Outsourcing-Technology - Essay Example

Outsourcing - Technology Outsourcing IT cn provide mjor cost nd time sving dvntges over rnge of projects from smll things such s repir of hrdwre or network mintennce to ongoing mngement of ll IT issues for multiple sites nd users. This re is in fst-growing mode due to the complexity nd necessity of informtion technology. IT outsourcing is not only utilized by the lrge corportions worth billions of dollrs but lso by medium-sized business to mnge their internl networks. Due to rpid chnges in IT, it is chllenging for both lrge nd smll businesses to remin technologiclly current. Outsourcing IT cn help with this process, s illustrted by the prolifertion of ppliction service providers (SPs) in the pst five yers. Clerly, the growth of the Internet hs creted forces tht re driving compnies to outsource (Jones, 2000), including highly competitive globl mrkets nd the rise of e-business. These trends compel compnies to reorgnize nd utilize more outsourcing to gin higher e-business cpcity, mke predictble cost forecsts nd cost reductions, ttin well-defined nd consistent service levels, cquire needed skills nd expertise, gin ccess to best prctices, nd focus on core competencies. The Gol: optiml outsourcing Trditionl outsourcing focuses on chieving higher performnce, greter flexibility, nd reduced costs. Outsourcing IT offers the possibility of imposing control on the process, llows the conversion of fixed costs into vrible costs, cretes the opportunity for incresed profitbility, nd fosters innovtive cpbilities nd expnded flexibility (Quinn, 2000). IT hs been identified s one of the most costly components of business (Brthelemy, 2001), so options for reducing costs re certinly worth considering. For number of resons, outsourcing IT cnnot be pproched like trditionl mke-or-buy decisions. To begin with, IT is not homogeneous becuse it is integrted with wide vriety of systems nd ctivities. dditionlly, djustments to stndrdized pplictions tht ccommodte the needs of business unit or function re often prohibitively expensive. Furthermore, estimting IT needs more thn three yers in dvnce is difficult, due to the rpid innovtion. Consequently, contrct extending beyond three yers my hinder the doption of new technologies. Unfortuntely, vendors expert t providing technology nd legcy systems tody re often not the best t providing tomorrow's new or emerging technologies (DiRomuldo et l., 1998), nd the qulity nd effectiveness of n informtion system re difficult to guge (Yost et l., 2002). The rpid pce of technologicl innovtion, the decresing costs of computing resources, nd rpid chnge in the underlying economics mke it extremely difficult to evlute the long-term costs of outsourcing. nd cost is not the only considertion. In US, ppulr discussin f th grwing mrkt in utsurcing infrmtin tchnlgy (IT) hs bn spurrd by dcisins f svrl lrg cmpnis nd th ustrlin gvrnmnt t utsurc IT prtins. Th srvics in ustrlin IT utsurcing mk up t 38 prcnt f th ttl IT mrkt. Rsrch grup Grtnr rprtd tht th ustrlin IT srvics mrkt is wrth US$5.5 billin (Hubr, 2002). Th utsurcing in th cuntry is still ky drivr f th IT srvics sctr s wll s mngd srvics in rs such s strg, Intrnt srvics, nd scurity. vr th lst fw yrs, utsurcing hs bn n f th singl lrgst cntributrs t th lcl srvics sctr, ld by th Fdrl Gvrnmnt's driv t utsurc th mjrity f its gncis' nd dprtmnts' prvisin f IT rquirmnts. Hwvr, mny f th Fdrl Gvrnmnt's "clustr" cntrcts hv bn criticizd fr cst blwuts nd r nw bing rviwd. Th gvrnmnt my stipult shrtr cntrct rrngmnts, nd pt fr mr slctiv, smllr dls. Th rcntly ngtitd Fr Trd grmnt btwn th U.S. n ustrli (USFT) will incrs pprtunitis