The Costs and Benefits of IT Outsourcing - Essay Example

Running head: IT MANAGEMENT The Costs and Benefits of IT Outsourcing/Offshoring Submitted by: Jon [Click here and type your s Abstract Companies are continually reviewing budgets and project requirements in an effort to find cost-savings to both customers and their own companies. One of these methods is in sending many projects into such outsourcing countries as India, but, is there in fact a cost savings or a cost spending attitude arising amongst those high in the IT ranks Through article reviewing and analysis of whether or not IT outsourcing/offshoring has in fact any merits with respect to cost- savings, this paper will look into the advantages, the dispelling of myths surrounding outsourcing, the importance of the value chain and the hidden costs of outsourcing that many companies do not take into consideration during the onset of the outsourcing project. Many of these discussion points can either make for a successful transition for companies looking into deciding whether to send critical or non-critical projects offshore, or, can entice a disdain for the whole process itself. This is for you to decide after reviewing all materials. Introduction Many companies are today faced with the high cost of maintaining their current economic state while at the same time maintaining low overhead costs so the ROI remains at a positive state. In order to prove a respectable ROI to both investors and the Board of Directors, the CIO and the CFO have been left with the task of trimming the only budgets that seem to spiral out of control. This means the IT budget. As the budgets are trimmed, many IT Managers/Directors are looking to outsourcing or offshoring to fulfil their requirements for the technical needs for each project, but, at the same time trimming the ballooning budgets that come with implementing new technologies. The focus of this paper will not only discuss the particulars encapsulating what is sometimes the stigma of outsourcing or offshoring and both the negative and positive impacts on the IT industry through use of MOT diagrams explaining the processes of what should and should not be included in an outsourcing proposal. Although outsourcing has many pitfalls and negative responses from people within the company that is considering outsourcing, through proper research and investigation, this can be an effective means of reducing budgets for many remedial projects such as the help desk, which frees up money for more projects that require in-house staff. A company that properly researches their outsourcing needs and does not rush into the decision making process, any problems associated with the outsourcing project will be minute in resolving. Outsourcing has many focal points which need to be reviewed which include the impact on the IT staff and the directorship as well as the actual hidden costs of outsourcing itself that decision makers may not have been privy to. There is also a need to look at the MOT factors which would emphasize, or clarify, which projects should or should not be outsourced. By providing a diagram based on the outsourcing needs, an IT decision maker will be more comfortable in his/her outsourcing requirements. The purpose of this paper is to take into account all the players within the outsourcing decisions, such as the IT Manager and Administration Manager, the advantages and disadvantages of outsourcing decisions and plausible discussions surrounding the whole practicality of offshoring/outsourcing. There is a caveat that needs to be realized in that there is an underlying biased amongst many IT professionals within the industry that feel outsourcing and offshoring brings a negative impact to the quality of work outputted by large companies. Oddly enough, these are the first professionals that would admit that they don't like to do the monotonous and mundane jobs that they must do as part of their job descriptions. This is where outsourcing is a plausible solution to these types of responsibilities. Literature Review There is an entire sub-culture of literature dedicated to the whole topic of outsourcing or offshoring that a person could write novels about. The many intricacies involved in deciding if outsourcing or offshoring is truly a budget enhancer or retractor include (which will be discussed further) but are not limited to: a) business transformation, b) "home sourcing" vs offshoring, c) dispelling the myths of offshoring, d) the impact on the value chain, e) vetting and overarching strategies, f) managing vendor alliances, and, g) the hidden costs of outsourcing. There is a need to encapsulate what outsourcing and offshoring mean in context of their true definitions. Outsourcing is defined as "the practice of subcontracting manufacturing work to outside and especially foreign or non-union companies". (Miriam Webster Dictionary) Offshoring is defined as "the movement of a business process done at a local company to a foreign country, regardless of whether the work done in the foreign country is