Chapter 19 - Outsourcing in The 21st Century

Semester II 2014
HUTECH JOINT BBA PROGRAM

WITH BRISTOL UNIVERSITY
HUTECH JOINT BBA PROGRAM WITH BRISTOL UNIVERSITY
In the high-speed global business environment, an organization needs to maximize
its profits, enlarge its market share, and restrain its ever-increasing costs.
Two basic options are available to organizations wishing to develop and maintain
their information systemsinsourcing or outsourcing.
Insourcing (in-house development) is a common approach using the professional
expertise within an organization to develop and maintain the organizations
information technology systems.
Outsourcing using a service from another organization. In some cases, the entire IT
department is outsourced
Outsourcing can range from a large contract under an organization to hiring
contractors and temporary office workers on an individual basis.
I. Outsourcing Projects

Location of outsourcing
Outsourcing Models and Cost Savings

IT outsourcing enables organizations to keep up with market and technology
advanceswith less strain on human and financial resources and more assurance
that the IT infrastructure will keep pace with evolving business priorities.
Planning, deploying, and managing IT environments is both a tactical and a
strategic challenge.
The three different forms of outsourcing options a project must consider are:
1. Onshore outsourcing engaging another company within the same country for
services.
2. Nearshore outsourcing contracting an outsourcing arrangement with a company in a
nearby country. Often this country will share a border with the native country.
3. Offshore outsourcing using organizations from developing countries to write code
and develop systems. In offshore outsourcing the country is geographically far away.
Typical Salary Ranges for Computer Programmers
Since the mid-1990s, major U.S. companies have been sending significant portions
of their software development work offshore primarily to vendors in India, but
also to vendors in China, Eastern Europe (including Russia), Ireland, Israel, and the
Philippines.
The big selling point for offshore outsourcing is inexpensive good work. A
programmer who earns as much as $63,000 per year in the United States is paid as
little as $5,000 per year overseas.
Companies can easily realize cost savings of 30 to 50 percent through offshore
outsourcing and still get the same, if not better, quality of service.
In many countries, outsourcing services are hampered to some degree by language,
telecommunications infrastructure, or regulatory barriers.
The first and largest offshore marketplace is India, whose English-speaking and
technologically advanced population has built its IT services business into a $4
billion industry.
Large organizations have found it acceptable to transfer their IT assets, leases, and
staff to outsourcers. Nowadays, in view of the changes in sourcing, the key question
is not Should we outsource IT? but rather Where and how can we take advantage
of the rapidly developing market of IT services providers?
The influential drivers affecting the growth of the outsourcing market include:
Core competencies
Financial savings
Rapid growth: By taking advantage of outsourcing, an organization is able to acquire
best-practices process expertise. This facilitates the design, building, training, and
deployment of business processes or functions.
Industry changes: The significant increase in merger and acquisition activity created a
sudden need to integrate multiple core and noncore business functions into one business,
while ensure compliance with government rules and regulations. Companies in either
situation turned to outsourcing so they could better focus on industry changes at hand.
The influential drivers affecting the growth of the outsourcing market include:
The Internet: the Internet as an effective sales channel has allowed clients to become
more comfortable with outsourcing. Barriers to entry, such as lack of capital, are
dramatically reduced in the world of e-business due to the Internet. New competitors
enter the market daily => plenty of suppliers, more comfortable outsourcing,
Globalization. As markets open worldwide, competition heats up. Companies may engage
outsourcing service providers to deliver international services.
The many benefits associated with outsourcing include:
Increased quality and efficiency of a process, service, or function.
Reduced operating expenses.
Resources focused on core profit-generating competencies.
Reduced exposure to risks involved with large capital investments.
Access to outsourcing service providers economies of scale.
Access to outsourcing services providers expertise and best-in-class practices.
Access to advanced technologies.
II. Outsourcing Benefits
The many benefits associated with outsourcing include:
Increased flexibility with the ability to respond quickly to changing market demands.
No costly outlay of capital funds.
Reduced head count and associated overhead expense.
Reduced frustration and expense related to hiring and retaining employees in an
exceptionally tight job market.
Reduced time to market for products or services.
II. Outsourcing Benefits
Outsourcing comes with several challenges, include:
Contract length. Most of the outsourced IT contracts are for a relatively long time
period (several years). This is because of the high cost of transferring assets and
employees as well as maintaining technological investment. The long contract
causes three particular issues:
1. Difficulties in getting out of a contract if the outsourcing service provider turns out to be
unsuitable.
2. Problems in foreseeing what the business will need over the next 5 or 10 years (typical
contract lengths), hence creating difficulties in establishing an appropriate contract.
3. Problems in reforming an internal IT department after the contract period is finished.
III. Outsourcing Challenges
Outsourcing comes with several challenges, include:
Competitive edge. Effective and innovative use of IT can give an organization a
competitive edge over its rivals. A competitive business advantage provided by an
internal IT department that understands the organization and is committed to its
goals can be lost in an outsourced arrangement.
Confidentiality
Scope definition Many difficulties result from contractual misunderstandings
between the organization and the outsourcing service provider. In such
circumstances, the organization believes that the service required is within the
contract scope while the service provider is sure it is otside the scope and so is
subject to extra fees.
III. Outsourcing Challenges
1) What are the benefits and risks associated with outsourcing?
2) What are the ethical issues associated with outsourcing government
applications?
3) What are the security issues associated with outsourcing government
applications?
Questions

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Semester II 2014

HUTECH JOINT BBA PROGRAM

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