fr U.S. IT srvic prvidrs. It is prdictd tht th USFT my pn th wy fr mr U.S. srvic prvidrs t prtnr nd prvid srvics t th ustrlin Fdrl Gvrnmnt (Fny et al.,1993). By fr, th biggst plyrs in this mrkt sgmnt r IBMGS, DS, CSC, nd HP s wll s th big ccunting nd cnsulting firms. Cllctivly ths cmpnis ccunt fr 65 prcnt f th ttl utsurcing mrkt. Th fdrl gvrnmnt ccunts fr 47 prcnt f ll public sctr IT spnding. Whn utsurcing, US cmpnis im t rch th fllwing finncil, businss, tchnicl nd pliticl bjctivs. Finncil Rsns. US cmpnis nd businss s utsurcing s wy t cut csts, imprv cst cntrl, nd rstructur th IS budgt. Rduc csts : Ths wh xpct tht utsurcing will sv th mny prciv tht vndrs njy cnmis f scl tht nbl thn t prvid IT srvics t lwr cst thn intrnl IT dprtmnts. In prticulr, cmpnis nd businss bliv tht vndr's unit csts r lss xpnsiv du t mss prductin fficincis nd lbur spciliztin. Imprv cst cntrl : nthr finncil rtinl fr utsurcing is gining cntrl vr IT csts. s ny IS mngr will ttst, IS csts r dirctly rltd t IS usr dmnds. In mst rgnistins, hwvr, IS csts r cntrlld thrugh gnrl llctin systms which mtivt usrs t dmnd nd cnsum rsurcs xcssivly. Gnrl llctin systms r nlgus t splitting rsturnt tb--ch dinnr cmpnin is mtivtd t rdr n xpnsiv dinnr bcus th cst will b shrd by th thr prtis. Cmpnis nd businsss s utsurcing s wy t cntrl csts bcus vndrs implmnt cst cntrls tht mr dirctly ti usg t csts. In dditin, usrs n lngr cll thir fvurit nlysts t rqust frivlus chngs, but instd must submit rqusts thrugh frml cst cntrl prcss. This rsults in th curtiling f xcssiv usr dmnds nd thus rducs vrll IT csts. Rstructur IS budgts : Sm cmpnis nd businsss s th rsn fr inititing utsurcing s mns fr rstructuring thir IT budgts frm cumbrsm cpitl budgts t mr flxibl prting budgts. Thrugh utsurcing, rgnistins culd mr fficintly purchs IT rsurcs s ndd rthr thn invst in cpitl. Th sl f th sst ls gnrts csh up frnt, which incrss th cmpnis' csh flw. In dditin, sm vndrs will purchs stck nd pstpn th bulk f IT pymnts t th lttr prt f th cntrct, mking th vrll nt prsnt vlu xtrmly ttrctiv t cmpnis (Jrvnp, Ivs, 1991). In rturn fr ths finncil incntivs, vndrs rquir lng-trm cntrcts, typiclly tn yrs in durtin. Businss Rsns. Businss rsns fr utsurcing includ rturn t cr cmptncis, fcilitt mrgrs nd cquisitins, nd strt up nw cmpnis. Rturn t cr cmptncis: During th 1990s, mny lrg cmpnis bndnd thir divrsifictin strtgis--nc pursud t mdit risk--t fcus n cr cmptncis nd utsurcing th rst (Jrvnp, Ivs, 1991). s rsult f this cr cmptncis fcus, IT cm undr scrutiny: is IS cmptitiv wpn r mrly utility vn within cmpnis, prcptins vr IT's cntributin t cr ctivitis vrid. In gnrl, snir xcutivs tndd t viw th ntir IT functin s nn-cr ctivity whrs IT mngrs nd sm businss unit mngrs cntndd tht crtin IT ctivitis r cr t th businss. Fcilitt mrgrs nd cquisitins: Mny f th cmpnis which utsurc pursu grwth strtgy thrugh mrgrs nd cquisitins. Mrgrs nd cquisitins crt mny IT nightmrs fr IT mngrs bcus thy r rquird t bsrb cquird cmpnis int xisting systms. Cmpnis xpct utsurcing t slv th tchnicl incmptibilitis, bsrb th xcss IT ssts, such s dditinl dt cntrs, nd bsrb th dditinl IT mplys gnrtd by mrgrs nd cquisitins. Prvid IS fr strt-up cmpnis: Sm cmpnis utsurc IT whn th cmpny is first incrprtd. t th tim, thy xpct tht utsurcing will b quickr nd chpr wy t prvid IT srvics. s strt-up cmpnis, thy simply cn nt ffrd th cpitl invstmnt rquird t rct intrnl IT dprtmnts. Dvlutin f rgnistinl nd mngmnt structurs: numbr f rgnistins initit utsurcing vlutins in rspns t dvlutin f rgnistinl nd mngmnt structurs ccurring in widr businss cntxt. ftn trmd dwnsizing, cmpnis intnd t us utsurcing s mns t rduc hdcunt nd thus th csts sscitd with slris, pnsins, nd