Outsourcing Management - Essay Example

Outsourcing Management Introduction The purpose of this study is to examine if IT Outsourcing Management acts as a strategic tool for Starbucks Cafe or not. Study encompasses a brief overview of its historic background highlighting the significance of "Kodak Effect". (Bryson, 185) Then, there will be a brief review of various types of Outsourcing Management Strategies used by the cafe like Selective Outsourcing, Value Added Outsourcing, and Cooperative Outsourcing and after that there is a brief description of the advantages and disadvantages of Outsourcing Management for the cafe. A general idea on its impacts at the Macro and Micro Level is also given in the discussion. History Currently Information Systems (IS) Outsourcing Management its a familiar concept that all of us have already heard something about. The Big Boom of IS Outsourcing Management started with the "Kodak Effect". Outsourcing Management of Information Systems it is a reality since 1963 when "Ross Perot with his company Electronic Data Systems signed an agreement with Blue Cross of Pennsylvania for the handling of its data processing services". (Dibbern, 6) The cases of IS outsourcing continued thought the years until 1980s when Kodak have made a successful " strategic alliance" with is IS partners led by IBM, DEC and Business Land to outsource its information systems. From this moment on no longer was possible to say that "IS is strategic and hence cannot be turned over to a third party ", because if Kodak a renowned company who considered IS to be a strategic asset and was outsourcing it in a successful way, then others could follow the same steps. This really happened like for example with: General Dynamics, JP Morgan, BP, and many others around the world. (Dibbern, 07) The following are a list of the three main types of outsourcing management. Total Outsourcing All operations have been contracted to another provider. This is common in generic, non-strategic businesses like food or janitorial services. Partial Outsourcing This is when certain activities are kept in house such as customer service while other more specialized activities are sourced out. Plants and telecom offices would typically engage in this type of outsourcing. No Outsourcing The operations performed day to day are highly unique to an individual business and vital to marketing believability. An example would be a college or university. In the Old Economy the notion of lifetime employment was considered the norm however the New Economy is built on flexible work contracts. Outsourcing Management is a trend that has become particularly attractive, as firms contact workers when the need arises. The Economist magazine hit directly upon the theme with the phrase ‘Your company needs you, for the time being’ (Heikkila, 183). Employees are facing greater job insecurity and wages are increasingly dependent on the performance of the group rather than the individual (Vernon, M, 56). As employees are freelancer agents, working for multiple firms on temporary contacts, they face a loss of fringe benefits such as health insurance and stock options (Kim, B. and Park, K., 48). Outsourcing Management at Starbucks When Starbucks outsourced to other developing countries, it came with technological information and new technology. When the locals go to the multi-national companies like Starbucks to work, they gain working experience and they learn the efficient methods that the multi-national companies use in their companies. When they leave the company to work at a local company, they bring along their methods of working and teach it to the new company, letting local companies learn the better ways of working. The host countries will then be able to gain from the multi-national companies by learning new technological information. This in turn helps them to improve their industries and factories production rate, thus increasing their profits and helping their country become richer. The government of hosting countries also gains taxes from the multi-national companies when they outsource to their country. The multi-national companies will have to pay the hosting government the tax revenues, letting the government become richer more through the taxes on the multi-national companies than the ones on their own countries companies. The multi-national companies also stand to gain when they move to the developing countries, as they tend to have lower cost of labour. Because of this, the multi-national companies spend lesser amounts of money on employing the workers and so their profits are higher than if they stay in their own countries. Globalization has made great impact on increasing amount of outsourcing management in Starbucks. These days, numbers of organizations are trying to entre in the foreign markets; this makes an increase in the amount of global companies. However, most of these companies unlike Starbucks do not possess in-house capability to discuss or run the supply chain in foreign markets. Hence, they have to outsource their chain of supply to big organizations having international skills in the distribution task. One major reason for increasing trend of outsourcing management at the café is the rising intricacy of distribution systems. To move and to store items is getting more and more complicated for the café with the passage of time. Majority of manufacturing firms do not want to waste their management resources to carry out such tasks. Hence, they choose to outsource this task to logistics companies as they have all the required skills and technology of performing such tasks. IS / IT Outsourcing In the last years everyone could witness the increase of investment in information technology. Looking to history, in this particularly case to a study done by Department of Commerces Bureau of Economic Analysis, regarding Local and International Companies, one can easily see that in 1965 the percentage of capital expenditure in information technology was 5%, in 1980 was 30% and in the end of decade it was almost 50%.