Key Drivers Of Outsourcing Information Technology Essay

Organisations must recognize the strategic context in where the procurement of goods and service should take place. All procurement activity independent of size and scope, contact on several factors on the growth of the organisation and it increases the likelihood of obtaining the best value for the money spent.

DEFINITION OF OUTSOURCING:

Outsourcing can be defined as the ‘contracting-out’ product/services that were previously performed in-house. Outsourcing is a supply strategy often chosen as a means of increasing organizational efficiency and effectiveness (Steane and Walker, 2000).

OBJECTIVE OF OUTSOURCING:

The main goal of outsourcing is to execute procurement and vendor operational strategies that restructure material or service flows, decrease production and supplier costs, and improve excellence and customer service in order to create better lasting customer/supplier relationship (Weber, C. A., et al (1991)).

Why do Company ‘Outsource’ Services?

There are several of reasons for why companies undergo Outsourcing. A recent analysis conducted by The Outsourcing Institute (IT Index, 2001) identified the 3 potential reason organisation get most of it. The main reasons are reduction in the cost; getting better focus and access to the high-class capability are the most probable benefits companies seek from the outsourcing relationships. Through the outsourcing the company can focus its core activities.

Main Factors influencing Successful Outsourcing:

Understanding company’s goals and objectives

A strategic vision and plan

Selecting the right vendor

Ongoing management of the relationships

A properly structured contract

Open communication with affected individual/groups

Senior executive support and involvement

Careful attention to personnel issues

Short-term financial justification. (Robert Handfield, 2006).

What is Procurement Outsourcing?

Procurement outsourcing is a process that a company outsource their part of their procurement functions to third-party service provider to purchase the goods and services. This doesn’t mean that the company loses control, but typically it has the power over the third party services. The outsourced procurement is mainly used in the organisations to reduce the cost, improve the efficiency, and improve the compliance and to enhance the performance.

Through the procurement outsourcing that the company can reduce the business risk, improvement in capability, service and flexibility towards the business.

KEY DRIVERS OF OUTSOURCING:

These are three different key factors which act as drivers that drives organisation to outsource and they are:

ECONOMIC FACTOR

STRATEGIC FACTOR

ENVIRONMENTAL FACTOR

ECONOMIC FACTOR:

Cost reduction

The main objective of the cost reduction is to improve profitability, operating effectiveness and add value to product. (Gonzales et al. (2005)).

Cost saving

The main objective of the cost saving is to improve cash flow and efficiency (Embleton and Wright (1998)).

Capital investment reduction

The main objective of the capital investment reduction is to gain the profit and make it available for core areas. (Lynch (2004)).

STRATEGIC FACTOR:

Acceleration of business process re-engineering

The main objective is to improve the performance and achieve competitive advantage (Clott (2004)).

Focus on core competence

The main objective of this factor is to improve the focus on core business, influence the firm’s skills and resources, and improve the competitiveness and to enhance the customer satisfaction. (Quinn and Hilmer (1994)).

Flexibility enhancement

The main objective of flexible enhancement is to

The main objective of flexible enhancement is to reduce the limitation of organization’s own production capacity, converting the fixed costs to variable costs, increase responsive market change and to minimise the risks (Corbett (1998)).

ENVIRONMENTAL FACTOR:

IT development

The main objective is to meet the increasing demand for new information systems and resources cost-effectively (Lynch (2004)).

Globalization

The main objective of globalization is to help companies increase global competitive advantage (Clott (2004)).

Capability of supplier

The main objective of capability of supplier is to improve the service excellence, customer service and increase the competitive advantage (Jennings (2002)).

For example: According to the research conducted in 2001 Outsourcing have a overall spending of about US$3.7 trillion as it is in the rising phase of the world economy (Clott, 2004).

Another Example: Goodyear the multinational tyre manufacturing company outsourced its human resource to Dallas based ACS, which is dealing with many large multinational firms like Motorola, GM Europe. After many years of industrial excellence it earned the contract with Goodyear HR function. According to the source that forty-five million savings is expected by moving into outsourcing. It earned the 10 year contract with Goodyear (www.hrtoday.com, 14/02/13).

BARRIERS OF OUTSOURCING:

These are the different obstacles that act as barriers of outsourcing and they are:

Loss of control

The main problem is the loss of core competency and risks of losing the potential customers. (Lonsdale & Cox (2000)).

