The Impact of Outsourcing Decision-Making on the Enterprise Performance - Essay Example

The impact of outsourcing Decision Making on the Enterprise Performance Student Name Name of Institution Date of Submission Executive Summary IT outsourcing refers to organizational practice aimed at sourcing contracts from other sources far from a running part of a computer system (ICT Standards, 2012). IT outsourcing is generally not a new phenomenon. However, the scale and scope of the idea have always been on the rise over the past few decades. Information Technology is a useful tool in enabling Business Process Outsourcing (BPO). However, there is very little research on IT outsourcing and its impact on organizational decision-making process to enable organizational management to understand the necessity of outsourcing in improving performance. However, from a different perception, this paper seeks to identify the need for IT outsourcing, outsourcing location, benefits and limitation of outsourcing, and final site some failed and successful examples of IT outsourcing and decision-making processes in organizations. It tries to explore the need for outsourcing and relating it to financial matters as adopted by various organizations. For the principle purpose of the paper, the extensional definition of IT outsourcing is utilized and taken as the primary base for decision-making processes of organizations in light of their external supply of projects or services. Table of Contents Executive Summary 2 Table of Contents 3 Why Outsourcing 4 The Location for Outsourcing 6 Advantages and Disadvantages of Outsourcing 7 Saving Money 7 Focused Strategy 7 Expansion 7 Customer Care Risks Mitigation 8 Time to implementation 8 Shifting of risk 8 Hidden Costs 8 Security Risks 9 Control Issues 9 Financial Ties 9 Moral Implications 10 Implications of SLA 10 Examples from Organizations 10 Successful Outsourced Projects 10 Failed Outsourced Project 11 Conclusion 11 Why Outsourcing Introduction As mentioned earlier, outsourcing has been attracting immense attention of most organizations in the recent past. Before outsourcing, however, organizations need to first access the feasibility of their business activities. This will help organizations get hold of the advantages that come with outsourcing. Most organizations for instance enjoy the benefits of outsourcing that include reduced cost of production and higher consumption. However, without proper decision and choice of outsourcing, organizations may also find themselves on the receiving end of the limitations that come with outsourcing. Therefore, outsourcing has been both beneficial and disastrous at the same time for organizations. However, it is important to note that outsourcing helps organizations to grow and gain a competitive edge over others (Princeton, 2005). Furthermore, IT outsourcing is beneficial in ensuring improved performance of an organization, thus improving productivity. For enterprises of most organizations, outsourcing ensures high customer care efficiency (abs, 2009). However, before deciding on outsourcing or not, organizations do the following analysis. Work Definition: organizations should first define and streamline their activities to help in evaluating the current capacity and capability. This is important to the organization as it helps in deciding what needs to be sourced to improve effectiveness. Vendor Selection: it is also important for an organization to investigate the available opportunities and come up with a decision on the choice of a vendor to source organization’s services from. Infrastructure: this involves organizations carrying out a clear investigation of what changes and the need for making investments for sustainable outsourcing. Transition: finally, organizations should investigate the possibility of switching activities between its internal operations and vendor. Reasons for Decision in Outsourcing One of the most important focuses of most organizations is to take a keen consideration of the resources that are utilized within the organization to ensure successful productivity. This implies that in the long-term, organizations should not waste time on resources that does not directly affect the focus of their operations, activities, and objectives. Outsourcing therefore is one of the most effective ways to solve this impending problem. The decision for outsourcing, in the first step, should be aimed improving performance, increasing productivity, enhancing profitability, and increasing organization’s competitive advantage in the market. However, organizations should take great care in assessing the risks associated with outsourcing that are likely to result from inappropriate management and misconduct in regard with outsourcing (iosco, 2005). Another important need for outsourcing by organizations is to attain highly specialized financial and accounting services and other activities. It is necessary for organizations to decide on outsourcing since it may prove difficult to develop and maintain some services since the organization may lack enough resources within its internal structures. Additionally, the need for outsourcing arises when an organization needs HR services from a third party vendor with the ability to offer the same services at very low cost. Therefore, over the last decade there is an increased demand for outsourcing in order to acquire more effective and standardized HR services relating to specialized technology and communication (Princeton, 2005). From this perspective therefore, it is therefore no surprise that most organizations decide to outsource most of their HR work from a third party vendor that include planning, recruitment and selection, employee relations, and compliances. Outsourcing such HR skills results from an organization’s shortage of skills or in a situation where an organization experiences inadequate internal resources to accomplish such functions (Princeton, 2005). The need for the attainment of high value services that are perceived to improve organizational competitive advantage is another reason for decision of outsourcing. Acquiring high value services at a very low cost are instrumental in providing organizations with a standardized mechanism that foster organizational development through improving HR services for employees while at the same time