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Outsourcing in general can be defined as passing of service provision or production to another internal or external party. The chief reason of outsourcing is to reduce capital expenditure over a business process. Also management gets more time to concentrate over core competencies. This also reduces the dependency upon internal resources and increases the flexibility to meet the changing business and commercial conditions.
Even though several other reasons can be listed up in favor of outsourcing, one must not overlook the disadvantages of it.
By outsourcing a business process, we tend to loose the managerial control. This happens because it is harder to manage the outsourcing service provider as compare to managing one's own employees. Also because we generally tend to skip (or miss to calculate) the
potential hidden costs of outsourcing which includes legal costs of putting together a contract between companies and time spent on coordinating the contracts, we feel that outsourcing reduces the overall expenditure of a business process, one of the major reasons why a company goes for outsourcing. This hidden and missed out costs of outsourcing is hard to predict causing overall costs to be underestimated.
Another disadvantage is that outsourcing can also prove to be a threat to the security and confidentiality of issues of a company. If your company is outsourcing business process such as payroll, confidential information such as salary will be known to the outsourcing service provider. Therefore one must be very careful in choosing which business process to outsource and which one not.
Outsourcing may also result into the possible loss of flexibility in reacting to changing business conditions, lack of internal and external customer focus and sharing cost savings. Loss of internally generated talent is yet another problem associated with the outsourcing as it may hamper the growth of an employee by depriving him from the experience he would have gained by handling the business issue himself then by passing it over to some other external party.
Thus before a company decides to outsource its business process, it must examine all the factors carefully. It may not happen that outsourcing becomes a reason for company to regret later.
There is a strong public opinion regarding outsourcing (especially when combined with offshoring) that outsourcing damages a local labor market. Outsourcing is the transfer of the delivery of services which affects both jobs and individuals. It is difficult to dispute that outsourcing has a detrimental effect on individuals who face job disruption and employment insecurity; however, its supporters believe that outsourcing should bring down prices, providing greater economic benefit to all. There are legal protections in the European Union regulations called the Transfer of Undertakings (Protection of Employment). Labor laws in the United States are not as protective as those in the European Union. On June 26 2009, Jeff Immelt, the CEO of General Electric, called for the United States to increase its manufacturing base employment to 20% of the workforce commenting that the U.S. has outsourced too much and can no longer rely on consumer spending to drive demand.
Quality Risk is the propensity for a product or service to be defective, due to operations-related issues. Quality risk in outsourcing is driven by a list of factors. One such factor is opportunism by suppliers due to misaligned incentives between buyer and supplier, information asymmetry, high asset specificity, or high supplier switching costs. Other factors contributing to quality risk in outsourcing are poor buyer-supplier communication, lack of supplier capabilities/resources/capacity, or buyer-supplier contract enforceability. Two main concepts must be considered when considering observability as it related to quality risks in outsourcing: the concepts of testability and criticality.
Quality fade is the deliberate and secretive reduction in the quality of labor in order to widen profit margins. The downward changes in human capital are subtle but progressive, and usually unnoticeable by the out sourcer/customer. The initial interview meets requirements, however, with subsequent support, more and more of the support team are replaced with novice or less experienced workers. India IT shops will continue to reduce the quality of human capital under the pressure of drying up labor supply and upward trend of salary, pushing the quality limits. Such practices are hard to detect, as customers may just simply give up seeking help from the help desk. However, the overall customer satisfaction will be reduced greatly over time. Unless the company constantly conducts customer satisfaction surveys, they may eventually be caught in a surprise of customer churn, and when they find out the root cause, it could be too late. In such cases, it can be hard to dispute the legal contract with the India outsourcing company, as their staff are now trained in the process and the original staff made redundant. In the end, the company that outsources is worse off than before it outsourced its workforce to India
Disadvantages of Outsource
Although there are several reasons in favor of outsourcing, a company must also consider the disadvantages of outsourcing. There are risks that need to be analyzed whenever a company embarks on a new business venture. Even though outsourcing is often the right solution for companies, one should not outsource simply for the sake of outsourcing. Several benefits and value addition have to be realized in order for companies justify outsourcing. It is a hot trend nowadays and seems an attractive option for many, but if the risks are not considered in detail, the disadvantages of outsourcing may dominate the advantages.
Lately however, the concept of outsourcing has been criticized. The negative attitudes toward offshore outsourcing have been mostly discussed by parties in the US and UK, due to job losses in the mentioned countries. Some people in countries like the US, feel that outsourcing is threat to their economy. Outsourcing jobs to offshore destinations, is causing unemployment in the minds of some people. It cannot be denied that the immediate effects of outsourcing such as lay-offs as well as the shifting of production and jobs to foreign locations causes problems many employees. Both high and low-end jobs are moving out of the US causing people to loose jobs. The needs of companies, national economies and those of individual people often clash.