still performed by the local company or a third-party. Typically, work is moved due to a lower cost of operations in the foreign location. (Farlex, the Free Dictionary). Each of these points will be discussed further based on literature to substantiate the literature including the subtle differences between the two definitions. Business Transformation - Outsourcing Marc Scharz, Vice President and General Manager, HP Managed Services. Beyond Expense Reduction: Outsourcing and Business Transformation. Outsourcing Journal. October, 2005. As explained by Schwarz (2005), "the impact of outsourcing is more than financial and extends far beyond the perimeter of the IT enterprise." Many individuals and decision makers in the IT industry fail to encapsulate the whole idea of what outsourcing is meant to relieve and that is "by outsourcing non-core activities." (Schwarz, 2005). The focus of the paper is in how outsourcing can play an integral part of any IT infrastructure on a global market by ensuring customers have a continued around the clock support mechanism in place that entices more market share for their products. Another very important part of outsourcing is the reduced cost experienced through increased capacity usage. This means that you are "paying for what you use and not investing scarce capital resources." (Schwarz, 2005) Home Sourcing vs Offshoring John P. Mello Jr. Home Sourcing vs Offshoring. [Electronic Version] CFO.com. January, 2005 A segment of business practice that can be a focus of reducing IT budgets is an alternative to the offshoring process itself wherein vendors can use home sourcing to replace the traditional call centre. As John Mello points to a recent study conducted by "Booz Allen Hamilton, not only is such 'home sourcing' cheaper than traditional outsourcing, but home agents are twenty-five percent cheaper than traditional outsourcing" (Mello, 2005). This allows an entirely different direction to be received by CFO's within their establishment in an effort to look at other avenues instead of outsourcing. Outsourcing is not appealing to everyone. As pointed out in the article by Mello, his interview with John Bowden, CEO of Willow raises the point by stating that companies are often more interested in "price and not the quality of conversation and if you are a triple-A customer stuck on the side of the road in the snow, you don't want to talk to somebody in India." (Mello, 2005). Another finite example of how many businesses place more of an emphasis on customer service than cost-savings mechanisms comes from Steven Lloynd, a senior analyst with IDC in Framingham, Massachusetts, it shows that not all is lost on the outsourcing idea itself but more towards "companies putting home-based agents on more complex calls where culture affinity might be a factor, but do offshore for other types of calls". (Mello, 2005). Business enterprise needs to provide value to the customer while addressing budget constraints. Dispelling the Myths of Offshoring McKinsey & Co. Exploding the Myths of Offshoring. [Electronic Version] The McKinsey Quarterly. CFO.com. July 14, 2004 Along with the entire aspect of offshoring itself, there are myths that do require a little expounding that may lend credence to the offshoring culture and perhaps engage in a more fair representation of shoring up some work to the outsourcing typology. McKinsey provides a conclusive summary of the myths and whether there is merit to the myths that are propagated by many. These myths are generally unfounded and in fact the benefits of offshoring "include: i) home country's economic benefits, ii) corporate savings, iii) better deal for consumers, iv) additional exports, v) repatriated profits, vi) productivity and new jobs." (McKinsey Global Institute, 2004). The article sums up the positive engagement in offshoring as not a delineated effort to strategically outsourcing much needed local jobs, but, rather an effort to embark on economic prosperity. Impact on the Value Chain W. Costello, W., McKone-Sweet, K., Rao, A. (June, 2004) Offshoring/Outsourcing: Fragile - Handle With Care. Babson Insight. http://www.SearchCIO.com. Retrieved March 4, 2006. As companies progress toward optimizing their economic valuation of utilizing outsourcing as a benefit to their budget issues, there is the need to evaluate based on the impact it will have on each stage of the value chain. The following chart explains this process further: Figure 1: Value Chain stages. Courtesy of Babson Insight. http://www.searchCIO.com The benefits far outweigh the risks regarding offshoring/outsourcing as long as the homework has been done and proper planning and unless these value chain factors are taken into consideration, there will be those who undertake this measure only to find it did not provide the desired functionality. Vetting and Overarching Strategies Overby, Stephanie. Inside Outsourcing in India. [Electronic Version]. CIO Magazine. June, 2003. Overby does a precise job at writing about how not only India but other countries are popping