offering opportunities to internal employees to concentrate their focus on strategic development of the organization (iosco, 2005). Therefore, outsourcing services are advantageous for organizations that are experiencing lack of skills and poor in-house resource base. It is also vital to note that vendor or third party service providers will always engage in specialized training to ensure delivery of high quality services. Finally, quality assurance officers within the organization and the third party vendor will always evaluate performance by carrying out quality survey and assessing feedback from customers before forwarding findings to the necessary agencies for proper quality of services being delivered to customers (abs, 2009). However, it is also necessary that organizations take care of their outsourcing to avoid the rise of unemployment and issues of privacy of data usage. The Location for Outsourcing The location for outsourcing implies the destination of the outsourcing firm. Most organizations take a keen investigation on location of outsourcing to ensure that they make a decision about the right choice of outsourcing destination. Most of the organizations focus generally on geographic labor and cost differences. Choosing the correct destination or location will help organizations avoid some future implications of poor outsourcing location. Countries like China, India, and South Africa would be appropriate offshore destinations (Princeton, 2005). Advantages and Disadvantages of Outsourcing The advantages of outsourcing projects Outsourcing comes with various advantages such as saving money, focused strategy, shifting of risks, improved customer care services, time saving, and organizational expansion as discussed below. Saving Money Outsourcing service from a third party vendor enables organizations to acquire high value services at a very cost and thus reducing organization’s cost of production. This will in turn help the organization gain a competitive advantage in the market through increased profitability. Focused Strategy Outsourcing by itself is an organizational business strategy that is aimed at companies engaging in purely business activities as strategized by people with expertise in the field. This offers room for organizations to dedicate their in-house resources to areas of concern. Furthermore, when an organization hires a specialized vendor to offer services that are more streamlined to meet certain international standards,it is likely to improve the organization’s reputation and thus offering room for expansion and strategic planning (ICT Standards, 2012). Expansion Outsourcing from an international company will help in the expansion of an organization since local companies already have their operations and clients in place. Thus acquiring high value and quality services at a very low cost from a third party vendor will help an organization to cut down its operational costs as much as practically possible. This will thus offer room for organizational expansion (ICT Standards, 2012). Customer Care Risks Mitigation Growth of an organization has a great relationship with its customer satisfaction. Outsourcing usually has the tendency of improving the customer care services above levels that are likely to improve customer satisfaction and thus increasing an organization’s customer base. This will eventually lead to more sales and hence expansion opportunities for the organization (ICT Standards, 2012). Time to implementation Outsourcing organizations concentrate on buying than building and thus reducing time to implementation drastically. This will also imply that organization’s resources that include human will be free to implement other organizational goals and objectives. Shifting of risk Most organizations view risk management and mitigation as yet another important factor for consideration that determines their effectiveness (ICT Standards, 2012). Therefore, most organizations use outsourcing as a means of distributing their risks to the outsourcing company. This ensures the most advantage in the event where the market demands keep changing from time to time. It is also difficult for organizations to predict their costs more effectively and hence shifting their business processes will definitely result in shift of risks as well. The disadvantages of outsourcing projects Despite its benefits, outsourcing also has some of its disadvantages to organizations. Such disadvantages include hidden costs, moral implications, security risks, security risks, control issues, financial ties, and implications of SLA. Hidden Costs In the event where an organization will require the acquisition of extra services or products that are not covered in the contract has the tendency of attracting extra costs for the sourcing organization. It is also mandatory that the two organizations involved in outsourcing should hire a lawyer to review the contract, provide advice on omitted facts, and even provide certain amendments and appendices (ICT Standards, 2012). The legal fees will therefore increase costs. Additionally, when the parties involved take more time on agreeing to terms and conditions of the contract, there will be a significant waste of time that would have been used in production. The combination of these factors will bring about the view that producing services and products internally would be cost effective. Security Risks When outsourcing services that call for information confidentiality, organizations will be exposing themselves to confidentiality and security risks. In this regard, outsourcing services such as customer personal data and employee payroll are likely to expose organizations into some legal implications that regulate confidentiality of such information when their confidentiality is compromised (ICT Standards, 2012). Therefore, before deciding on outsourcing, an organization should have to assess the third party vendor to evaluate and mitigate the possibility of security risks in the business. Control Issues When you outsource a function from your organization to a third-party you are effectively signing over management control and decision making for that function to another organization. Whilst you will have a contract in place to cover the service level agreement, it won’t cover management decisions, and the third-party will