bnfits. Tchnicl Rsns. Tchnicl issus sscitd with why cmpnis nd businsss cnsidr utsurcing invlv th tchnicl difficultis sscitd with prviding ffctiv IS; mr spcificlly, th dsir t ithr imprv tchnicl srvics, gin ccss t tchnicl tlnt nt currntly vilbl in th rgnistin, nd/ r prvid ccss t nw tchnlgis. Imprv tchnicl srvic: Sm cmpnis r disstisfid with th tchnicl srvics prvidd by thir in-hus IT dprtmnts. In prticulr, th IT dprtmnts dlivrd systms lt nd vr budgt nd did nt rspnd in timly mnnr t usr rqusts. Cmpnis viw utsurcing s wy t imprv tchnicl srvic, rsning tht utsurcing vndrs pssss tchnicl xprtis lcking in intrnl IT dprtmnts. ccss t tchnicl tlnt: ftn cmpnis utsurc in rdr t prvid ccss t tchnicl tlnt. Cmpnis find it difficult t find nd/r rtin stff with th stt-f-th-rt tchnicl skills. Vndrs r flt t hv cr cmptncis in tchnlgy skills which llw thm t bring ths skills t th rgnistin thrugh utsurcing. Numrus cmpnis cnsidr utsurcing prtly fr th ccss t grtr IS xprtis it wuld bring. ccss t nw tchnlgis: Sm cmpnis fl utsurcing will prvid cnduit t nw, mrging tchnlgis. Thy viw utsurcing s wy t hdg bts n mrging tchnlgis, prviding thm ccss t th prducts f th vndrs' lrg rsrch nd dvlpmnt dprtmnts. Cmpnis r prticulrly intrstd in clint/srvr tchnlgy, xprt systms, nw dvlpmnt mthdlgis, nd CS tls. Fcus th intrnl IS stff n cr tchnicl ctivitis: Mngrs frm numbr f cmpnis initit utsurcing vlutins t fcus th intrnl IT stff n cr tchnicl ctivitis, such s th dvlpmnt f nw pplictins, whil utsurcing nn-cr tchnicl ctivitis, such s th supprt f lgcy systms. Pliticl Rsns. Pliticl rsns fr why cmpnis d businsss cnsidr utsurcing rvlv rund th dsir t dl mr ffctivly with th subjctiv ntur f ssssing th vlu f IT (Willccks, Fitzgrld 2002) In shrt, th pliticl dimnsin f utsurcing invlvs th bhviur f th vrius prtis sscitd with th utsurcing dcisin-mking prcss. In cntrst t th rtinl dscriptin f utsurcing vlutin surrunding th bv-mntind finncil, businss, nd tchnicl rsns, th pliticl prspctiv intrprts th bhviur f th rgnistinl ctrs in subjctiv light, sing utsurcing s n pic f lrg puzzl invlving th shping f snir mngmnt's prcptin but IT. Pliticl rtinl fr why rgnistins cnsidr utsurcing includs: prving fficincy (s rctin t th fficincy imprtiv), justifying nw rsurcs, rcting t th psitiv mdi rprts, rducing uncrtinty, liminting trublsm functin, nd brking th s-clld 'glss ciling' (i.. nhncing crdibility). Rctin t th fficincy imprtiv: cmmnly citd rsn fr inititing utsurcing vlutins by cmpnis ws th rctin t th fficincy imprtiv. Bcus mst f thm ccunt fr s n vrhd functin, snir mngrs tnd t vlut th functin slly n cst fficincy (Gntz, 1994). Bcus n cncrt msurs f ctul fficincy xist, snir mngrs frmult nly prcptin f fficincy. Whn snir mngrs prcivd tht IT ws infficint, thy inititd utsurcing vlutins t imprv fficincy. In similr vin, IT mngrs thmslvs inititd utsurcing vlutins. This wy, IT mngrs prvd tht th IT dprtmnt ws lrdy fficint r ws mking strids t bcm fficint. Th nd t cquir nw rsurcs: Cmpnis initit utsurcing dcisins t cquir nw rsurcs, such s mchin upgrds, dditinl prsnnl, r csh. IT mngrs r wll wr tht thir rqusts fr cpitl funds wuld b mt with qustins such s 'isn't it chpr t utsurc this' utsurcing vlutins hlp cmpnis nd businsss cquir rsurcs by shwing tht utsurcrs culd nt prvid th dditinl rsurcs t lwr cst. Th cmpnis dpting this strtgy wr usully grntd th rsurc. Rctin t th bndwgn: nthr rsn idntifid is th rctin t th prvrbil bndwgn. Fvurbl utsurcing rprts triggr cmpnis t initit utsurcing fr tw rsns. First, cmpnis, spcilly snir mngrs, wnt t duplict th succss stris thy rd in th litrtur. Bcus ths snir mngrs didn't truly vlu th IT functin nywy, thy hp t t lst rduc csts t th lvls thir cmptitrs llgdly chivd thrugh