Reason For Outsourcing

Reasons for Outsourcing:

There are four primary reasons why a company outsources one or more of its functions:

Outsourcing may free staff for other activities

As it moves to new technologies, a company may want to provide existing staff members with the opportunity to upgrade their skills.

For example, when a company is implementing a large integrated system such as an enterprise resources planning (ERP) system, it may choose to transfer responsibility for legacy system support to an outsourcer so that its own staff can focus on the ERP installation.

Outsourcing can provide expertise that is not available in-house

This is the converse of the first reason. Rather than train its own staff in new technologies or new systems, IT may choose to hire an outsourcer to provide that expertise.

Outsourcing may reduce risk

If IT has high staff turnover, minimal breadth of coverage of key functions, or is at risk of losing key staff due to early retirement, it may choose to mitigate that risk by transferring responsibility to an outsourcer who will provide continuous coverage and cross-training.

Outsourcing may reduce costs

Lower costs are one of the key drivers for outsourcing. Although the use of off-shore resources is one way a service provider can lower costs, others reduce costs by employing formal procedures to eliminate waste and non-value added tasks.

Before initiating an outsourcing strategy, IT should consider what it hopes to accomplish.

Potential Disadvantages of Outsourcing:

Although there are compelling reasons to outsource certain IT functions, there are potential risks that must be considered, including:

Flexibility is reduced:

1.       Because IT no longer manages the day-today activities of the entire staff, it cannot easily transfer people who were supporting one system to another system if business needs shift.

2.       Similarly, in the case of a sudden economic downturn, the company cannot lower costs by lying off staff that are now controlled by the service provider.

3.       Although contracts typically provide clauses for renegotiating services and fees under these circumstances, the renegotiation process may be longer than IT and the customers would like.

Costs may not be lower:

1.       Some companies have found that outsourcing contracts that were written to reduce their costs do not. The primary reason for this discrepancy is that all needed services may not have been included in those transferred to the supplier.

2.       This can occur when the requirements definition phase is curtailed or when the right customers are not included in the project team. In some cases, the negotiated SLAs are lower than those previously provided by in-house staff. This may be the result of an incomplete analysis of requirements, where the team does not fully understand the current service levels, or it may be a deliberate attempt to lower costs by reducing services.

Customer satisfaction may suffer:

1.       If negotiated service levels are lower than those previously provided or if the customers’ perception is that the supplier provides fewer services, satisfaction may decrease. As noted above, even if service levels do not change, customers may be unhappy with the change from in-house staff to a service provider.

2.       The risks are real; however, outsourcing can succeed if the right strategies are employed. Six Sigma tools and a continued focus on customers will help.