CPM202 Introduction to Outsourcing:

Kaushal Rai|1801T3090025

Outsourcing is letting external third party organization execute one or more of the companys operations or services under some financial and goal agreement. With help of outsourcing, operation that has been outsourced need not be operated in-house. Though, outsourcing is inspired by many reasons along with same number of factors, prominent cause is reducing estimated or probable high expenditure. Outsourcing gives company more time and attention to be focused on its core business. Outsourcing companies generally presents services for fewer budgets and of high quality. Along with advantages, there is no denying of drawbacks that can arise from outsourcing. An Umbrella company for instance has determined producing umbrellas of high quality than that of being produced by other companies on the market. So, it basically requires working on production, marketing, distribution and advertisement of umbrellas. Though many aspects are there to be given attention in successful marketing, the companys significant resource should be employed on producing high quality umbrellas. This creates beneficial opportunity to outsource department of marketing, advertising. Outsourcing those departments will require less attention, manpower and generally low cost. Umbrella Corporations

Fig: Functionality Division for Outsourcing With advancement of time, most of the companies today would not rationally function without help of outsourcing. Giant companies such as IBM, Google also operate with managerial help that it gets from outsourcing. So, outsourcing has been of utmost importance today. Though outsourcing produces benefits in huge number, there are possible disasters that can occur from it too. Outsourcing may lead to exposure of confidential resource, reduce grasp on company, etc. Cautiously a company should plan to avoid failure while outsourcing and prominently ask, is outsourcing better for this company? How much will the profit margin be with outsourcing and without it? What are the risks and are these risks worth outsourcing?

Fig: Funneling what to outsource.

CPM202

Kaushal Rai|1801T3090025

Outsourcing, Contracting-out and Their Differences: The primary process while outsourcing is creating contract. A contract is a mutual agreement among a company that is outsourcing and a company that provides outsourcing services. Contract confines right and duty of the agreeing companies. Contract has two main phases that are pre-award phase & post-award phase. Preaward phase is phase where determination of potential candidate is made. After this, contract is signed. The post-award phase supervises and oversees contract performance. Contractingout helps client company control and somehow shapes the way the project is moving. Though outsourcing and contracting-out are inter-related, differences are found between them. Some main significant differences are described below. Outsourcing is process of providing services by an outsourcing company to customer companies under contract basis. An outsourcing company named Security Corporation Pvt. Ltd. provides all kinds of security services to client companies. Among them one is Faith Courier Service. Faith Courier Service has incorporated security system from Security Corporation Pvt. Ltd. This process of providing service from a company to another client company is outsourcing. While outsourcing, two companies went through a thorough discussion and came to an agreement. Agreement on service budget, service time, service violation, etc. was done. Agreement was documented and was signed by both companies. This process is contracting-out. Therefore, outsourcing basically envelope contracting-out. Contracts too can enclose outsourcing within it.

Fig: Relationship of Outsourcing and Contract Outsourcing is of different forms. According to services and resources to be outsourced they happen to contrast. Some forms are consultant outsourcing, specialized service outsourcing, resources outsourcing, etc. Contracts too, have different types. Fixed price contract (a fixed budget is agreed upon to complete project), cost-reimbursable contract (contract when exceeds preliminary budget, outsourcing company gets reimbursed for additional expense) are main two type of contracts.
2

CPM202

Kaushal Rai|1801T3090025

There are various factors to be taken under consideration while outsourcing as well as contracting-out. What to outsource? What is the risk involved? Will outsourcing significantly lower the cost? Is outsourcing really what the company needs? These queries should be dealt with before outsourcing. While contracting it is also necessary to deal with different aspect of contract that will directly or indirectly affect involving companies. What kind of contract to sign? Which contract will produce better profit with lesser risk? Such queries will arise while contractingout.

Reasons and Factors for Outsourcing: A company comes to decision of outsourcing from vision of benefits from outsourcing. Sometimes there are reasons that obligate the company. Below are significant reasons for outsourcing:
1) Lower Cost & Expenditure: 3

CPM202

Kaushal Rai|1801T3090025

Outsourcing can considerably lower budget to carry out a certain task. This is due to other dedicated outsourcing service company that has all the expertise needed. So what a company does in-house can be done with outsourcing in much less and competitive price. Moreover, there are number of choice for company to choose the service from.
2) Efficiency in Quality and High Quantity Production:

Due to detailed knowledge and experiences of outsourcing company, they produce high quality products and in less time, this increases the productivity of company. A company may not have sophisticated and up-to-date technology than that of outsourcing companies.
3) Lack of Skilled and Qualified Manpower:

Generally, it takes time and resources to produce skilled manpower for certain task. For a company to do so, will cause high expense. Outsourcing companies will have all expert and qualified manpower that have high experiences. By outsourcing, utilization of such employees can be indirectly done.
4) Managerial & Goal Dominance:

When outsourcing company handles secondary operations of a company, the company can focus on its core business and managerial aspects. Time and resources can be expended in different innovations. Various strategies can be built up to refine the company.
5) Staying Ahead of the Competition:

Outsourcing leads to implementation of dedicated services for better competition on market.