utsurcing. Scnd, cmpnis, prticulrly IT mngrs, fr tht th fvurbl rprts wuld sduc thir mngrs int utsurcing. By tking th inititiv, cmpnis us utsurcing vlutins t tmpr th mny xggrtd clims md in public infrmtin surcs (Willccks, Fitzgrld 2002). Rduc uncrtinty: Cmpnis initit utsurcing vlutins t rspnd t thir dsir t rduc uncrtinty. Bcus IT dmnd is rrtic, IT mngrs hv difficulty plnning fr IT srvics. Rthr thn rct t dmnd fluctutins, IT mngrs utsurcd. By including clus tht vris fs with vlums, IT mngrs ffctivly dispnsd with th risks sscitd with uncrtinty. limint trublsm functin: nthr pliticl rsn idntifid is th dsir f cmpnis t limint trublsm functin. Sinc snir xcutivs d nt fully vlu IT IT dministrtrs rciv fw cclds fr mnging th functin. Whn th functin runs smthly, snir xcutivs d nt ntic. Whn th functin xprincs prblms, snir mngmnt scrms. nhnc crdibility: Th finl rsn idntifid by th cmpnis is th us f utsurcing vlutins t nhnc prsnl r dprtmntl crdibility. Sinc snir mngrs d nt fully vlu th srvics f th IT dprtmnt, thy my nt vlu th cntributin f th ppl wh run th functin. Studis hv rptdly shwn tht IT prsnnl rrly brk int th uppr chlns f mngmnt. Svrl cmpnis inititd utsurcing dcisins t nhnc thir crdibility. By shwing tht thy r willing t utsurc thir kingdm fr th gd f th cmpny, thy prv t mngmnt tht thy r crprt plyrs. Whil th US mrkt my b flt t prsnt, lcl rsrch grup Intrntinl Dt Crprtin (IDC) hs rcntly idntifid systms infrstructur prjcts s n f th principl sub-sctrs t driv up th lcl IT srvics mrkt in th shrt t mdium trm. IDC stts tht 27 prcnt f lcl cmpnis' IT mngrs rprtd tht infrstructur nd scurity prjcts wr th highst priritis fr 2004 (Kllborgh, 2004). Dbunking th thry tht th Custmr Rltinship Mngmnt (CRM) mrkt is dd, fiftn prcnt f IT mngrs hv sttd tht thy r plnning r r implmnting CRM prjcts. Th grwth in ths prjcts cms t th xpns f Businss (bth B2B nd B2C) nd ntrpris Rsurc Plnning (RP) inititivs. Th intrst in IT surcing is grwing nd chnging. Th incrsing numbrs f vndrs nd srvics vilbl in th mrkt plc prvid mr pprtunitis, but ls cmplict th dcisin-mking, cntrcting, nd mngmnt issus. s th mrkt vlvs nd lng-trm cntrcts mtur, ur lrning but IT surcing nd th implictins fr sund prctics will ls vlv. Thr r mny pprtunitis fr furthr rsrch in th r. Hwvr, ur rsrch f ustrlin cmpnis nd businsss tht utsurc must first ddrss sm vry significnt chllngs bfr vn cnsidring mrkt ffrings. Ths chllngs includ: ligning stkhldr xpcttins fr th IT prtfli, undrstnding th currnt nd futur businss cntributin f th IT prtfli, prprly ssssing th undrlying cst drivrs fr th IT prtfli. n pint 1, th prblm is dignsd but thr r still cncrns vr th dptd slutin. n pint 2, IT is nt prcivd s cntributing much, but this is bcus IT's cntributin is mskd. In ur css, IS ws ccuntd fr s n vrhd which highlightd nly csts, nt vlu. Svrl fctrs tht sm crrltd with dmnstrtd vlu r th IT ccunting structur, rprting lvl f th IT mngr, us f IT t supprt crprt strtgis, tp mngmnt supprt, nd sm msurs (hwvr pitiful) f ffctivnss (prticulrly vlutins cming frm bnchmrking ginst thr cmpnis) (pplgt nd lm, 2000, Fny t l., 2001). Th idntifictin f ths fctrs, hwvr, prvids fw insights int hw IT mngrs cn pliticlly nd cnmiclly nct ths plicis. Th prblm is ssntilly n f th chickn nd th gg: ds dmnstrtd vlu cm bfr r ftr tp mngmnt supprt n pint 3 custmrs must qustin hw vndrs prps t dlivr givn IT ctivity t thir bid pric. Th bst wy is thrugh n nlysis f cst drivrs. Wht cst dvntgs ds vndr hv tht cnnt b rplictd in-hus It is strngly dvisbl tht prctitinrs cn nly utsurc, i.. turn vr th mngmnt nd dlivry t vndr, whn thy undrstnd xctly wht thy wnt nd cn rticult ths xpcttins in dtild cntrct. 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