Reasons Why Organizations Outsource IT and E-Commerce - Essay Example

MICS Contents Critically discuss the reasons why organizations outsource IT and/or e-commerce 3 The critical issues in managing outsourcing relationships 10 References 19 Appendix 21 Critically discuss the reasons why organizations outsource IT and/or e-commerce E-commerce which stands for electronic commerce is all about carrying out business over the internet with the help of computers that are connected to each other forming a network, it helps both customers and business organizations to be updated with the information related to products or services worldwide, so that both of them could benefit with the best of deals in supplies. E-commerce is using digital communications for buying and selling of goods or services or transfer of funds. E-commerce helps the suppliers to be directly connected to the customers through online marketing without investing in any kind of establishment or hiring any third party/ agents. E-commerce has helped in a great way to bigger organisations by increasing the information flow within the supply chain by letting consumers directly avail the products/services from the suppliers rather than going through the different intermediaries. This intranet connection helps to reduce any delay in the supply chain due to constant flow of information between the suppliers and the business. The constant flow of information helps the business firms to be aware about the customer demand and the availability of supply hence reducing on the inventory cost. Whereas in case of small and medium sized enterprises if the company is having e-commerce activities it has to maintain higher stock levels compared to earlier in order to meet the higher customer demands through online selling. The maintenance of higher stock level in turn will increase the cost for these SMEs but they will be benefited by elimination of the middle men and reduction in data entry or other such paperwork costs with the help of e-commerce activities. E-commerce gives a competitive edge to the organisation and helps to expand more in less amount of time that to reaching out all the customers globally. E-commerce cut down the huge amount of expense involved in travelling, marketing, promotion of products and helps to reach out the targeted customers located across the globe in the least time possible. It is the most cost effective tool and the only platform where the customers and the suppliers can meet. It helps in reducing the cost of production, processing and even distribution of products to the desired location. E-commerce down the line has not only helped in cost reduction for many organisations but has also helped in drastically increasing the revenue by more sales and thus more profits. It is the most important tool outsourced by majority of the organisations. E-commerce helps in segmenting the market and focussing on a particular segment and sells the products. It helps in customization of products and services without any cost involved and helps in generating profits for the organizations. E-commerce helps an organisation to acquire new customers at the most lowest cost by operating 24/7 hours in a day and even maintains customer loyalty by applying various innovative techniques of push technology at the lowest investment possible. E-commerce gives customers a wide range of choices in products or services and also helps organisation to create new products and services. E-commerce is the most effective and inexpensive tool for expansion of the business, this tool even reduces the time to minimum in terms of marketing, delivery, it helps in gaining customer loyalty and increases profits for the organisation. A direct benefit of this tool is increased levels of customer satisfaction which in turns results into higher sales and thus higher profits (Tallo, 2007, pp. 53-57). An e-commerce enabled business helps in reducing labour costs, and even costs involved in documentation, supervision, mail preparation, data entry, telephone calling, error detection and correction. This reduction in time and personnel for the various business processed helps in reducing the strain on other resources. E-commerce helps an organisation to advertise more products at lesser expense, promoting products or services online with lesser investment, providing online quotations, attain customer queries, using e-mail as a communication tool and eliminating paper work, helping in foreign market research, operating efficiently on the dealer network, better coordination between supply and customer relation from several outlets, providing better service out of normal working hours, and improving response time to customer queries (Tanzania Trade development authority, 2014). Outsourcing is a method by which certain activities or functions are transferred from the internal group to an outside entity. Often organisations transfer certain noncore functions to the outsourcing vendor. Outsourcing is not about simple supply chain transactions between a firm purchasing products or services from an external vendor but it is more about effective client coordination and communications totally based on trust. Any function or activity of a business can be outsourced but mainly outsourcing requires transfer of design, production, and various services. Many organisations had their own IT solutions previously but now outsourcing has become a core competitive tool, it involves cost savings and strategic partnerships with the IT vendors. All IT related