(Carr, 45) This is only a study that gives us the suggestion what is happening in all world in terms of the concern with information technology and consequent increase of capital expenditure in this area. Its a common use the expression "Information System Outsourcing ", this is related with the using of an external vendor to build or operate a firms information systems. (Dibbern, 04) Outsourcing Management allows the cafe to save monies that can eventually reinvested and often create new jobs. There are also some disadvantages of outsourcing for the cafe. Some drawbacks include the "loss of direct knowledge within the cafe and difficulties in managing the outsourcing process." Ironically, as much hype that is going on about the mass numbers of companies outsourcing (overseas), "according to recent statistics, less than 5% of Fortune 1000 companies are fully utilizing outsourcing." The Department of Labor reported last month that off shoring (outsourcing) to other countries has only accounted for 3% or a little over 16,000 layoffs in 2004. As far as Starbucks is concerned, "Outsourcing actually brings far more benefits than costs, both now and in the long run", says Daniel W. Drezner, Assistant Professor of Political Science at the University. When asked if citizens should be concerned about the economic effects of outsourcing, he replied "Not particularly." The truth is majority of the calculations that are presented are overstated estimates. There are different kinds of outsourcing arrangements, used by the café like: (Stiroh, 90) * Selective Outsourcing - when one particular area of IS activity is given to a third party. * Value Added Outsourcing - particular area of IS activity given to a third party who is thought to be able to provide a service that is going to add value to the activity that could not be cost effectively provided by the IS internal group. * Cooperative Outsourcing - some activities are provided by the internal IS group and the third party The decision to IS outsource or not is going to depend if that is a core or non - core competency. The idea is to outsource what is non-core and do in-house the core competencies. This distinction is going to change according with the business of the organisations. (Heikkila and Gordon, 184) With this in mind there will be an analysis of different aspects of IS Outsourcing like Drivers and Impacts. Outsourcing Drivers Scarcity of capital - companies not always has the amount to use in the development of all the areas, outsourcing saves a lot of money since they dont need to support the development costs or have an internal information systems staff. A survey for 252 IT managers in the UK, 44 % feels that cost-savings is the primary reason for global outsource. (Rao, 01) Lack of Know-How- sometimes its difficult to have a quick development in certain competencies inside the organisations and there are others companies specialised in this areas. (Heikkila and Gordon, 183) This situation occurs because its expensive to invest in the development of this kind of knowledge, especially if its related with a sporadic project. Its hard to be able to recruit, train and retain IT professionals inside the organisations. Speed or time to market - to make a project in a small range of time, its easier if its done by specialist than to develop in-house. (Heikkila and Gordon, 185). Outsourcing companies are much more used to deal with all the necessities and problems that a short period project faces, at the same time they can beneficiate from economies of scale. Its impossible for some companies to develop their facilities by their one means to make projects that require a big IT investment. Difficulty to justify IT value for the business - investments in IT are always expensive and the results are difficult to be seen. Another issue is when its time to stop investment because its an area that its always in constant changing and needing further investment. Outsourcing Disadvantages There are several factors to have in mind when companies plan to outsource their Information Systems abroad. In terms of country factors Starbucks needed to look at the telecommunications Infrastructure of the country since some underinvested in business infrastructures and this can create future limitations. Otherwise there are developing countries creating "technology parks" in the attempt to attract more outsourcing. A good example is India that in the state of Andhra Pradesh has developed a high-technology enclave called "Cyberabad". Legal and Security Issues, its another factor to be aware off, as governmental regulations on technology transfers, intellectual property and copyrights, privacy laws. Around the world the laws governing data privacy are diverse if one compares the fact that US doesnt have laws that prohibit the movement and processing of data between international borders and the EU require very stringent privacy standards. (Rao, 01) Its extremely important that the developing countries improve in these kinds of regulations to make them more attractive. Intellectual Property