6) Less Risk:

As functions are divided, there is less risk from the companys side. Risks are divided between the company and service provider. And as the service provider is experienced and skilled, risks are avoided. The company too can focus its expense on acquiring right decisions.

Factors that direct a company toward outsourcing are indirectly explained in the postulates above. The same primary factors are listed below: 1) 2) 3) 4) 5) 6) Time Cost Manpower Resources Customer Satisfaction Productivity
4

CPM202 7) Risk

Kaushal Rai|1801T3090025

Fig: Relationship between factors and reasons of outsourcing.

Outsourcing and its Relation with Core Business: Outsourcing reduces function and managerial pressure on a company. A company always has its main focus on certain task or goal known as core business. While the outsourcing company handles some operation that are essential but not core business of the company, the company can determine on core business. The umbrella company that has been talked in the introduction section, has core business of producing high quality umbrellas, but has to give its focus on marketing, distribution, advertisement and other aspects. This other operations do take a lot of resource and time of the company. But if those are outsourced, company focuses on producing high quality umbrellas. The company can hire expertise to train employee from the money preserved from outsourcing. Latest equipments and quality raw materials can be used. The number of umbrellas the company has been producing will drastically increase. So, it is deduced that quality of umbrella is relying on the decision of outsourcing or not. Let us suppose, Umbrella Corporation has budget of Rs.100 million, which is divided among different operations of the company. Production: Marketing and Distribution: Advertisement: Manpower: Resources: Rs. 30 Million Rs. 10 Million Rs. 10 Million Rs. 20 Million Rs. 30 Million

CPM202

Kaushal Rai|1801T3090025

Let us suppose, following is the change after outsourcing Marketing and Distribution and Advertisement: Production: Marketing and Distribution: Advertisement: Manpower: Resources: Total Saving: Rs. 30 Million Rs. 5 Million Rs. 5 Million Rs. 20 Million Rs. 30 Million Rs. 10Million

Now, Rs. 10 Million profit from outsourcing can be used in any of infrastructures to develop company further more. Or the company can focus on core business of producing higher quality of umbrellas. Focus cannot only be budgetary but also in sense of time, resources, research and other aspects to improve status of company.

Disadvantages and Risks of Outsourcing: In spite of various advantages of outsourcing, there are several disadvantages and risks that a company has to face while outsourcing. After being secure of those risks, only then a
6

CPM202

Kaushal Rai|1801T3090025

company should move to outsourcing. Down below are disadvantages and risk while outsourcing:
1) Loss of Control Over Management/Less Flexibility:

Outsourcing creates less control over the function or operations that has been outsourced. Once any function has been given to outsourcing company, they will do as their policy. The policies between agreeing companies may contrast. It also causes to make organization less flexible.
2) Risk of Exposure of Confidentiality/Security Issues:

While outsourcing, the outsourcing company has to know less or more about the company it is about to work for. This process may lead to exposure of confidential information about your company. Moreover the confidentiality risking function should never be outsourced. 3) Probable Quality Issues: After outsourcing company hand over the product it was asked to produce, the quality issues may still persist. Outsourcing companies are business oriented. In this process they may majorly discard the quality of the product that the company it was working for was expecting. This will seriously jeopardize the career of the company.
4) Increasing Dependency /Slow Response:

Outsourcing is itself a process of dependency on other organization; increasing independency is not profitable to company. This will cause time delay, low quality product and other disasters.
5) Loss of Skilled Manpower in Company:

Outsourcing helps to employ most qualified and skilled manpower, but it neutralizes possibility of generating such manpower in-house.
6) Additional Cost:

Upon contract cost, many procedures will still require additional cost. Renewing contracts, implementing the contract, verifying and watching over, are example of such procedures. This cost should be calculated and analyzed before outsourcing.
7) Change is difficult or Only Partially Possible:

While bringing change in company and on procedures, it may take long time. Changing in the contract in the process of contract being carried out may take time. The new contract may take time to be implemented.

Forms of Outsourcing: According to needs of the company, outsourcing can take various forms. For simple to complex function, there are outsourcing services according to need. Some of the main forms are postulated below:
7

CPM202
1) Outsourcing of Consultant:

Kaushal Rai|1801T3090025

The elementary form of outsource is outsourcing consultants. Consultants are required to supervise and guide company toward the goal. In needy situation, they can provide direction. Consultants are easy to hire and fire. Profit is in hiring consultant and not in raising one. Disadvantage of this outsource are that, the consultants might not be devoted toward attaining goal, consultants will be supplied with confidential information that will possess possible threat to company. Hiring a consultant to supervise financial aspect of company is an instance of this kind of outsourcing.
2) Outsourcing Personal Services Contract:

