Clarification of Answer by
websearcher-ga
on
15 Nov 2002 08:34 PST
Hi shaz_600:
Well, I was able to finish the task today. :-)
Please find below my best effort at putting this information in "essay
form" as you requested. It is a little less than 2000 words long
(1900+), so there's still some room for you to add some personal
touches in areas you might think need more emphasis.
If you are looking for additional material, I would recommend browsing
through some of the sites listed in my original answer - they really
contain a wealth of information.
Thanks.
websearcher-ga
*************************
Outsourcing is becoming an increasingly more common practice among
organizations looking to alleviate some or all of their information
systems/information technology functions.
What exactly is outsourcing? While there are many different
definitions out there, they all share some common threads.
ADP.com defines outsourcing as "the contracting out of a company's non
core, nonrevenue-producing activities to specialists. It differs from
contracting in that outsourcing is a strategic management tool that
involves the restructuring of an organization around what it does best
- its core competencies." (http://nas.adp.com/outsource/what_is.html)
The emphasis is on nonrevenue-generating activities, implying that it
would be foolish to outsource areas that generate revenue. This
implies that outsourcing should be saved for more "day-to-day" tasks.
Typically, the unique things that a company does – probably the reason
it was created in the first place – are those that directly bring in
money. These things are called "core competencies".
Kudos says outsourcing "can be defined as the strategic use of outside
resources to perform activities traditionally handled by internal
staff and resources. Sometimes known also as facilities management,
outsourcing is a strategy by which an organisation contracts out major
functions to specialised and efficient service providers...who become
valued business partners."
(http://www.kudos-idd.com/outsourcing/what_is.htm) This definition
implies that the company who is outsourced to is more efficient at
performing their specialized task. This makes sense because most
outsourcing companies perform their specific IS/IT tasks for dozens of
individual organizations, and are therefore able to invest in the most
up-to-date software/hardware as well as attract the best specialists.
Outsourcing-law.com adds some interesting points with their
definition. "Outsourcing is the transfer or delegation to an external
service provider the operation and day-to-day management of a business
process. The customer receives a service that performs a distinct
business function that fits into the customer's overall business
operations....In 'traditional' outsourcing, employees of an enterprise
cease to perform the same jobs to the enterprise. Rather, tasks are
identified that need to be performed, and the employees are normally
hired by the service provider."
(http://www.outsourcing-law.com/what_is_outsourcing.htm) This
definition adds the key component that separates outsourcing from
contracting – outsourcing is for when you want someone else to
completely take over a specified task so that your employees no longer
have to perform that task. Contractors, on the other hand, typically
help your staff in performing a task they are already doing – and will
continue to do in the future.
So, what is a good combined definition of outsourcing, one that
includes its most key components? Outsourcing is the strategic use of
outside (i.e., external) service providers to perform
non-revenue-generating activities so that an organization may focus on
its core competencies.
There are other key elements that show the nature of outsourcing.
"Outsourcing contracts are usually characterised by the large-scale
transfer of human and technology assets (employment of staff, and
purchase of technology and fixed assets, such as data centres) to
vendors and long-term commitments to using their services (usually 5
to 10 years)." (http://www.cscresearchservices.com/foundation/library/105/RP03.asp)
This quote demonstrates that most outsourcing arrangements are made
for the long-term. Because the transfer of such key business functions
involves a significant investment (and a related risk), there would be
little sense in doing it for just a short period. This is another
essential difference between outsourcing and contracting.
There are different types of IT outsourcing as well - different types
with differing natures. The types can be grouped into four separate
categories that are described at
http://www.cscresearchservices.com/foundation/library/105/RP02.asp
:
Total outsourcing - refers to all of the major functional areas of IS,
including data centers, applications development, systems maintenance,
networks, help desk, desktop services, and so on. Typically, only user
liaison and contract-management functions remain.
Selective outsourcing - where one or more major IS function or
activity is outsourced, but significant activities and functional
areas remain in-house.
Transitional outsourcing - refers to situations where a company
outsources aging or obsolete systems and/or technology platforms in
order to focus its attention and limited resources on the creation of
new systems and infrastructure.
Transformational outsourcing - is the reverse of transitional
outsourcing, where a vendor is hired to move a company to a new
technology platform and/or applications portfolio, and to build new
skills and capabilities.
Knowing the main groupings of outsourcing is important, but it is
equally important to know which particular business functions might be
involved. There are indeed many different types of IS/IT functions
that might be outsourced, from minor tasks to mission-critical
day-to-day processes. The following are just some of the many
functions that can be outsourced.
1. Call Centers
"A call center is traditionally defined as a physical location where
calls are placed, or received, in high volume for the purpose of
sales, marketing, customer service, telemarketing, technical support
or other specialized business activity."
(http://www.callcenternews.com/specials/definition.shtml) Call centers
are an ideal candidate for outsourcing because their function is
easily separable from the rest of an enterprise. As well, they often
involve dull, repetitive work that may not be something your employees
want to do. They also require a large amount of specialized
communications equipment that it may be uneconomical for a company to
invest in.
2. Applications Development/Maintenance
If the main business function of your company is not software
creation, then applications development might be a perfect outsourcing
choice for you. Writing complex programs to be used internally
(whether in accounting, shipping, communications, payroll, etc.) can
be a time-consuming and costly investment in hardware, software, and
manpower. Even the maintenance of you existing programs might be
better left to a company specializing in these areas.