rights its other issue since like before the regulations are very varied among countries and this can lead to situations of industrial espionage. Its important to standardize laws across countries. (Rao, 01) In cases that large geographical distances separate the collaborating teams, the time zone differences assume a potential opportunity or loss for both parts. Some companies have opted for partnerships with outsourcing providers that lie in closer time zones. (Rao, 01) Another thing to have in mind its the culture and language differences. Some developing countries where the high volume of population is fluent in English like India and French for African countries are being preferred instead of some countries like Brazil and Mexico. The ability to speak a common language is crucial to the success of the outsourcing process at Starbucks. (Rao, 01) An Outsourcing success relies on the technology as much on people, its important to bear in mind that if technology is predictable that doesnt happen with individuals. Sometimes outsourcing its a success in the beginning of implementation but them with time it becomes problematic because the staff that is using it doesnt feel comfortable. (Vernon, 53). For Example: If someone works in a European Business Service for the Financial Area, to make this possible it is necessary to outsource some areas. Now gradually that IT outsource staff is leaving and when the problems occur the IS internal staff needs to sort it out, but they have lack of technical knowledge and they are different from the persons who created the systems, this creates delays to solve the problems. IT/ IS Strategic or Not There are different definitions of strategy, in this work will be considered "Strategic Information Systems as a computer systems at any level of the organisation that change goals, operations, products, services, or environmental relationships to help the organisation gain a competitive advantage." (Kim and Park, 43) Many opinions about this topic" IT/IS Strategic or not" have been published during the years. Lets have a quick look to see what the real discussion is. First, the importance of IS Outsourcing its a result of changes in business strategy. If one looks to diversification strategies performed by some companies they can realise that there is a focus in their core competencies. This is a result of the fact that senior executives come to believe that a sustainable competitive advantage come by a strategic focus on what an organizations does in terms to improve and beat the competitors, the rest should be outsource. This vision of IS function as non-core activity and considering that IT vendor have economies of scale, technical expertise that allow them to provide this services more efficiently than an internal IS departments creates an increase in the IS outsourcing activity. As mentioned before organisations like Starbucks outsource their non- core competencies, but there is a exception to this principle, if the activities are special in terms of being a critical success factor or in another words if they are necessary to the success to the firm but not sufficient and if this its not available in the marketplace this will be done inside the organisation. (King, 48). IT was considered a "special "activity in the beginning, but with all the specialization in the several areas in the future only a few areas related with IT will prevail as " special " in terms to justify their non- outsourcing. Other authors look at outsourcing in a different way, splitting it in two concepts: tactical or strategic. They consider that outsourcing is tactical if driven by a problem-solving mentality. Example: an organisation outsources its IT infrastructure to save costs. On the other hand its "strategic" if is aligned with the organisations long-term strategies, as improve the competitive advantage, focus in the central activities of the business or reposition in the marketplace. But some companies had problems with mega-deals with IT vendors, and had to invest again in there IS departments. On the other hand other companies that refuse to outsource had failed putting their business in risk. Looking to these scenarios its important to have in mind that IS outsourcing its something that needs to be planned carefully to avoid similar problems. Its important to have in mind that the Information Systems Strategy must be considered in the Business Plan. Carr defends that with the increase of the importance and ubiquity of the Information technology, their strategic value decreased. He defends that what gives competitive advantage its not the ubiquity but the scarcity. At this moment hardware and software systems are standardized and best practices are universal practices available to everyone, so the eventual competitive advantage as gone. With this he reinforce that IT is no longer a source of competitive advantage but rather a competitive necessity. (Kim and Park, 45) Following this perception managers will prioritise reduce risks and costs rather to make investments and innovations, but this doesnt mean that they should stop investing in IT. This is for sure one of the areas where is more profitable to share the innovations making them common in the market than to keep it only for themselves because the cost it too high compared with the benefits. According to Kharif, the cost of IT off shoring is going to be more or less the same if the work was done internally. She says that the problem is that only few companies are aware of the real costs since its difficult to measure