Loss of critical skills

The main problem is the loss of competitive advantage and increased contenders.

(Beaumont & Sohal (2004)).

Inadequate capabilities of service provider

The main problem is loss of competitive advantage and market share (Jennings (2002)).

Loss of flexibility

The main problem is reduced responsiveness and risk of potential customers (Beaumont & Sohal (2004)).

Failure to realize hidden costs of contract

The main problem is increased operating cost (Palvia (1995)).

Difficulty in obtaining organizational support

The main problem is increased difficulty in getting support and high probability of failure (Razzaque & Sheng (1998)).

Indecisiveness on which activities to outsource

The main problem is increased chances of failure (Lankford & Parsa (1999)).

Inadequate cost and benefit analysis systems

The main problem is financial loss and risks in obtaining competitive benefits

(McIvor & Humphreys (2000)).

Fear of job loss

The main problem is it makes to change and decrease the staff confidence

(Razzaque & Sheng (1998)).

For example: G4S (Group 4 Securicor) is a British multinational security service provider company. G4S was appointed as the official security services provider for the London 2012 Olympic and Paralympics Games.

G4S had an agreement to supply 10,400 staff for the London Olympic events, but the company failed to provide the security personnel as per the £284m contract. That made the government to leaving some 4,700 members the military armed forces to stand in for them.

The main reason for the failure is because of the outsourcing failure. The outsourced private sector could not fill in the requirement (www.bbc.co.uk, 09:10, & 15/02/13).

Another example: Boeing 787 Dream liner is the airliner developed by the Boeing commercial airplanes. After the launch of Boeing dream liner that the company grounded the dream liner because of the lithium battery failures that resulted in fire in Boston and another on fire of battery on a flight in Japan after a week time.

According to the source that the company admits that it is heavily relied on their outsourcing for various numbers of products and connected pieces and the batteries were made in Japan (www.seattletimes.com, 15/02/13).

DRIVERS OF OUTSOURCING PROCESS:

There are many factors which act as drivers of the outsourcing process. From the analysis of different industry’s practice, five drivers of outsourcing process are identified.

The five drivers of outsourcing process are:

Managerial initiative

A higher level decision (Hierarchy)

Behavioral display (Imitation)

Information (Outsider advice)

Knowledge source (Michael J. Mol & Masaaki Kotabe (2011)).

Managerial initiative:

The managerial initiative is the initiative taken by the managerial level executives of the company to carry the outsourcing process. Taking the proposal for the new strategic plan improves the standing of the managerial position.

A higher level decision (Hierarchy):

This is the decision taken by the firms which are in the multinational level. Often the multinational firms compare the outsourcing strategy of their competitors and draw out the strategy and implement it. The hierarchy takes place when top level management from the multinational firm encourage their globalised companies to follow the outsourcing strategy more.

Behavioural display (Imitation):

While analysing the other competitors strategic outsourcing plan and how it affects the managerial decision making in the firm and that is because of the less awareness.

Imitation comes when one company uses the strategic practice used by the other company in the line.

Information (Outsider advice):

The information is commonly from their suppliers, customers, consultants, and joint enterprise partners of the third party service.

Knowledge source:

The knowledge source is commonly the related conference and basically from the different knowledgeable network, famous organizational literatures made the managers to learn the information and benefits about the outsourcing.

PROS AND CONS:

The major advantage and disadvantage of outsourcing is:

ADVANTAGE

DISADVANTAGE

Improved profitability and efficiency

Difficult to outsource more activities

More capital funds available for core business

2. Limitations in selecting the

right suppliers

Reduced risk

3. Failure in achieving the expected cost

reduction or to fulfil the capital

investment

Improved service quality

4. Failure in knowing if the process is

running fine as planned

Improved performance and business focus

5. Failure in identifying areas of

improvements or changes

(Kwok Hung Lau & Jianmei Zhang, (2006)).

OUTSOURCING METHODOLOGIES:

The Outsourcing methodologies are used for better outsourcing strategies to analyse the risk involved in every stage of the process in terms of different approach that allows organisation to think about the full proposition of their action rather than adopting short-term answers for cost reduction (McIvor, (2000)).

There are three methodologies for outsourcing with several stages in it.

Method 1:

In this model that the companies do several assessments

Internal assessment of criticality of business activity:

To analyse the risk involved in their outsourcing in terms of their core/non-core capability. By this analysis the companies should have the understanding their type of business involvement and value in it and they can identify the non-core activities and little risk in outsourcing

Internal assessment of external supply market:

To analyse the knowledgeable suppliers or service providers, in order to find who provides the better level of service with constant improvement.