3. System/Network Maintenance/Management
Maintaining a managing a company’s computer systems and networks
includes many specialized tasks for which specialized personnel must
be hired. Unfortunately, many aspects of systems management are
non-regular, which means there are times when more attention is needed
and times when things are much slower. If you staff for the "tough
times", you’ll be left with unused resources for the "easy times".
Outsourcing can alleviate this problem.
4. Data Centers
A data center can be defined as "a warehouse filled with computer
servers in a carefully controlled environment. IDCs usually have
multiple high-speed Internet connections, just in case one connection
goes down, on-site technical support staff, very tight security, and
gas-based fire suppression systems. "
(http://hosts4porn.com/pornhoster/idc.cfm) Obviously, creating such an
important infrastructure internally would be extremely expensive. This
is why most companies outsource their data centers to organizations
that have already made the substantial investment required. Because of
the 24/7 nature of data centers, they can also cause staffing problems
for most companies.
5. Training
Training of employees is another area where outsourcing can make a lot
of sense. To create your own training department requires a hefty
on-going investment, but the actual training (depending on the size of
your organization) may only be needed sporadically. An outsourcing
training company can come in and provide your employees with the new
skills they need, when they need them. Many of these outsourcers also
have there own specialized training locations where you can send your
people to be trained.
6. Web Presence
While Data Centers (above) provide the infrastructure and
communications to send your web-based message out to the world, they
do not actually create that message. Many companies have found that
outsourcing their web presence is the best way to manage the ever
changing and complex challenges that Internet technology and trends
present. Many traditional marketing firms have morphed themselves into
Web-presence outsourcing companies as the popularity of the Internet
has exploded.
7. E-Commerce/E-Business
An even more specialized type of outsourcing is for e-commerce
applications. While many companies want to keep the creation of their
web presence in-house, they do not want to invest in the
infrastructure and accounting nightmares that go with e-commerce. So,
these companies outsource the gathering of money from customers (and
all the myriad of details that involves) to other companies that
provide these services for many clients. The outsourcing company
simply provides them with regular revenue cheques and whatever
accounting data they need, in a way that is easily integrated into
their internal systems.
Now that we know the general nature of outsourcing and what sort of
functions it typically involves, we need to discuss the advantages and
disadvantages of outsourcing. There are many arguments on both sides
of the outsourcing issue, and they can be organized under a few
specific headings.
Improved Focus vs. Loss of Skills: As mentioned previously, one of the
major advantages touted for outsourcing is that it allows a company to
focus on what it does well – it’s key competencies. It does this by
removing the need for the company to staff and equip itself for what
might be seen as more "mundane" tasks. There is little argument about
this benefit. However, some people believe that in distancing itself
from such tasks, companies lose the skill sets that those tasks
require and therefore become weaker and more dependent on their
outsourcing company for their survival. Some feel this dependence is
too high a price to pay for convenience.
Specialization: One of the major advantages of outsourcing is that it
is likely the outsourcer will have access to more sophisticated,
up-to-date equipment, training, and resources to perform the allotted
task(s). On the other hand, any differences in computer systems
between the companies could lead to integration and data-flow
problems.
Dependency: While some companies gain comfort because a
well-established outsourcer is a more dependable long-term solution
because they have the specialized machines and expertise necessary to
the task, others feel that this dependency is not worth the price. It
is felt that once an outsourcing company is engaged to perform a
particular task they become entrenched - it becomes extremely
difficult to take that task back internally or even to simply switch
to another outsourcer. The fear keeps many companies away from
outsourcing.
Risks: Many of the issues around outsourcing revolve around risk. On
the one hand, the "shared risks" that outsourcing provides can help
buffer a company against unforeseen disasters. (For example, many
companies in the WTC had outsourced there IS/IT functions, so were
able to get back up and running quickly after 9/11.) On the other
hand, when you take on an outsourcer, you take on the risks of that
company as well. If bad things happen to them it is beyond your
control and can affect your company dramatically.
Control: While many companies feel that outsourcing allows them to
control things such as cost and budgeting, many others fear the loss
of control over key functions that outsourcing might bring. Using
outsourcing for customer service, for example, might lead to losing
control of the level or quality of that service and might lead to
dissatisfied customers. As well, because the corporate cultures
between the two companies might differ greatly, there is a fear of
sending mixed messages both internally and externally. Also, some
companies fear the loss of control over their sensitive corporate
information.
Cost: This is one of the greatest areas of disagreement. Some believe
that outsourcing is an excellent way to lower overall costs of doing
business by eliminating staff, equipment, and overhead. Others believe
that the time and effort involved in managing the relationship with
the outsourcer outweighs any initial cost benefits and actually ends
up costing the company more in the long run.
Other advantages not listed above include: there are advantages to
having a slim and streamlined organization; improvement of the
company’s financial indicators (taxation, income/assets, human
resources/profits ratios, etc.); fewer labor market problems (for
example, caused by strikes); and ease of measuring the exact cost of
the outsourced function(s).
Other disadvantages not listed above include: fear the outsourcer will
cut corners that you wouldn’t to increase their profit; possible
problems or interruptions during transitional phases; possible longer
response time to problems; a loss of "informal communication" between
departments; and possible software licensing problems.
