Evaluation of the Outsourcing Decision - Case Study Example

Tegan Case Study Table of Contents Introduction 3 2.Evaluation of the Outsourcing Decision 3 2 Reason behind Outsourcing 4 2.2.Major Outsourcing Challenge 4 2.3.Tradeoffs in Requirement Analysis 5 2.4.Choice of Development Methodology 5 2.5.Scope & Requirements Problems 5 2.6.IT-Management Failures 6 3.Concluding Remarks 6 4.Recommendations 7 References 8 1. Introduction Against the backdrop of the contemporary globalized business environment that is dotted with companies which rely upon 24x7 operations, it is no wonder that the average global citizen is attuned to terminologies such as business process outsourcing (BPO) and knowledge process outsourcing (KPO). Outsourcing may be described, although loosely, as “the use of a third party to perform tasks normally performed independently (within the organization)” (Tho, 2005, “The Practice of Outsourcing”). However, on the basis of the theories propounded by Elfing and Baven (1994) and Domberger (1998), this concept has been formally defined as “an activity where the supplier provides for the delivery of goods and/or services that would previously have been offered in-house by the buyer organization in a predetermined agreement” (Tho, 2005, “Agreeing the Definition of Outsourcing”). In keeping with this brief introduction, the current research will aim at evaluating the decision of Tegan, Inc. (Tegan) to outsource its accounts payable (A/P) project and recommending one or more feasible options from among those that had already been identified by the organization. 2. Evaluation of the Outsourcing Decision As has been mentioned in the introduction, the decision that had been taken by Tegan while outsourcing it’s crucial A/P project will be evaluated under this heading. Considerable efforts will be made to identify the reason behind outsourcing, the major outsourcing challenge, and the tradeoffs in requirement analysis (performed by Hrad Technika – a Czechoslovakian IT company). Subsequently, the choice of development methodology will be discussed and problems pertaining to scope and requirements will also be analyzed. Finally, light will also be shed on the IT-management failures of the organization. 2.1. Reason behind Outsourcing It has been reported that despite sluggish sales, Tegan had managed to grown constantly all through its life. On being approached by the Chinese toy maker Fan Li in May 2007, Tegan could not apprehend that the inclusion of this accessory line would lead to a situation where the increase in orders will not match with that in sales growth. However, the contract was perceived to be a mismatch because of wide differences that existed between the two companies in terms of pricing – while Tegan’s products came at an average price of £50, Fan Li often priced its accessories below £5. It has been observed that the profit margin being in the range of 1 percent the major concern at Tegan was the error-free management of the A/P process. As the A/P process at Tegan did not have the required number of skilled staff, the company nearly buckled under the pressure of high sales volumes that were generated by Fan Li. This was the main reason that had made Tegan decide to outsource the said process (Upton & Staats, 2008, “Accounts Payable and the Changing Invoices”). 2.2. Major Outsourcing Challenge A closer look at the developments that took place at Hrad Technika (Hrad) after it engaged with Tegan over an IT outsourcing deal has revealed that the major outsourcing challenges were centered on contract length as well as scope definition. It has been reported that the functionality of the pilot project that was delivered by Hrad was excellent; however, as the company started suffering from excessive flexibility, the project ran late. As Tegan was not strong enough to manage its A/P process internally, it depended on Hrad. However, in the process, it completely overlooked the vital fact that “successful management of an outsourcing relationship depends on clearly defining the requirements, unambiguously expressing objectives…and defining plans for continuous improvement” (Brown & Wilson, 2005, “Managing your Outsourcing Vendors”). 2.3. Tradeoffs in Requirement Analysis As is the case with any outsourcing deal, the financial impact played a major role in this case too. When the otherwise efficient pilot project delivered by Hrad was found to have certain performance issues, Tegan decided to send its computer architect to the headquarters of Hrad so that he could gather hands on experience that was necessary for addressing the issues. However, it was soon realized that this activity should be undertaken within Tegan’s offices; Hrad couldn’t send its own professionals to Tegan as the latter had a tight budget. Owing to this limitation, Hrad had decided to delegate one of its excellent architects at Tegan’s offices (Upton & Staats, 2008, “The Tegan Engagement”). 2.4. Choice of Development Methodology While deciding upon the development methodology, Hrad took a holistic measure. Firstly, they thought of advising Tegan to upgrade its existing A/P system. When this proposal was accepted, Hrad embarked on creating an all-encompassing documentation to help Tegan put this system to bid. Attempts were made to ensure that complete knowledge about the system was garnered by interviewing the individuals that were using its existing version. Finally, the project was rolled out only after Hrad felt it had gathered sufficient knowledge about Tegan’s A/P system. 2.5. Scope & Requirements Problems The reasons why companies opt for outsourcing are as the following: 1) It helps tap external sources of technical know-how; 2) Helps in channelizing resources into core business; 3) Reducing operational costs as well as size of workforce; 4) Eliminating the need for reinvesting in technology; and 5) Enhancing the management of costs associated with internal processes. In this particular case, it has been observed that the scope and requirements of the A/P management system could not be communicated efficiently to Hrad because of the fact that there was just one person who had some amount of knowledge about its functionality. However, in is noteworthy that this person was a finance veteran who didn’t have any experience in outsourcing projects. Hence, the central problem, alongside financial constraints, that Tegan faced was the absence of SMEs. 2.6. IT-Management Failures As has been mentioned earlier, the Achilles’ heel for Tegan was its lack of skilled staff in the A/P process. This problem was accentuated when the architect, who was given offshore training at Hrad’s headquarters, left Tegan in pursuit of better opportunities. It has been found that Tegan didn’t have subject matter experts (SMEs) and hence its knowledge of the A/P system was quite blurry. All these factors put together led to the failure of its IT-management. 3. Concluding Remarks It has been observed during the course of this research that Tegan could not cope up with the astounding sales volumes generated by Fan Li as its A/P system was not robust enough to record the huge amounts of data. Moreover, the company lacked necessary expertise that is required for addressing such critical issues. However, it didn’t succeed in garnering positive and sustainable results by outsourcing the project to Hrad Technika. From the evaluation of Tegan’s outsourcing decision is evident that it was an unnecessary step that was taken by the European giant which was otherwise doing considerably good as far as its core business was concerned. 4. Recommendations Perhaps the best option that may be recommended to Tegan is that the company should upgrade its A/P system by incorporating necessary modules into its existing version. This can only be done when the company will have specialized staff that have the required levels of knowledge, skills and abilities (KSAs). Precisely, Tegan should take on board (or develop through training and development) subject matter experts (SMEs) for its A/P process because of the fact that much of its success depends on the efficiency of this process. Moreover, the company should focus on its core business and enter into deals with businesses that have aspects almost similar to it. References 1. Brown, D. & Wilson, S. The Black Book of Outsourcing: How to Manage the Changes, Challenges, and Opportunities. John Wiley and Sons. 2005. 2. Tho, I. Managing the Risks of IT Outsourcing. Butterworth-Heinemann. 2005. 3. Upton, M. D. & Staats, R. B. Hrad Technika. Harvard Business School. October 21, 2008. 4. Upton, M. D. & Staats, R. B. Tegan c.c.c. Harvard Business School. October 31, 2008. Read More