up as a definitive alternative to outsourcing avenues. The cost savings are important to many CIO's, but there is a bridge that needs to be crossed with respect to jumping on the outsourcing bandwagon. As Overby interviews such powerhouses as Otis Elevator in the article, it points to the need to not only ensure that you are vetting the outsourcing bidder for the project but also overarching by ensuring you are over managing projects to ensure what you have written down in great detail for the project scope is actually met with great vigilance. This is where many companies fail to embark on this strategy and thus lose out on the potential of great cost savings. One of the main focus points of discussion inside the article, as explained by John Doucette of United Technologies, is "the mistake initially at Otis (Elevator) by trying to have our own employees communicate with the offshore workers in order to save as much money as possible." (Overby, 2003). Vendor Alliances MOT 8231. Managing Vendor Alliances and IT Outsourcing. November 13, 2004 One of the intricacies of outsourcing is in maintaining current vendor alliances through continued functional integration between businesses and the IT division. As shown in the following diagram related to business strategy and the IT strategy alignment framework it is important to maintain the business and IT strategic fit: As companies continue to debate the needs to outsource and what should be in sourced, it is relevant to review those pieces of the project that fit under a strategic umbrella and those that would fall under the outsource umbrella. This is further emphasized by what would fall under any M.O.T. deliberations: W W When any CIO or IT Administration Manager embarks on discussions with valuation of outsourcing, the following chart should be consulted as far as strategic implementation: Role of IT Manager and Admin Managers in Offshoring Charungundla, Kent. (2005) Effective and Efficient Management for Off-shore Call Centres. Virtual Contact Centre. TMCNet on the Web. Retrieved March 6, 2005. In order to effectually rewrite the job descriptions of both IT Manager and Admin Manager upon a company going the way of outsourcing, there can be a capitalization of a project through reduced costs, controlled outcomes and focusing on core business practices. As such, the roles of each of the managers' shift to new directives that are outlined below, this will encourage the new streamlined department towards a "well-planned management control" (Charungundla, 2005) system: 1. Executive Management Provides for management to keep your finger on the pulse in regards to the offshore team. This includes retaining control over such things as the company's 800 number to ensure quality is maintained; work and perform under the home country's laws and make sure the outsourcer has an office in the company's home country. 2. Information Management Ensure things like data being written directly to your home country's based databases, checking real-time traffic reports no matter that the vendor is accepting calls, customizing CRM applications to bring in the vendor to use your company's application software to ensure conformity throughout the company, ensuring the vendor uses web based applications to answer calls that are piped through the company's web server. 3. Call Routing Important to match up the outsourcer's telephony system with the company's to ensure streamlined routing techniques. 4. Monitoring and Tracking This includes all facets of monitoring a call centre through non-traditional methods wherein the IT manager will now manage at host contact centre not located in the building. (Charungundla, 2005) Lederer, Yvonne. (1998). 'The Pros and Cons of IT Outsourcing'. Journal of Accountancy, Vol. 185, 1998. http://www.questia.com. Reviewed 04 Mar 2006 Yvonne Lederer discusses outsourcing IT in a blended light "because IT permeates an entire organization, it is not like other resources a company successfully outsourced in the past. IT outsourcing cannot be compared with outsourcing of security, logistics, legal services, advertising or the procurement of raw materials and components." (Lederer 1998) The importance of outsourcing with management is in the need to realize that considering IT outsourcing is not similar to all other types of projects or applications that can be outsourced as explained in the above article, there is a need to understand what is lost in the outsourcing process. This means that, for instance, if you outsource for the code development you lose the custom ability, core functionality review and loss of creative control. Hormozi, Amir, Hostetler, Erin, Middleton, Erin (2003) Outsourcing Information Technology: Assessing Your Options. SAM Advanced Management Journal, Vol. 68, 2003. http://www.questia.com. The IT management staff, comprising of all facets of the IT management grid needs to understand how to analyze the feasibility of outsourcing or not which include: 1) Is the IT function under consideration a commodity or is it strategic 