As a student, I were invited by the Dean of the Institute of Computing to attend a seminar-workshop on information systems planning with some of the faculty members. In one of the sessions, a discussion of outsourcing came up. I have been asked to present your evaluation about outsourcing the information systems functions of the school.
If the Dean of the Institute of Computing will invite me to attend a seminar-workshop these are the things that I will present in my evaluation about outsourcing the information systems functions of the school:
Outsourcing is subcontracting a service such as product design or manufacturing, to a third-party company. The decision to outsource is often made in the interest of lowering cost or making better use of time and energy costs, redirecting or conserving energy directed at the competencies of a particular business, or to make more efficient use of land, labor, capital, (information) technology and resources.
Outsourcing has assumed strongly negative connotations in certain circles. To some, outsourcing today means low-cost labour, performing low-value work in substandard or even exploitative conditions. When combined with offshoring, outsourcing has led to rising unemployment and other economic and social ills. Outsourcing and offshoring have become symbols of globalisation’s adverse side effects, and so both practices have become politically volatile.
Reasons for outsourcing
Organizations that outsource are seeking to realize benefits or address the following issues:
• Cost savings. The lowering of the overall cost of the service to the business. This will involve reducing the scope, defining quality levels, re-pricing, re-negotiation, cost re-structuring. Access to lower cost economies through offshoring called "labor arbitrage" generated by the wage gap between industrialized and developing nations.[15]
• Focus on Core Business. Resources (for example investment, people, infrastructure) are focused on developing the core business. For example often organizations outsource their IT support to specilaised IT services companies.
• Cost restructuring. Operating leverage is a measure that compares fixed costs to variable costs. Outsourcing changes the balance of this ratio by offering a move from fixed to variable cost and also by making variable costs more predictable.
• Improve quality. Achieve a step change in quality through contracting out the service with a new service level agreement.
• Knowledge. Access to intellectual property and wider experience and knowledge.[16]
• Contract. Services will be provided to a legally binding contract with financial penalties and legal redress. This is not the case with internal services.[17]
• Operational expertise. Access to operational best practice that would be too difficult or time consuming to develop in-house.
• Access to talent. Access to a larger talent pool and a sustainable source of skills, in particular in science and engineering.[4][18]
• Capacity management. An improved method of capacity management of services and technology where the risk in providing the excess capacity is borne by the supplier.
• Catalyst for change. An organization can use an outsourcing agreement as a catalyst for major step change that can not be achieved alone. The outsourcer becomes a Change agent in the process.
• Enhance capacity for innovation. Companies increasingly use external knowledge service providers to supplement limited in-house capacity for product innovation.[19][20]
• Reduce time to market. The acceleration of the development or production of a product through the additional capability brought by the supplier.
• Risk management. An approach to risk management for some types of risks is to partner with an outsourcer who is better able to provide the mitigation.[21]
• Venture Capital. Some countries match government funds venture capital with private venture capital for startups that start businesses in their country.[1]
• Tax Benefit. Countries offer tax incentives to move manufacturing operations to counter high corporate taxes within another country.
Drawbacks of Outsourcing
Outsourcing can provide considerable benefits to your company. However, there are definitely a number of drawbacks that you need to be aware of in order to make a good assessment:
• Management & Control Problems
Effectively managing the operation of a department within your own company is challenging enough. Effectively controlling an offshore operation is difficult due to the geographical distance, time-zone difference, and lack of face-to-face communication.
• Failure to Deliver
With external sources, you are trusting a third party to deliver a certain quantity/quality of deliverables. Should your provider fail to deliver, you are likely to suffer the consequences despite the Service Level Agreements (SLAs) you had in place.
• Exposure
Outsourcing exposes a certain part of your business to a third party. Unless you completely shield your offshore operation, you might expose your company to a breech of confidentiality, malicious use of system access, and other vulnerabilities in your organization.
• Negative Reputation
Outsourcing has gained a negative reputation and even though studies have proven otherwise, the general public opinion remains that offshoring eliminates domestic jobs. Your employees, clients, and partners might not appreciate the fact that you are offshoring certain business processes especially if that means that you are terminating a part of your domestic operation.
• Company Value
The major risk of outsourcing is that you may not be building the value of your company in terms of personnel, in-house knowledge, and infrastructure. In this case, the value of an outsourcing agreement with a provider will be less effective than an internal department.
If I had to take a position I would choose in-sourcing.
In-Sourcing is the opposite of outsourcing; that is in sourcing (or contracting in) is often defined as the delegation of operations or jobs from production within a business to an internal (but 'stand-alone') entity that specializes in that operation. In sourcing is a business decision that is often made to maintain control of critical production or competencies. An alternate use of the term implies transferring jobs to within the country where the term is used, either by hiring local subcontractors or building a facility.