The disadvantages of outsourcing may include the following:
· Loss of managerial control, because it is more difficult to manage outside service providers than managing one’s own employees working possibly in the same building.
· Often the hidden costs are difficult to calculate or prepare for. These include legal costs related to putting together a contract between two companies and the time spent to coordinating the contract.
· Another disadvantage of outsourcing can be a threat to security and confidentiality. If your company is outsourcing processes like payroll, medical transcriptions or other confidential information, a company must be very careful in choosing which process it wants to outsource and to which provider.
· A possible loss of flexibility in reacting to changing business conditions, lack of internal and external customer focus and sharing cost savings may also be a disadvantage of outsourcing.
· Other disadvantages of outsourcing may include unfavorable contract lengths, loss of competitive edge, problems in contract renewal, and contractual misunderstandings.
When the IT department is taken over by an outsourcer you will see some changes. Some of these changes can be good for you and your organization -- but not all will be. The outsourcer will make a great deal of noise about its ability to leverage its support organization and your contribution to that organization. This makes it sound like a good thing for your organization in that you get a wider range of skills and you don't have to employ any additional staff to achieve it. Also, it suggests a good prospect for you because it gives you a career path outside your current employers' structure without actually changing jobs. As Ira Gershwin wrote; "It ain't necessarily so."
The tight integration with the outsourcer's help desk and systems management solutions, which I addressed in my last article, is a double-edged sword.
Here are some reasons to be wary:
· Longer resolution time. Typically, any problem with a server that you control will take significantly longer to resolve when you're relying on an outside company to solve it. Before being outsourced, you would have been able to go to the server room or at least access it using Remote Desktop and act quickly and directly using your knowledge and experience. Now that your are outsourcing the support for the server, you may find yourself constrained and possibly unable to control the server in the manner that is most appropriate to the problem at hand. Remember that if performance is merely degraded, you may not be given permission to do anything about the application until a time that is convenient for the outsourcer but inconvenient for you and your staff.
Server and Active Directory permissions are almost always changed. Settings pertaining to the operating system are set in a way that only personnel in the data center or remote support center are able to control such things as drive configuration, Registry settings or patch levels. If you have an application problem, rest assured that the problem will come straight back to your lap, but you will have one hand tied behind your back while you are troubleshooting and resolving the problem.
· Patch management is becoming more complicated. Patch management is always an area of heated debate. Traditionally, IT structures have the ability to control which patches are applied to their servers and, more importantly, when those patches are to be applied. Support teams from outsourced providers are often constrained by a contract that is written by the customer to keep operating systems and applications patched to a degree that sometimes may not sit well with third-party application vendors.
These vendors may often be focused on their product's functionality rather than on certifying it with a given service pack or patch. For example, there are many applications out there that are still only certified to run on Windows 2000 Server, with no prospect of them being approved for use on Windows Server 2003 in the future. Major releases aside, there is always a time lag between minor releases such as service packs and patches that application vendors take a long time to approve from a supportability perspective. You will receive a great deal of pressure from the centralized operating system support teams within the outsourcing organization to take patches that might not be even remotely relevant to your server(s) but are deemed essential by the centralized teams to allow them to conform with their schedule of the contract. Be prepared for some difficult conversations with the outsourcers'centralized teams, the Service Management organization and almost certainly with the software vendor or its support people.
· Stifled innovation. Innovation will also be a challenge for you personally. No matter what the marketing hype says, innovations and new technologies and ideas will present a challenge. Your contract may not contain a provision to develop the infrastructure using existing technology in a manner that will enable you to be part of the future within the organization. The kind of research & development activity that would have been done during an internal undertaking at no visible cost to the project is not always possible within an IT outsourcing arrangement. Projects under an outsourced arrangement typically are done to a tight cost model. While it might appear to you to be expensive, it takes into account the project management and other governance activities that may have been missing in your organization previously.
· Career advancement may be stifled. An outsourcer will always bring an external team in to look at two things that affect you -- architecture and business process. Architecture is the primary affecting point here. The team will view the entire infrastructure and work closely with the business process re-engineering teams. Future designs may be implemented with only a cursory reference to what technologies are in place -- save for how to migrate away from them. Whereas before your career progression may have gone from Windows administrator to technical architecture or to an IT management role, you will find that both of those functions are now imported from the outsourcer's pool of resources, who already have the requisite experience.
This is a newsletter from inquirer:
How gov't projects (like NBN and Cyber Ed) get overpriced
I have been studying the Cyber Ed project for the past few weeks. All of a sudden one night last week it dawned on me--proponents of overpriced government mega-projects use the same strategy as ERP (enterprise resource planning) vendors.
