Slide: 1Slide 1

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

Slide: 2Slide 2

Today's Agenda

What is Outsourcing? History and Types Why Outsource (business driver) What are the problems

Slide: 3Slide 3

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

Slide: 4Slide 4

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.

Slide: 5Slide 5

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.

Slide: 6Slide 6

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

Slide: 7Slide 7

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’

Slide: 8Slide 8

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

Slide: 9Slide 9

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)

Slide: 10Slide 10

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

Slide: 11Slide 11

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

Slide: 12Slide 12

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

Slide: 13Slide 13

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.

Slide: 14Slide 14

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?

Slide: 15Slide 15

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)

Slide: 16Slide 16

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

Slide: 17Slide 17

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

Slide: 18Slide 18

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– …

Slide: 19Slide 19

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?

Slide: 20Slide 20

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?

Slide: 21Slide 21

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

Slide: 22Slide 22

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

Slide: 23Slide 23

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