functions may that be development, maintenance, helpdesk activities, database servers, data entry, storage, IT strategic planning are being outsourced by organisations to give them a core competency amongst the fierce competition. Outsourcing of e-commerce/IT solutions is done by organisations typically for any of the three reasons may that be operations improvement, business improvement or cost improvement. Cost improvement is through reduction of overhead costs, labour costs, and outsourcing may involve investment but lower compared to the cost involved in developing rather than outsourcing. Operation improvement will be there in terms of specialization of the vendor in one specific area from whom the services are being outsourced and apply all its expertise in that particular area for its client organisation. This kind of operation improvement is mainly seen in IT speciality niche such as ERP customization, Web hosting etc. Another reason for such outsourcing is business process improvement that is supply chain activities and customer relationship activities; it enables to improve performance metrics, business rules and policies, and development of organisation structure. Outsourcing such e-commerce solutions from an outside entity helps to provide a comparative advantage for the organisation. (Schniederjans, 2007, pp. 95-97) The e-commerce enablers are the ones who provide the services to the organisations, these enablers act as outsourcing vendors for the firms. These enablers provide various kinds of services on a digital platform may that be calculating shipping, value added tax, duties or charges which is unique to each country, or translating websites. Outsourcing is more common to non-core standardised products. Organisations which are large and are highly productive are the firms which are involved in such off shoring process. There are basically two kinds of outsourcing – managed service outsourcing and business process outsourcing. Managed services are those type of outsourcing where the vendors from whom the services are being outsourced uses the applications that are hosted by the organisations to execute outbound campaigns. The vendor either will host or take over the applications of the host company in managed service outsourcing. Business process outsourcing is using outsourced technology for various activities internal to the company may that be lead generation, database management, telemarketing of the products or services etc. If a call centre company handles the telemarketing department for an organisation then it will be termed as a business process outsourcer. Any organisation will require outsourcing the IT solutions when there is a lack of expertise or bandwidth. Many product-driven companies, many B2B companies, and even some consumer product companies may not have enough people with all the skills it is then when the outsourcing becomes very important for the firm to face the highly competitive market. Very high skills are required to build database analytics, database marketing and thus the ecommerce solutions are outsourced by the organisations to cut down the cost to reach to as many customers as possible at the lowest cost. There are organizations which do not have the skills required to operate marketing automation tools effectively in such cases outsourcing plays a major role for an organisation as specialised help is needed. Often organisations are not so much technology driven or they might have incompatible technology. In order to integrate high technology driven marketing applications for the company may lead to high investment cost. This situation is well avoided by outsourcing specific marketing function with high ended technology from the specialists. This method helps the staff of the organisation in long run as they can develop their skills on being in constant touch with the upgraded marketing tool. The outsourcing thus helps to give the company the best technology at the low cost and even develops skills in the employees. When the staffs of the organisation is fully skilled then in the later stage such technology can be built within outsourcing or can be outsourced on demand depending on the financial stability of the firm. Any firm needs to reduce its costs to as minimum as possible to earn better revenues, so in order to manage such costs firms opt for outsourcing of IT solutions or ecommerce. More amounts of fixed costs are involved with people, system or facilities. In such cases outsourcing means cutting down the fixed costs by reducing the intermediaries and connecting directly with the customers. A firm needs to be flexible in terms of changing market demand. This flexibility is bought by outsourcing rather than developing. These IT solutions are outsourced from vendors who are specialists on the specific field and there is no need for the company to give training to its staff or hiring people to develop such tools which in turn reduces much of the cost. Ecommerce gives a cost effective and work efficient platform for the organisation, and outsourcing such a platform gives the organisation the assurance of being provided with the best of technology from skilled personnel even to some extent being customised as per company preference and also adaptable to any change that is such tool which are outsourced can be changed according to market demand and growth. Although the specific costs of outsourcing might be a little higher then developing on itself but there are certain hidden costs involved in maintaining such internal