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Topic1 introduction outsourcing


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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 website.

Published in: Business, Technology
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Topic1 introduction outsourcing

  1. 1. Slide: 1 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
  2. 2. Slide: 2 Slide 2 Today's Agenda  What is Outsourcing?  History and Types  Why Outsource (business driver)  What are the problems
  3. 3. Slide: 3 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
  4. 4. Slide: 4 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.
  5. 5. Slide: 5 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.
  6. 6. Slide: 6 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
  7. 7. Slide: 7 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’
  8. 8. Slide: 8 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
  9. 9. Slide: 9 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)
  10. 10. Slide: 10 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
  11. 11. Slide: 11 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. 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
  13. 13. Slide: 13 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.
  14. 14. Slide: 14 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?
  15. 15. Slide: 15 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)
  16. 16. Slide: 16 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
  17. 17. Slide: 17 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
  18. 18. Slide: 18 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 – …
  19. 19. Slide: 19 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?
  20. 20. Slide: 20 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?
  21. 21. Slide: 21 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
  22. 22. Slide: 22 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
  23. 23. Slide: 23 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