probably not be driven by the same factors that drive your organization, resulting in potential conflicts. Financial Ties Organizations that outsource their services from a third party are practically tying their finance to the well-being of the third party. This will call for assessment of risks resulting from such financial ties. The assessment will be majorly based on the financial strength of the third party, the core use of the outsourced function of the daily operations of the organization, and the quality of the outsourced product or service (abs, 2009). Moral Implications It is also important to consider the implications of outsourcing in an organization’s existing staff, and especially when the outsourcing idea brings about very limited financial gain. It is important to analyze whether outsourcing will boost employee morale and motivation or lead to employee demoralization when a considerable number of employees are laid off. Implications of SLA The third-party organization, will always strive to reduce its cost of production to maintain a competitive advantage and improve its profitability. This implies that the organization will only try to meet the quality of products as required in SLA but will never improve quality beyond that level. It is also likely that in the event of a change in the business environment, it is not possible that organizations will adapt rapidly since the two parties must have to agree on the scope of change and even adjust to price terms in the contract (abs, 2009). Examples from Organizations Successful Outsourced Projects A good example of Outsourcing can be cited as that of Sprint outsourcing its network operations to Ericson, which is among the largest network outsource in the world as the company also outsources to portions of Vodafone and Digicel networks. Although one can argue that Sprint is poorly managed, its differentiating factors typical of telecom industry include retaining a great customer experience, customer technical support, and good service review (Mathew, 2009). Failed Outsourced Project Depro Technology boasts as one of the leading plastic manufacturing and distributing companies across Malaysia. The company is specialized in manufacturing all kinds of plastic design and printing various cards such as ID cards, greeting cards, and birthday wishes cards among others. The company decided to source its accounting services from a third party company called BPA since its inception in 1997. Depro Technology leaves BPA to perform its accounting information such as data entry, preparation of the annual report, preparing payroll, and other daily accounting transactions. The reason for deciding on BPA was simply because of the relationship between senior managers of Depro Technology and Depro (Noradiva, 2010). The main reason for decision of outsourcing by Depro was the lack of such as the cost of hiring accounting staff to run the accounting functions effectively during the start of its operations. However, the company did not carry out survey of cost and benefit analysis before making the appropriate choice of whether to outsource or not. Another serious fault was the company’s failure to choose a competent third party. The choice of BPA only resulted from the close relationship between senior management of the two companies. Although the services have gone on smoothly since 1997, by a 2006 BPA started delivering poor quality accounting services that almost resulted in failure of Depro, not to mention the financial loss suffered by the company (Noradiva, 2010). Conclusion Most firms consider the importance and benefits of outsourcing before deciding on whether to carry it out or not. As discussed in the paper, outsourcing enables organizations to reduce their costs of production, improve management, shifting of risks, reduced implementation time, room for expansion, and the service quality of IT. However, the paper also discusses the limitations of outsourcing that include security risk, hidden risks, morale implications, control issues, and implications on SLA. Moreover, organizations need to adopt precise decision models that help the organization improve precision in its decision-making (Jason, 2006). This paper argues that firms will consider various factors that include the quality of products delivered and market demands before decision on outsourcing is reached. Therefore, practitioners should come up with the best decisions that will help organizations develop a competitive advantage and find room for internal development and expansion. It is only through better decisions that organizations will reap better benefits of outsourcing. The paper has looked at the need for IT outsourcing in light to decision-making of whether to outsource or not depending on its appropriateness. This study is not without limitation. The paper argues that the widespread need for the organization’s need to outsource results from the lack of appropriate skills and resource that include human necessary to carry out specific functions. On the other hand, the paper also explains the importance of outsourcing as it enables organizations to consolidate its in-house resources to other areas of strategic goals and objectives. Reference List Abs, (2009). Outsourcing and Customer Rights Principle. Retrieved 28th April, 2013 http://www.abs.uci.edu/model_for_sustaining_admin_improvement/2-5.html ICT Standards. (2012). Advantages and Disadvantages of Outsourcing. Retrieved 28th April, 2013 http://www.ictstandards.com/Advantages_And_Disadvantages_Of_Outsourcing.htm Iosco, (2005). Principles of Outsourcing. Retrieved 28th April, 2013 http://www.iosco.org/library/pubdocs/pdf/IOSCOPD187.pdf Jason, B. (2006). Decision-Making Criteria for Outsourcing Opportunities. Retrieved 28th April, 2013 http://www.wistrans.org/mrutc/files/01-03onepage.pdf Matthew, G. (2009). UPDATE 3-Ericsson to manage Sprint network in $4.5-$5bln deal. Wall Street. Retrieved 28th April, 2013 http://www.ccgbank.com/documents/Sprint_Outsourcing_%287_09%29.pdf Noradiva, Hamzah et al, (2010). Accounting Outsourcing Decision Processes in a Malaysian Company. Malaysia. Retrieved 28th April, 2013 http://www.wbiconpro.com/101.Nordiva.pdf Princeton University. (2005). Outsourcing in a Global Economy. Retrieved 28th April, 2013 http://www.princeton.edu/~grossman/outsourcing.pdf Read More