marketing tools. These include the rate of attritions, delays of changing priorities, lack of support when required, the costs associated with the contraction and expansion of the marketing functions are very high even if calculated by the organisations on the monthly basis. Though the onetime cost for outsourcing is a bit high but it is considerably low compared to the high variable expense if developed by the organisation internally. Even the level of service provided by the outsourcer can be scaled up or down depending on the market changes. Though the outsourcer charges more for the service being offered but they even bear the risks involved when the organisational strategy changes. Another reason behind outsourcing is to set a benchmark against the best practices. Outsourcing a function is to trust such a company who has been performing such operations earlier for other organisations. The experienced gained provides the best of practices to the organisation which is an added advantage for the firm. This experience can be developed in-house but it will take longer time, but engaging experts provide access to their expertise and even the knowledge can be transferred immediately. (Aswathappa & Dash, 2007, pp. 117-120) When the focus of the company is to handle the insight rather than the operations the IT solutions are outsourced. The focus of the company is to run the operations smoothly and this technology helps the operations simpler. In a rapid growing market to outsource new process are faster and cheaper. In such a growth phase imparting knowledge to the staff regarding supply, demand, production, promotion, distribution may be time consuming so outsourcing of such technology enabled solutions help to impart knowledge and even the benefits of the outsourced function can be taken while developing and maintaining internal capabilities. When there is fall in profit or revenue levels the company cut down on costs. The marketing activities cannot be shortened. There would be cost involved if such activities are cancelled, and then there are even cost associated with staffing, attrition, and the erosion of the knowledge base which can be expensive. Outsourcing functions offer a great level of flexibility. Some vendors bill on a project basis which can be adjusted on minimal notice period. When there is a retainer agreement there is lower degree of flexibility but a significant level in the practice. For the outsourcers the customers always play a very important role. Another advantage or the reason behind such outsourcing is to mitigate the legal risk. Legal compliance is very crucial factor for any organisation. Some of them have very less knowledge regarding the legal compliance matter. When a well-structured outsourcing agreement is made that ensures data privacy and security of customers it not only helps the organisation to well understand the issues but also removes the burden to some extent related to legal risk whenever there is an audit by the government or any customer complaint. This in turn is an added advantage of the outsourcing method opted by the organisation? There have been many mergers, acquisitions over the years which in turn have led to greater market opportunities but in turn have resulted into incompatible processes and systems. Some outsourcers specialize in merging data, duplicating, some redesign the services offered, and some even provide enterprise wide unique marketing solutions which can be flexible to any change. Since the outsourcers have an access to large number of database their expertise and ability will scale up as necessary and will be advantageous for the organisation. Acquiring a new customer channel or geography comes with its own opportunities or pitfalls, implementing a new marketing channel would require a level of expertise which companies might not be having in such case outsourcing such resources to supplement internal resources is a better idea and is used by most of the organisations. The critical issues in managing outsourcing relationships Business process outsourcing and electronic commerce started gaining prominence from the beginning of 1980. Slowly, the outsourcing activities started gaining increased importance due to the various advantages associated with the outsourcing activities. There are major benefits of outsourcing activities for a business including cost advantages, flexibilty, innovation, scalabilty and time and resource saving. There are many critical issues faced in the outsourcing of the business processes including information technology processes and e-commerce activities. One of the major factors which decide the success or failure of the outsourcing activities of a business is the Outsourcing Relationship Management (ORM). Outsourcing relationship management is considered as an important discipline of mangement. Effective relationship management strategies are used by different companies across the world to ensure that the challenges and issues faced in the process of outsourcing are properly solved. The main reason behind outsourcing the IT function of the business is to save costs and get a better and expert service in the domain. A new way of thinking is to make IT outsourcing a strategic transformation of the IT domain. These strategies can be further divided into four sub-groups through which IT outsourcing can be managed: Sourcing Strategy: This is a strategy carried out when the service provider is to be finalized and sourced. It involves a thorough and rigorous research to find