Internal selection of appropriate types of external supplier relationship:

To select the exact process of supplier relationship, so that helps to select the right selection of supplier.

Supplier selection:

Selection of the right supplier who can supply the product/service which benefits the organisation by clearly describing that what organisation need. Organisation will select the supplier after several processes.

Supplier management:

After the supplier selection the supplier management is done through efficient performance monitoring with the move towards creating partnership and contracts.

Re-tender or return in-house:

The efficient management for re-tender must be managed efficiently. It can cause unprofessional status in the market if it was managed badly.

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Source: (Lonsdale & Cox, (1998)).

Method 2:

This model was provided in the form of tree involving four different key stages.

Core activity:

The vital role is to differentiate between the core and non-core business activities. So the company can outsource the non-core activities and focus mainly in the core activity which can add benefits to the organisation.

Value chain activities:

In this the organisation evaluates the capability of the company with the potential providers in the market and analyse that how they can able to add benefits to the organisation through their service.

Through this value chain analysis the organisation can select the potential providers who have loss cost support.

Total cost analysis:

In this phase, the organisation should compare the external sources with total cost of the business, if the total cost of the organisation is more efficient than the external providers then the company should go with in-house ability.

Relationship analysis:

In this phase, the focus is to develop appropriate relationship with the selected suppliers who have the ability. This will add value to the company and afford continuous development (McIvor (2000)).

Model 3:

The strategic outsourcing can save lots towards the cost efficiency through the various phases as like the previous two models. The several stages involved in this model is the core competency evaluation, process identification for outsourcing, relationships types, supplier selection and management, relationship management.

For example: Goodyear Tire & rubber manufacturing company in North America following the outsourcing strategies in many categories in the aim of cutting down the cost.

According to the source by following the outsourcing methods, it helps the company to save one billion by the year 2008.

The categories which Goodyear outsourced are their transportation, maintenance, repair, operations and their marketing service (Baily, et al (2008)).

Case Study

Case study on Mahindra & Mahindra an Indian multinational automobile manufacturing company in India, the company is outsourcing their non core activities in the motive to cut costs and succeeded in doing it.

So according to the source, the Company managed to save one billion by 2008 and that made their buyers to focus on their core-activity.

The main categories that they outsourced were their transportation, distribution, operation, repair, and marketing service.

OUTSOURCING PITFALLS:

In outsourcing commonly pitfalls is the difficulty which the company face while supplier delivering the services to the customer. This is mainly because the clients have not specified the exact service they are in need of. To avoid it the proper quality measures should be taken by the management team.

The supplier needs a specific format that defines qualitative requirements together with the output and the main input. The customer needs to know the unseen cost involved in the process.

For example: according to the study conducted by PA consulting that majority of the customers passed out very less attentiveness on the supplier. Only twenty one percentage of the supplier felt that the customer communicated their intention well (Peter Bailey, et al (2008)).

HOW TO AVOID PITFALLS:

The main thing needs to be done to avoid pitfalls is the proper communication between buyer and supplier. The buyer should communicate their expectation with the supplier.

The organisation should maintain a small team to analysis the performance of the supplier and the contract relationship. Once the key performance indicator is proper in the company then the buyer supplier relationship can be observe through the various re-evaluation with the exact needs and delivery period.

One of the main things is that the company should have the partnership approach with the suppliers to make them engaged in the process (Peter Bailey, et al (2008)).

CONCLUSION:

This paper summarises the ethical purpose and the significance of Outsourcing in today’s generation with proportion to the organisations. My assignment uses a case study and various examples to provide the clear idea about the apposite reasons for outsourcing in the organisation and the possible barriers if not used it appropriately. 

It focuses on various Outsourcing methodologies which are described in the step-by-step approach with the intention of writing a typical Outsourcing process.

The causes for Outsourcing pitfalls and the list of factors to avoid pitfalls are discussed.

The drivers of Outsourcing signify a list of effectual forms that remunerate the organisation and the supplier in several ways.

The perceptive barriers indicate the various downsides an organisation and the supplier faces without the use of proper exploitation. 

To conclude, this paper spotlights the piece of evidence that Outsourcing has various advantages and few drawbacks, where the organisation should plan accordingly to make best use of it.