2) What scope of services is required and how can the risks of securing these services be minimized, and, 3) What are the direct and hidden costs of outsourcing the function (Harmozi, Hostetler & Middleton, 2003) Once the IT manager and Admin Manager are able to answer these questions with confidence, then the roles they play in any aspect of offshoring will ensure quick turnaround and success. The role of the IT manager and Admin Manager may in fact have changed with respect to traditional roles, but, their new roles in ensuring positive productivity numbers are answered in the three questions above. Hidden Costs of Outsourcing Overby, Stephanie. The Hidden Costs of Offshore Outsourcing. CIO Magazine. September, 2003. Retrieved March 4, 2006 from http://www.cio.com/archive/090103/money.html Many times businesses will consider the strategic value, as well as both the vendor alliances that need to be maintained and the value chain impact, but fail to gain the true costs involved with offshoring outsourcing. Overby introduces a further methodology called "TCO or total cost of offshoring". (Overby, 2003) and areas not thought of during the project discussion phase of resource implementation. These areas include "productivity and poor processes can eat away at potential savings, and you could end up spending just as much as you would in the U.S. of A." (Overby, 2003). This article goes on to explain costs that need to be seriously reviewed such as: "the cost of selecting a vendor, the cost of transition (this can take from three months to a full year to completely hand the work over to an offshore partner), the cost of layoffs, the cultural costs, the cost of ramping up, and, the cost of managing an offshore contract." (Overby, 2003). Conclusion As many large companies focus on the aspect of outsourcing many of their projects to outsourcing countries such as India, the entire process of doing such is reliant on two important factors: cost and implementation factors. There are many opportunities for companies to reduce their ROI through offshoring many non-critical projects such as a help desk to handle minor technical issues. Other companies find that the importance of whether to offshore divisions is customer driven wherein their most important clients would not appreciate speaking to non-native countrymen in an effort to get their problems resolved. This paper has progressed through what advantages there are to doing offshoring along with debunking some myths surrounding offshoring as well as explaining the overall strategic value in deciding which project management options that could be outsourced due to their net value to the company as a whole. It is relevant to point out that not all companies will find outsourcing an overall cost savings measure as discussed in the article relating to the hidden costs of outsourcing/offshoring in an effort to ensure companies are fully aware of the actual costs that are involved and it is not something to embark upon lightly or without great discussions and planning to ensure that their offshoring or outsourcing project has a respectable ROI to the company. References Bayley, R. E. 1998. 'Teaming for success in business process outsourcing'. Outsourcing Journal. Available at: http://www.outsourcing-journal.com/issues/aug1998/ analyst.html Charugundla, Kent. (2005). Effective and Efficient Management for Off-shore Call Centers. Reviewed 06 March 2006 from http://www.tmcnet.com/channels/virtual-contact-center/virtual-contact-center-articles/effective-management-offshore-call-centers.htm Costello, W., McKone-Sweek,W., Rao, A. Offshoring/Outsourcing: Fragile - Handle With Care. Babson Insight. SearchCIO.com. June, 2004. Reviewed 04 March 2006. Hormozi, Amir, Hostetler, Erin, Middleton, Erin (2003) 'Outsourcing Information Technology: Assessing Your Options'. SAM Advanced Management Journal, Vol. 68, 2003. http://www.questia.com. Lederer, Yvonne. (1998). The Pros and Cons of IT Outsourcing. Journal of Accountancy, Vol. 185, 1998. http://www.questia.com. Reviewed 04 March 2006 Mello, John P. Mello. Home Sourcing vs Offshoring. CFO.com. January, 2005 McKinsey & Co. Exploding the Myths of Offshoring. The McKinsey Quarterly. CFO.com. July 14, 2004 Overby, Stephanie. Inside Outsourcing in India. CIO Magazine. June, 2003 Overby, Stephanie. The Hidden Costs of Offshore Outsourcing. CIO Magazine. September, 2003. Reviewed 04 March 2006 from http://www.cio.com/archive/090103/money.html Scharz, Marc, Vice President and General Manager, HP Managed Services. Beyond Expense Reduction: Outsourcing and Business Transformation. Outsourcing Journal. October, 2005. University of Minnesota. MOT 8231 Session 5: Managing Vendor Alliances and IT Outsourcing. November 13, 2004. Reviewed 04 March 2006 from http://ids.csom.umn.edu/faculty/friggins/mot8231/Session05.pdf Williams, Jeff. 2001, 'IT Pragmatics: Some Perspectives on Outsourcing'. The Public Manager. Volume: 30. Issue: 1. Publication Year: 2001. Page Number: 60. [online] Available at: http://www.questia.com. Read More