This is topic one of a short open course on outsourcing this first session covers the basic ground of the rationale and history of outsourcing. It is accompanied by a guide and course notes on the www.1stoutsource.com website.

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Slide 1
Defining Outsourcing Topic 1
In this Topic we will understand
 What is Outsourcing?
 History and Types
 Why Outsource (the business driver)
 What are the problems

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Slide 2
Today's Agenda
 What is Outsourcing?
 History and Types
 Why Outsource (business driver)
 What are the problems

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Slide 3
Outsourcing as example Strategic Change
 I.T. Outsourcing
 A decision taken to contract-
out or sell the organisation’s IT
assets, people and/or activities
to a third party supplier…over
agreed time period
 Enabled by Technology,
changes structure and culture.
 Externalisation of employment
– changing world of work
 Professional (vs) secondary
workers

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Slide 4
Defining Outsourcing
 ‘Outsourcing’ is an act of subcontracting a part, or all, of an
organization’s work to external vendor(s), to manage on its behalf.
 ‘Outsourcing’ is the transfer to an external supplier of the technical,
process and human resources of a function that includes the
management for the transferred staff.

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Slide 5
Outsourcing Information Systems Functions: Two
Driving Forces
 Focus on core businesses that adds value to end product or service
– Global competition in 1980s-2012 have forced efficiencies.
 Shareholder value: Companies ‘priced’ based on shareholder value
– With focus on short term profits.
– Some tendency for this to be a specific feature of US/UK.
This implies management must stress value, they must consider
outsourcing for their non-strategic functions.

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Slide 6
Outsourcing is not a passing fad but is main-stream
 80% of large companies outsource at least one function or service
– 40% outsource two or more functions
– 20% annualised growth
 Most companies even in these credit crunch times expect to
outsource in the next two years
– Focus on cost savings may actually receive an extra impetus (especially
public sector)
 Still many large deals being struck…
– … focus on second generation deals and selective sourcing
The issue of why/what to outsource is largely settled how to
improve the operational performance of outsourcing is centre stage

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Slide 7
At the start focus was on the mega single source
 IT outsourcing
– Single outsourcer
 Big bang (common pre-1990)
– Sell IT assets to outsourcer
– Move personnel to outsourcer
– Get fixed costs off books and change to variable costs
– Outsourcers took loss for 2 years and then got economy of scale to
keep costs down
– Many problems with transition and culture shock of ex-employees being
treated like ‘temps’

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Slide 8
Outsourcing Alternatives
 Transitional outsourcing (common early to mid 1990s)
– Single outsourcer
 Stopgap outsourcing for a one-shot specific need
– Y2K
– Need to transition to new tech frame
 Two strategies:
– Outsource maintenance of legacy systems to focus on building new
systems in new frame (C/S or Internet)
– Or outsource development while maintaining legacy and then transition
with turnkey system

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Slide 9
Outsourcing Alternatives
 Best-of-breed outsourcing (common mid to late 1990s)
– Multiple outsourcers
– Choose each outsourcer based on their expertise
– Alternatively, could be ‘collaborative outsourcing’
 Prime contractor and subcontractor system
 Business process outsourcing (late 1990s)
– Buying radical innovation in processes via IT
Is risky and sometimes risks and rewards are shared in joint ventures (but
not common)

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Slide 10
Early signs of risks in Outsourcing showed control a
key issue
 Risks/Rewards of outsourcing:
– IS Management loses an increasing amount of control
– Vendors take more risk to win the deal
– Vendors’ margins improve by simplifying service
– Choosing the right vendor very important
– Organizations lose learning and often intellectual property from
innovation
– Organizations lose management control (cannot demand immediate
help, etc.), quality control, and loyalty

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Slide 11
Other sourcing approaches also emerged
 Application service providers (ASPs)
– Software services for rent in remote location (e.g., no temps working in
house)
– Primarily with an Internet interface
– Pay by the transaction
– Can integrate company externally and someone else provides and
maintains hardware and software

12. Slide: 12
Slide 12
Outsourcing alternatives such as shared services also
common
 Shared services
– Insourcing within organization
– Across large organization, create centralized service unit that deals with
services of all sorts
– A spin off company that has its own management and autonomy and in
some cases is legal corporate entity
– Specialties within types of service (like IT or mailroom or legal) have
autonomous subunits within service unit
 Shared service group can become prime candidate for outsource

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Slide 13
A whole new vocabulary sprang up
 Out-sourcing
 In-sourcing
 Back-sourcing
 Competitive sourcing
 Off-shoring
 Near-shoring
 Right-shoring
 In-shore
The cheesy term Rightshore ™ is a trademark of Cap Gemini Ernst
& Young, with a filing date of May 27, 2003.

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Slide 14
Define what you think is meant by total outsourcing?
 Can you suggest advantages/disadvantages?
 How would you measure the benefits of an outsourcing decision
once it was completed?

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Slide 15
An active market attracted new entrants
 Consultants (Accenture, PWC)
– FM as entry to high value activities such as Business Process
Outsourcing
 System Houses (Atos, EDS)
– Long term provision of custom/package software
– IT & project management
 Hardware vendors
– Diversifying to avoid margin trap
 Ex IT departments
– Operational IT (FM focus)

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Slide 16
Suppliers diversify to gain more of the market potential
Their different backgrounds mean they have specific competences to offer
but the go-to-market position is they can do everything
Strategic & tactical
Application development
Operational IT/IS
Hardware
Consultancies
HWVendors
Ex IT Departments
System Houses
Margin
Traditional IT
vendors
acquiring
consultancies
to get up the
value chain

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Slide 17
What is important in vendor choice?
 Think about the vendor decision in an
outsource bid
 Reflect on what would be the key factors you
would use when selecting a vendor
 Rank you criteria in order and justify your
choice

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Slide 18
Important Factors
 Probably the most important is specific expertise in the technology or
process being outsourced
 Others:
– Sector specific competence (demonstrable)
– Scale and scope in outsource area
– Ability to deliver savings
– Culture match (to service delivery people)
– Good transition management capabilities
– …

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Slide 19
The Myths of Outsourcing
Costs Savings
Provide scarce IT skills
Better quality service
Assist cash flow
Over what time period?
Could do this anyway?
At what price?
In the contract?
Continuity?
How measured?
Paid for later?
Focus on core
competence
What is core?
Reliability of service?

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Slide 20
More Myths…
Flexibility
Utilises spare capacity
Accountability
Increases management
control
In the contract at what price?
True availability?
Shared services?
Switching costs?
Clear contracting? Detailed
SLA’s
Different type of skills required
to manage vendor
Manage demand variability
Over what range and at what
price?

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Slide 21
Reshoring/near shoring became more attractive due to
labour arbitrage but...
 Customers in US rated off-
shore call centres 26 points
lower than on-shore.
 First time call resolution
‘dramatically’ lower offshore.
 Evident contextual gap in
language use.
 Potential risk to customer
experience and loyalty
– 50% customers ready to
change over poor experience.
Emphasises the need to do
proper due diligence

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Slide 22
Assessing the Myths and Issues of Outsourcing
Desired
 Cost reduction and control
 Focus on core competencies
 Access to staff and technology
 Performance improvement
But
 Mixed evidence, hidden costs
 Problems pinning down a core
competence, time invested in
managing outsourcing
contracts
 Complaints that supplier does
not staff well and pinches own
best
 Evidence of serious or difficult
service-level problems

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Slide 23
What is happening here?
 What do you think that some of these issues are
really telling us?
 Discuss in your groups what could be the
explanation for these problems
– Suggest remedial actions