outsourcing productivity. Michael Manh, manager partner at software consultancy QSM Associates says that a lot of companies have realised that and they dont say the problems they have to avoid more crashes in the projects. Another point mentioned by Manh is that programs developed in offshore are buggier 30% to 40 % than the ones developed internally. The costs of fixing these bugs are normally very expensive. Kharif also describe the increase of cost when offshore as, increase of salaries for the employees that the company expatriate to taken care of their operations abroad in terms of supervision. On the other hand the increase of costs of executive travels is evident. (Kharif, 01) Micro and Macro Level There are two current opinions regarding the IS outsourcing impact in Micro and Macro level. These two current of opinions will be represented by the Opponents and Proponents points of view. (Misra, 2004) Proponents Micro Level: they consider that savings are too high to disregard and this leave the companies to outsource, but its essential to be conscious that if you offshore a bad process its difficult to have saving only because of outsourcing it. The savings are related with networks advances like VPN technology and storage. On the other hand sometimes the result expect in the first outsource process its not the best in terms of savings, but there will be an increased in the following ones. (Nguyen, 62) Macro Level: in the future this creates higher salary jobs and market place becomes more efficient. (Nguyen, 62) Opponents Micro Level Savings are not as expressive as initially thought, there are hidden costs as knowledge transfer, additional management, IT quality sometimes is poor or difficult to measure, and training in language , culture are expensive too. (King, 80) Macro Level Losses of jobs that arent compensated with the creation of new ones. The risk of security and privacy its evident since a lot of confidential information is shared with external organisations. (Stafford, 32) Despite all the benefits of outsourcing, there are some drawbacks, and they primarily deal with the loss of control of the business operations at Starbucks. Like Starbucks, many businesses are worried about outsourcing at the same time as taking advantage out of it. A business operation would usually have a company manager provide oversight and control of the operation, whereas the control of an outsourced operation is maintained solely through the outsourcing contract. It is critical that the outsourcing contract be detailed with clearly defined expectations for the service provided. In addition to the loss of control, another disadvantage to outsourcing is the lack of flexibility. Since an outsourced business operation is under contract, there is an inability to rapidly change this relationship to take advantage of a changing business environment. Weighing the advantages and disadvantages is essential to determining what business operations should be considered for outsourcing. However, there are some business operations that are better kept inside a corporation and should not be outsourced. Any operation that is extremely critical to your companys existence should usually stay inside your corporation. Also any business operation that you are an expert in, or that your company excels at, should not be outsourced. For Starbucks, another disadvantage is the loss of managerial authority. It is much easier to manage employees in house than it is to manage an outsourced service provider. Outsourcing does not eliminate management responsibilities; it simply changes the nature and level of responsibility. It is also possible to lose sight of day-to-day operations while focusing on coordinating contracts with an outsourced company. Add to that the legal fees that will be incurred for putting together these contracts. The main reason to outsource is to reduce overall costs and any hidden fees may affect a business’ bottom line. Conclusion During this study this different approaches and opinions regarding IS Outsourcing Management at Starbucks Café were discussed. Some defended that the benefits of outsourcing go further than cost-savings, including also reduce of fixed IT costs, access to technical experts around de world and allows focus in the core competences of the organisations. (Stafford, 31) On the other hand, others as Kharif defend that there are hidden costs regarding IT Outsourcing Management that normally are dismissed like the costs of: travel for executives to ensure the ongoing projects, fixing bugs from programs. Regarding the discussion, if IT Outsourcing Management can be considered strategic or not, its possible to see that since IT is appropriate for applications that are not sources of competitive advantage for Starbucks, it cannot be considered as strategic. The distinction between being strategic or not is going to depend from the fact that the companies maintain in-house their core competencies and tend to outsource the non-core competencies. With this in concern if the companies outsource Information Systems its because its not strategic for them. Looking to IT Outsourcing Management one can realise that this kind of outsourcing is more complex than the others, because its going to affect organisational process at Starbucks during the process of outsourcing. References Brown, Douglas and Scott Wilson. (2005) The Black Book of Outsourcing: How to Manage the Changes, Challenges, and Opportunities. New Jersey: Wiley. Pg 1. Bryson, P. (2001). 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