the correct vendor to outsource the IT function. Since IT function forms the backbone of any business, it has to be outsourced to a vendor who can manage it efficiently and cost-effectively. ESP evaluation: External Service Provider or ESP selected through the above step needs to be evaluated before it can be given the live IT function of the business to measure its efficiency. Once the IT function is transferred completely, it cannot have any margin for error. This is the reason why the ESP is thoroughly evaluated from time to time even after the outsourced work is handed over. Deal Development and Contracting: A contract needs to be in place between the ESP and the service recipient as per the requirements of the latter. For measuring the success of the relationship p, empirical data is derived out of such contract. This contract must be free to evolve as per the needs of the service recipient over time. The terms of the contract can even be redefined if deemed necessary else the contract may become limiting and might not provide the ESP the freedom to operate in its full strength. The objective also shifts over time from cost control to other aspects like productivity and profitability. As the objectives evolve over time, the contract must also evolve to become more prevalent. Sourcing management: The most critical factor of outsourcing is the sourcing management. The more a sourcing relationship is taken care of, the more it nurtures and results in overall success of the relationship. The most satisfied enterprises with their on-going relationships are those who understand that outsourcing does not eliminate the need to manage the ESP. There is more need for a strong internal management structure which can interact with the ESPs at various levels when the relationship is complex in terms of breadth of services and reach within the enterprise. Enterprises and service providers can successfully exploit the relationships through a clear, disciplined and structured process keeping in mind the critical success factors. Focusing on integration of the relationship is also important which is done in three steps, coordination of activities, adaptations of resources, and interaction among individuals. A requirement in outsourcing contracts is that a relatively intimate relationship should be established between the outsourcing vendor and outsourcing. If such a relationship exists then the outsourcing company may eliminate the need to closely monitor the outsourcing vendor. On-going relationships help to build trust between the two parties. The more they interact with each other, the more comfortable they would be in maintaining the relationship. The outsourcing company must also design the work such that it adequately incentivizes the exceptional work done by the outsourcing vendor in order to help boost the confidence of the outsourcing vendor and motivating it further to achieve better and better results. This activity can be considered as a relationship strengthening exercise in which the outsourcing vendor feels motivated to do a better work for the outsourcing company. If the relationships are close enough, both the parties can exchange their views towards a common goal and collectively discuss and show confidence in each other in achieving the desired goal. The trust in such kind of relationships lessens the perceived likelihood of demands for recognition by the outsourcing vendor. Sometimes a combination of co-operation and conflict arises between the two parties. Co-operation exists when the outsourcing vendor helps in creating value for the outsourced company which would not have otherwise existed. Conflict arises when the outsourcing company divides the resulting surplus value. These are called hybrid relationships and are difficult to manage (Barthélemy, 2001, pp.60-69). Structuring of feed by the outsourcing company for the outsourcing vendor also forms an integral part of the relationship between the two. If the performance achieved by the outsourcing vendor is easy to measure, the fees can also be easily calculated. But even in this there may be an issue if the outsourcing company finds out that the outsourcing vendor is not efficiently using the technology or not implementing the state of art technology. The reverse may happen when the outsourcing vendor does not pass on the savings it makes through its upgraded infrastructure to the outsourcing company. Here, performance measures may have to be related to the business value of such systems rather than their technical performance. In case of paying fees to the outsourcing vendor, another important question is whether the fees to be paid should be fixed, variable or a combination of fixed and variable. Some outsourcing vendors demand that they be paid a minimum amount of fees regardless of the work they receive from the outsourcing company in order to safeguard and cover up their fixed expenses which they will anyways incur even if they don’t get any work for a period from the outsourcing company. This may also be for the assets the outsourcing vendor has to purchase in order to fulfil the work requirements of the outsourcing company. The outsourcing company may even demand for a minimum acceptable return if they pay a minimum fee to the outsourcing vendor. They may also mutually fix a ceiling for the maximum fees the outsourcing company will pay to the outsourcing vendor for a given period of time. This saves the outsourcing company from incurring unlimited expenses in outsourcing the work when volume is