There are different position that will require certain personality with adequate knowledge and experience. For that purpose a person will be contracted, evaluated and decision will be made whether to employ full-time or let go. This service can be used to get best out of several candidates with less expenditure. Choosing such post can be hard to determine, and those contracted employee will not sense security. Hiring a receptionist, and evaluating as he/she works, is an instance of this outsourcing.
3) Outsourcing Specialized Services:

Organization providing specialized services can be contracted to execute specific task of company. Due to specialized nature of the organization, service will be of high quality. An outsourcing company if outsources security related resources only, it is instance of this type of outsourcing.
4) Outsourcing Parts and Materials:

Outsourcing certain specific resources for a task can produce high quality products and services. Collaboration of two or more companies under certain agrees to form a pact to produce profit. There should be understanding among the companies forming pact. Sony laptop uses LED monitor produced by Samsung which is example of this form of outsourcing. 5) Business Process Outsourcing (BPO): This form of outsourcing handles particular business operation of a company. These outsourcings as other have its share of advantages, such as superior service quality, etc. and disadvantages are the risk it holds. For instance, a company producing umbrellas, processes of marketing can be outsourced.
8

CPM202

Kaushal Rai|1801T3090025

6) Legal Process Outsourcing (LPO): Legal outsourcing renders various law and legal related consultant and services to client companies. This type of manpower is most for a company, so instead of producing such, outsourcing can be a better alternative. An expert on law-suit is hired to handle related functionalities of the company.
7) Knowledge Process Outsourcing (KPO):

Outsourcing knowledge and data related operations are KPO. This can be done outside company or in-house by company using this service. A research team is hired to learn about all possibilities with solar energy for instance. 8) Engineering Process Outsourcing (EPO): The processes of creating architecture and building different aspects of a company are engineering processes. Outsourcing such operations is EPO which is widely used for project management, constructing information modeling, etc. A group of employee is hired to develop information management system for instance.
9) Recruitment Process Outsourcing (RPO):

The outsourcing of operations related to recruit different skilled manpower and services needed for a company is RPO. For instance, if a company provides outsourcing facility to contract doctors, it is example of this outsourcing.

Major Barrier to Outsourcing IT Functions: Privacy and confidentiality issues are two of the significant obstructions to outsourcing IT operations. Every company has certain amount of private and confidential resources and information. The working of the company, strategies applied to reach the objective of the company, daily transaction records and other such, is generally private of every company. This confidential information is kept in some databases on electronic devices. These databases are updated and maintained by an operator. If such databases of a
9

CPM202

Kaushal Rai|1801T3090025

company are gotten hold by other competitors, then it may create severe risk. If the companys competitors thoroughly knew the internal structure of the company, finding loopholes and using against the company wont be too far away. If a company has physical infrastructure that should be kept secret, then there too may be the risk of outsourcing. Potential threats of outsourcing information related functionalities are: 1) Leakage of confidential information to rival companies. 2) Misuse of customer information, resulting less customer satisfaction. 3) Losing control over core business. 4) Longer period of time to implement or bring change on the old system. For instance, an operator is hired to operate a customer information system where data of customer are kept and are confidential to external world. If the company finds the operator to be unqualified, letting go will be the companys next move. The operator then is let go. But he/she will still inherit some of the knowledge about the companys customer, which can be misused. This is general threat that can be mitigated, but if same case was with higher confidential information system, there is grave threat ahead. There are many such cases that have occurred in past related to confidentiality issues. Recently, angry ex-employee Rodney Lorenzo of American Airline threatened to expose crucial information about in-flight safety after being dismissed from the job of flight attendant. He had written two letters threatening the airlines.

Fig: Evaluating between risks and advantages of outsourcing is necessary. Due to probable great risk and loss to the company, companies hesitate to outsource IT functions. But with necessary precaution and consultant, companies can radically diminish such threats.

10

CPM202

Kaushal Rai|1801T3090025

References: Books & Whitepapers: Rod Aalders, IT Outsourcing: Making IT Work, Fujitsu, 2002. Pages 5 to 8, 12. Robert A. Adelson, Outsourcing: Legal Issues and Contracts, 2005. Oleg Ishenko, Outsourcing Of Software Development, Humbold Universitt zu Berlin, 2005. Pages 3 to 5. Websites: Pallab Dutta, IT Outsourcing Facts, www.eHow.com http://www.ehow.com/about_5488292_outsourcing.html T. Thompson, L.S. Wynn(03 March 2011), What is Outsourcing, www.wisegeek.com http://www.wisegeek.com/what-is-outsourcing.htm Arnold Anderson(May 27, 2010), Reasons for IT Outsourcing, www.eHow.com http://www.ehow.com/list_6558893_reasons-outsourcing.html

11

CPM202

Kaushal Rai|1801T3090025

Turnitin Originality Report Project Management by Kaushal Rai From Project Management (Project Management) Processed on 03-13-11 3:54 AM PDT ID: 175915572 Word Count: 2587

Similarity Index < 1% Similarity by Source Internet Sources: 0% Publications: 0% Student Papers: 0%

12