They sell the idea that having a single vendor guarantees that everything will work together and this best for the customer (or government).
Seven years ago the Manila Polo Club bought a Club ERP from Micros-Fidelio at P12 million because they thought if they bought everything from a single vendor they would have an integrated system.
The Club did not get an integrated system now seven years after the club's management says that the various subsystems--POS, receivables, F & B management, and accounting do not work well together.
It is a pity because if the club had bid the various subsystems independently the cost could have been only about P6 million instead of P12 million.
Many vendors could have offered IBM based POS Systems at about half the price of the Micros-Fidelio POS.
My company had offered a Windows based F&B System for P250,000 instead of the DOS based Micros Fidelio F&B system at P1,415,000.
The advantages to the customer of breaking down bids into loosely coupled subsystems can be very significant.
Deeper analysis shows that the ERP single vendor integrated systems strategy is not for the good of the customer or the government.
It is a vendor strategy to
1. Eliminate competitors who cannot offer everything in the mega RFP (request for proposal)
2. Get all the business.
3. Be able to get very high margins.
The ERP selling strategy includes:
Sell high (to top management)
Make single vendor and integrated mandatory
Offer total solution (hardware, training, implementation, project management)
Sow FUD (fear, uncertainty, and doubt) about smaller specialized vendors.
In the NBN-ZTE and Cyber Ed projects, we see that the project proponents advocate the ERP single vendor integrated system concept (religion!) as well as the strategy of selling high. How much higher can you get? It's not everyday that you get the President of a country flying to another country to witness the signing of a commercial contract (which subsequently gets lost!).
In both projects a single vendor provides everything (hardware, software, training, project management, etc.).
If one studies both the NBN-ZTE and Cyber Ed projects it becomes obvious that the Arroyo administration is not focused on good governance nor does it follow good procurement practices:
1. Both projects looked like they were being rushed.
2. Both projects avoided any semblance of competitive bidding.
3. Both projects do not show evidence of any effort to save money for the government.
4. In fact there seems to be an effort to borrow and spend as much as possible.
5. Both projects are designed to award everything to a single vendor.
Advantages of INSOUCE:
Ø No struggling with the trends of increasing costs.
Ø No support fees.
Ø Increase of staff knowledge and skill.
Ø Gives a high rate in employment of IT personnel.
Ø No vendor-lock in.
Ø Reduce costs.
Ø No managerial control.
Ø No loss of flexibility in reacting to changing business conditions.
Ø No hidden costs.
Ø No unfavorable contract lengths, loss of competitive edge, problems in contract renewal, and contractual misunderstandings.
Ø Not tied to the financial interests of vendor
This is my projected cost plan of my adopted company which I conducted a assessment of their Information System.
Projected Cost Plan
Shows in the table 1.1 the estimated cost in outsourcing and in sourcing. It also shows that in sourcing is cheaper than outsourcing. It also increases staff knowledge and skills to ensure a productive and satisfying work environment. As seen in the table it is much cheaper to switch to in source from outsource. Even though the company will have to spend more in personnel cost that is 82,500 php compared to outsource that is 45,000 php. It is an advantage also in our IT industry because in- sourcing gives a high rate in employment of IT personnel.
| YEARS | COST SAVE | TOTAL |
| 1 year | 1,436,500 | 1,436,500 |
| 2 years | 257,500 | 1,694,000 |
| 3 years | 257,500 | 1,951,500 |
Table 1.2 | ||
Table 1.2 shows that shifting to in-source from outsource it can save 1,436,500 php. And in 3 years time the company will save 1,951,500 php.
I recommend hiring additional programmers, designer, researcher, and create a system development team to make a program system application so that the company doesn’t have to buy license system anymore. I recommend going in-source, to avoid too much expense in the company. Building a system development team is more easier for the IT personnel in the company to customized a certain program, and can also put the company information and ideas to the software, rather than buying a license where in if the company need assistance, the company will call their customer care specialist then every question cost time and money. I recommend going in-source so that the company will not be dependent anymore to the source of their Information System. Lastly, I recommend going in-source with the intention that the company will not be requires to sign an agreement that mandates that support fees will continue to be paid even if use of that product is discontinued within the contract period.
REFERENCES:
http://www.cyfuture.com/disadvantages-of-outsourcing.htm
http://www.softwareprojects.org/disadvantages-outsourcing.htm
http://searchwinit.techtarget.com/news/article/0,289142,sid1_gci1212417,00.html
http://en.wikipedia.org/wiki/Wikipedia:Citation_needed
posted by Rosemie Sandoval @ 4:51 PM
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