high. Generally, the outsourcing vendor agrees to such an agreement as it is getting a guaranteed minimum amount regardless of the volume of work. Some outsourcing companies and vendors may also decide upon a fixed fee structure where a fixed amount is paid to the outsourcing vendor regardless of the volume of work. This is beneficial when the outsourcing company generally has high volumes of work or is sure that they will be able to get a substantial amount of work to be outsourced so that they do not make loss by paying a fixed fee (Collis and Montgomery, 2007, pp.539-548). Disputes arise in every relation but the method of sorting out these disputes without hampering the relation is the most effective. These dispute clauses are generally covered in the contact that the outsourcing company and the outsourcing vendor enter into. In case the outsourcing vendor refuses to accept the work which is contacted to it, results in breach of contract and can be settled firstly by settling into a mutually agreeable solution. The managers of both the parties discuss out the problem and try to give a mutually agreeable solution. If mentioned in the contract, a third party expert may also be called in if the dispute is not settled mutually. Another method is calling in an arbitrator and the proceedings are conducted in confidence. These various methods of dispute resolution ensure a smooth and clear relationship between the outsourcing company and the outsourcing vendor. One of the critical issues faced in the outsourcing processes is the effective linking done with the external service providers. The level of partnership and the amount of information shared are to be decided keeping in mind the objectives and goals of the organization which employs outsourcing processes. The partnership clauses in an outsourcing agreement are decided by the client as well as the external service provider with reference to the different motivational factors, objectives and boundaries related to both the businesses. The establishement of proper linkage between the client company and the service providing company is critical for the success of the outsourcing process. The nature of the outsourcing activities play a major role in deciding the levels of information that are communicated between the two companies involved in the partnership. The client companies often face the issue of not being able to mainatin transparency with the service providers. Therefore, the client companies should decide on the levels of information that they want to share about their business with the external partnership company. The major aspects used by the companies for effectively incorporating the outsourcing strategies involve management strategies, information technology infrastructure and the organizational structure of both the client organization and the service providing organization. The management strategeis include the decisions related to the most effective combination of the different service level agreements and terms of contract and the various techniques of relationship management (Das and Teng, 2002, pp.725-746). The information technology infrastructure involve the development of supporting infrastructure for the management and monitoring of the network of different external service providing companies in the outsourcing processes. The organizational structure involves the development and maintenance of proper management within the organization and the maintenance of critical vision, structure, insight and mechanism within the organization. The role of the top mangement is critical in maintaining the proper outsourcing initiatives. Generally people from the senior management are involved in the relationship maangement process of outsourcing because outsourcing plays a critical role in the performance of differentt businesses in the current gloabal business environment. One of the critical issues faced by different companies in maintaining effective relations in the outsourcing process is that the implementation of outsourcing processes involves the requirement of innovative and flexible techniques of management and calls for specialized skills and efficiencies of the management team of the client organization. The need for the involvement of the senior management of the client company in maintaining beneficial relationships with the outsourced service providers has been much recognized in today’s world. But most organizations across the world face major issues while complying with these requirements and addressing these needs for the outsourcing process (Barthélemy, 2003b, pp.87-100). Many academic works related to effective relationship management processes in the outsourcing activities have identified the need for skilled managers to manage the outsourcing of information technology as well as e-commerce processes for an organization. The need for specialized mangers who deal with the management of outsourcing relationships is being hugely felt, especially in the IT industry which is highly dependent on outsourcing processes for the cost benefits as well as for increasing the performance levels of the business. The sourcing capability model is being implemented across different industries to measure the skills and maturity levels within an organization which are essential for the relationship management in outsourcing processes. Effective and proper management skills are essential for the successful relationship management in outsourcing. The lack of proper management skills act as major hindrances