Why Insource?
Insourcing can also reduce variability and help the manufacturer develop and test line extensions with a higher degree of security than with outsourcing. A manufacturer’s response to a crisis, such as tampering, destruction, or compromise, can also be quicker than if its goods are with an outsourcer. However, both insourcing and outsourcing can help an OEM recover from catastrophes, or alleviate short- or long-term capacity issues.
Insourcers can also enjoy improved responsiveness over contract partners. Because they are closer to their customers, insourcers can react more quickly than those that are simply managing a larger supply chain. With the control of insourcing, relationships can be leveraged for additional cost savings. Insourcing is particularly suited for noncommodity products, because companies can provide competitive quotes and lower their cost of goods sold. Finally, if companies do not achieve quality enhancements through outsourcing, they should consider keeping control in-house.
There are cost benefits to insourcing, of course. Average salaries and benefits for qualified staff in Manila are about a third of market rates in other major cities throughout the world, and even lower than high-cost jurisdictions, such as London and New York.
Rents, utilities and other fixed costs are also more affordable in Manila, and they are expected to remain so for the foreseeable future.
As a result, the firm’s global marketing team saves more than half a million dollars annually by doing most of its graphic design and desktop publishing work in Manila. In addition, we have realised similar savings by consolidating much of our software-development work globally in GSM.
Advantages of In-Sourcing
• Substantial cost savings
• Increased Professional Resources
• Direct Management
• Reduced Operational Expenses
• Extended Productivity Hours
What about Outsourcing?
The quick answer to the outsourcing question used to be cost reductions. This still holds true for certain products and contexts. With the right partner, outsourcing can provide significant production scale without capital investment.
For small companies with limited access to capital, outsourcing provides a means to manage cash flow and inventories. Outsourcing is a good option for commodity manufacture, because third parties can offer economies of scale that individual companies cannot reach on their own.
The benefits of minimal capital investment and cash flow, however, may be offset by the increased inventory needed to support the long lead times inherent in outsourced manufacturing.
Managing outsource partners may result in greater personnel costs and a loss of flexibility and control. It’s also important to understand the implications of outsourcing for inventory and cash flow management. A common issue is deciding when an OEM should pay for its product (upon receipt, ex-works, etc.).
In fact, industry experts note that a key factor driving insourcing has been the failure of outsourcing to achieve the consistent, long-term, and significant cost savings that clients anticipate.3
Estimates from Compass Sourcing Services indicate that large outsourcing contracts show, on average, a cost reduction of 15% in the first 18 months of the agreement. However, experts also say that because of growing demand for services and sales charges of many outsourcing contracts, the client’s costs are often 30% higher than those of a well-managed internal operation by the end of the term.3
Another possible drawback of outsourcing material is quality. Although this problem is alleviated by choosing an outsourcer that emphasizes quality, there is a risk that the quality of the product will not meet the expectations of the manufacturer.
There are three key issues to balance in making the decision to outsource or insource manufacturing, as follows:
• The complexity of the product design. Commodity-type products can benefit from the economies of scale and purchasing power of their contract manufacturers.
• The maturity of the product design. Companies should be cautious about outsourcing brand-new products.
• The stability of the market need. Allowing the product and the market to stabilize before considering an outsourcing partner helps ensure a successful transition.
Products that may require future improvements or updates to address market needs may be difficult to outsource because partners may be unwilling to share in the cost of production changes. Depending on the lead times for manufacture, the volume of in-process inventory may be significant. Finally, OEMs must make sure that partners are willing to alter their processes to accommodate individual needs.
For success in outsourcing, it is critical to pick the right partner. No contract is bulletproof. It is important to understand that unexpected things will happen. OEMs must put plans in place to be ready to manage them when they do. Unforeseen changes in ownership or management can seriously alter a partnership and the terms of supply, price, and quality.
What is best for the organization?
If the organization has a number of non-core processes which are taking plenty of time, effort and resources to perform in-house, it would be wise to outsource these non-core functions. Outsourcing in this case, would help you save on time, effort, manpower and would also aid you in making quicker deliveries to your customers.
If the require expertise services in areas which do not fall under your core competency, then outsourcing will be a good option as you can get access to expertise services. For reducing costs and making faster deliverables, outsourcing is again a good option.
If the work involves production, then it would be more ideal for your organization to opt for insourcing, as you can save on transportation costs and exercise a better control over your project.
It is not necessary to choose outsourcing over insourcing or vice versa. The organization can outsource and insource at the same time. By outsourcing and insourcing simultaneously, you can have the best of what both offers and your business can get a competitive advantage!
References:
http://www.in-source.com/benefit.html
http://www.devicelink.com/mddi/archive/07/03/027.html
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