships between the information system
function(s) to be outsourced and other functions that
will remain in-house are also clarified so that contracts
with vendors are certain to include proper interfaces
with in-house services. The request for proposal is
developed, responses are collected from vendors and
analyzed, and a vendor is chosen.
3. Design Phase. Negotiations proceed with the vendor
and a contract is developed and signed.

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Outsourcing Methodology cont.
4. Implementation Phase. The transition from in-house
provision of services to outsourcing is made.
5. Operations Phase. The outsourcing relationship with
the vendor is managed and any maintenance or
changes in the outsourcing relationship are negotiated
and implemented.
6. Termination Phase. At the end of the contracting
period the decision is made to negotiate another
contract with the vendor or a new vendor, and the
cycle begins again. Alternatively, a decision is made to
bring the function back inside the organization.

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Service Providers

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Service Providers - ASPs cont.
⚫ Application service providers (ASP): is a
company that provides access to software for
other companies over a network (internet).
⚫ A client firm would pay a monthly
subscription fee to gain access to specific
application software package.
⚫ ASPs offer other services, such as, professional
services (system integration and customization
of software) so that clients does not have to go
to many vendors.

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Service Providers - ASPs cont.
⚫ Why considering ASPs:
1. It is difficult for small businesses to attract
and retain IT specialists.
2. It is very expensive to build and maintain IT
infrastructure to support the necessary
applications.

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Service Providers - MSPs cont.
⚫ Management service providers (MSP): is a
company that delivers information technology
infrastructure management services on a
subscription bases.
⚫ For a fee, could monitor a client firm’s network
and manage security and performance issues.

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Service Providers – Web services cont.
⚫ Web services: are software components that
represent a business functionality that can be
accessed by users using a standard protocol.
⚫ Web services are used to enable access to applications
across the internet from a variety of client devices
without having to worry about the infrastructure
involved.
⚫ Web services share a common element with ASPs and
MSPs in that services are delivered over the internet.

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Selective Sourcing
⚫ Rather than outsourcing all IT resources and
responsibilities in the company, many
organizations enter into a partial arrangement
selective sourcing

⚫ Ex. Outsourcing e-commerce website for a

period of time. Especially for a trail period.

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Social Responsibility
⚫ Outsourcing sends jobs to the lower-income areas
where work is being outsourced to.
⚫ The end goal: buyers to pay less, and sellers to widen
profit margin.
⚫ Some argue that the outsourcing of jobs (particularly
off-shore) exploits the lower paid workers.
⚫ Unfair for local workers.
⚫ Social responsibility is also reflected in the costs of
benefits provided to workers (transfer the cost of
retirement and medical benefits to the other
countries) reduction in salaries and benefits at home
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Staff Turnover
⚫ The staff turnover of employee who originally
transferred to the outsourcer is a concern for many
companies.
⚫ Turnover is higher under an outsourcer and key
company skills may be lost with retention outside of
the control of the company.
⚫ In outsourcing offshore there is an issue of staff
turnover. It is quite normal for such companies to
replace its workforce each year. This inhibits the build-
up of employee knowledge and keeps quality at a low
level.

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Company Knowledge
⚫ Outsourcing could lead to communication problems
with transferred employees.

⚫ Ex. before transfer staff have access to transmit

company e-mail informing them of new products,
procedures etc. Once in the outsourcing organization
the same access may not be available.
⚫ Also to reduce costs, some outsource employees may
not have access to e-mail, but any information which is
new is delivered in team meetings.

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 Security
⚫ When these same people are transferred to an
outsourcer they may not change desk but their legal
status has changed.
⚫ They no-longer are directly employed or responsible to
the organization this causes legal, security and
compliance issues that need to be addressed through
the contract between the client and the suppliers.
⚫ Fraud is more likely when outsourcers are involved.
⚫ Ex. credit card theft: in April 2005, a case involving the
theft of $350,000 from four Citibank customers
occurred when call center workers acquired the
passwords to customer accounts and transferred the
money to their own accounts opened under untrue 4-27
Quality Risks
⚫ Quality risk is the tendency for a product or service
to be imperfect, due to operations-related issues.
⚫ Quality risk in outsourcing is driven by a list of
factors:
⚫ Opportunism by suppliers due to misaligned incentives
between buyer and supplier, information unevenness,
or high supplier switching costs.
⚫ Poor buyer-supplier communication,
⚫ Lack of supplier capabilities/resources/capacity.
⚫ Lack of buyer-supplier contract enforceability.

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 Quality Risks cont.
⚫ Quality fade ‫ ذﺑﻮل‬is the intentional and secretive
reduction in the quality of labor in order to widen
profit margins.
⚫ The descending changes in human capital are
insignificant but progressive, and usually
unnoticeable.
⚫ In the end, the company that outsources may find
that it is worse off than before it outsourced its
workforce.
⚫ Less quality Less customer satisfaction
⚫ Quality should be measured by customer satisfaction
questionnaires 4-29
Conclusion
⚫ A survey by Santa Clara University showed that R&D
sector would be the next target of outsourcing.
⚫ Hundreds of major multinational corporations have
set up R&D centers in India, the list of such
companies include several big names such as Oracle
Corporation, Intel, Adobe Systems, SAP, IBM, and
Microsoft.
⚫ As of 2006, India alone was getting 25% of new global
investments on research. India's software exports are
growing by more than 30% per year.
⚫ At the same time, there is a shortage of PhD's in India,
possibly due to brain drain or because of lack of
financial resources. 4-30