to the establishment of an advantageous partnership between the client business and the outsourcing partner. The latest trends in the outsourcing processes have identified that the businesses which adopt a multi sourcing process in the outsourcing strategy generally find specialized service providing companies and get better scale of operations and leverage with respect to the outsourcing activities. The organizational structure should be flexible for implementing the various outsourcing changes within the business. The non-flexible nature of the organizational structure and the business model of the client side business often act as a major hindrance to effective service providing. Since, in outsourcing, the in house work is shifted and allocated to different offshore service providers; it becomes critical to manage the organizational structure so as to adapt to the changing business practices. The governance function in outsourcing is a challenging area for organizations due to the huge complexity involved in the process. The lack of a robust in house management and governance often leads to confusion in the relationship management with the offshore service providers and acts as a hindrance to the success of the outsourcing strategies. The lack of proper governance within the organizational structure can act as one of the major issues faced by the organizations in effective outsourcing relationship management. The evaluation of the governance models and the monitoring of the governance practices are important processes underlying the development of robust relationship management techniques with respect to the outsourcing processes. The companies may also face critical issues related to the implementation of proper technology to support the strategies used for relationship management process in outsourcing (Barney, 2002, p.16). The requirements of communication and technology are much complex and can have far reaching impacts on the outsourcing process. The client organizations should use different software infrastructures to measure, monitor and control the performance of the relationship management techniques used in the organization. The main functionalities of the software systems include the management of the contract and agreement documents, the tracking metrics, issue, management, reporting and dashboard views of the relationship management processes. One major drawback of outsourcing is that the infrastructure related to technology for the company is to be established to the outsourcing service providers, there are many associated technology, security and compliances constraints related to this reestablishment process (Corbett, 2004, pp.44-48). But the companies should ensure the implementation and enforcement of proper infrastructure and the guiding tools required for supporting the relationship management process. The success of an outsourcing partnership cannot be decided or guaranteed by the signing of an agreement or contract (Cohen and Young, 2005, p.55). The outsourcing g process encompasses a number of supporting activities and effective relationship management techniques are necessary for ensuring the success of an outsourcing agreement. Only the agreements and the contract rights are not enough for guaranteeing a successful outsourcing process. The value of the outsourcing can be established and enhanced through the proper management of the outsourcing governance process. A co-operative agreement between the client company and the service providing company is based on the trust factor which can be achieved through the relationship management techniques used by the client organization. If the relationship between the two companies is strained, it is likely to have a great impact on the objectives of the outsourcing and the process can go haywire. On the other hand, a proper relationship management process will ensure innovation, value creation, cost saving, increased flexibility and mutual benefits for both the client and the service provider. Some other recommendations for relationship management with respect to different theories are given in Appendix 1. References Aswathappa & Dash, 2007. International HRM. New York: Tata McGraw Hill. Barney, J. B. 2002. Gaining and sustaining Competitive Advantage. Upper Saddle River, NJ: Prentice Hall. Barthélemy, J. 2001. The hidden costs of IT outsourcing. Sloan Management Review. Vol.42 (3), pp. 60–69. Barthélemy, J. 2003b. The seven deadly sins of outsourcing. Academy of Management Executive. Vol. 17(2), pp.87–100. Cohen, L. & Young, A. 2005. Multi sourcing: Moving Beyond Outsourcing to Achieve Growth and Agility. London: Routledge. Collis, D. J., & Montgomery, C. A. 2007. The hard and soft sides of IT outsourcing management. European Management Journal. Vol. 21(5), pp. 539–548. Corbett, M. 2004. The Outsourcing Revolution: Why It Makes Sense and How to Do It Right. New York: Kaplan Publishing. pp. 44–48. Das, T. K. & Teng, B. S. 2002. The dynamics of alliance conditions in the alliance development process. Journal of Management Studies. Vol. 39(5), pp.725–746. Schniederjans, 2007. Outsourcing Management Information Systems. Idea Group Inc. (IGI). Tallo, 2007. Business Organisation & Management. New York: Tata McGraw Hill. Tanzania Trade development authority, 2014. Benefits of E-commerce. [Online]. Available at: http://www.tantrade.or.tz/faq.php?item=10. [Accessed on 25th Feb 2014]. Appendix Appendix 1 The recommendations related to successful relationship management based on different theories. Read More