While there are two ways to outsourcing—onshore and offshore outsourcing, at present the most noticeable one is offshore outsourcing. Here is the statistics that shows the annual wage levels of five IT outsourcing exporting nations. From the viewpoint of personnel expense, it is not hard to realize why the total dollar spending on IT outsourcing increases every year lately since the cost savings on personnel expenses are able to make up for insufficiencies in other ways.
For example, India is the biggest market in the global outsourcing economy right now. First, their huge IT talent pool gives them a big advantage over other nations. Although they don’t have nationwide telecommunication infrastructure, India government plays a critical role in developing and enhancing the telecommunication and technological infrastructure in major IT cities. Also, government support is very strong with tax advantages for IT exporters.
Secondly, as a former British colony, India has an English-educated system in their schools as well as relatively lower average salary base compared with the U.S. In addition, their cultural compatibility and friendly attitude toward western countries also play a essential role to attract outsourcing contracts to earn India the first position as the biggest IT exporting country in the world.
Surprisingly, Indian IT quality is very high, not as low as its price. This is considered as one of the biggest reasons of their success in the global outsourcing economy. They have the highest number of Capability Maturity Standard certified companies in the world, including North America.
Data source: Jatras, 2001, forbes.com
Background
Edward Liao, who has been working in IT field for over twenty-five years in his career, is a senior network administrator in an international retailing company. About one year ago, he was laid off by Computer Science Corp (CSC). CSC is a professional IT service provider which offers consulting, system integration, and outsourcing services to its clients. However, when macroeconomic environment suddenly and rapidly turned down after .com bubbles in the end of 2000, CSC was forced to “outsource” Edward’s whole twelve-person team to India.
Now, though Edward has joined this retailing company and its $2 billion dollar sales system with his expertise for one year, his annual salary has been cut by around 50%. Moreover, his role in current company is just a pure technician instead of a managerial position in CSC. Thus, like his other young colleagues, Edward is required to be on-call for a whole week by taking turns every month in order to solve any possible problems of this system. When in such an on-call week, sometimes in the middle of the night, Liao, including his wife, would be woken up by a telephone call. Reluctantly, he has to leave from his warm blanket, and then, sit in front of his cold computer to settle a network problem.
“IT (in American) is almost dead”, Liao says. “Sooner or later, my job will be replaced by someone in India. The only way to slow it down is to continuously learn new stuff faster than those Indians.”
Challenges and Issues
- Transition cost
Outsourcing of IT is difficult. Because IT is everywhere in a whole organization, separating IT out individually is not as easy as outsourcing other resources, such as security, logistics, legal services, advertising or the procurement of raw materials and components.
Finding a vendor and writing the contract costs an average of $500,000, or about 3% of the average total outsourcing cost. (Betts, 2001). Such a big number of costs are not pleasant for every company. Besides, in the process of transferring IT system, it is hard to quantify and to control the total dollar cost. Some unexpected situations may happen due to a lack of understanding between the outsourcer and the vendor.
- Possible loss of control
Some people who oppose IT outsourcing contend that outside vendors are impossible to exactly match the responsiveness and service levels offered by an in-house function since in-house function department must follow its management direction and control but vendors do not have to. In addition, they also argue that the end users may become vendors’ hostage. Once outsourcers’ technical staff and end users get locked into vendors’ software and hardware, they will totally lose control of their IT function. Though outsourcers have more leverage when making a contract with vendors, vendors instead have more leverage after the contract is signed.
- Downtime loss
Outsourcers may suffer loss due to vendor’s fault. Once a vendor is unable to deliver services to its clients because of failure of its equipments or operations, the downtime loss of productivity and revenue of clients will be hard to quantify and to make up. Some questions need to be addressed first, such as “how much should the vendor compensate for clients?”, “does this kind of responsibility need to be covered by insurance?”
- Cost savings?
Sometimes outsourcing IT doesn’t bring enough cost savings. Economies-of-scale tells us that average costs of production can be reduced as long as mass production and labor specialization efficiencies are applied, but in IT arena economies-of-scale might not be always true since a vendor might offer an outsourcer a better price due to it uses older technology instead of the latest one.
- Subcontractors
A vendor may outsource its contracts to other vendors or freelance engineers. An outsourcer may fail to write a restriction down to prohibit vendors from subcontracting their contract to others. Thus, the outsourcing benefits may not be as many as expected.
- Morale issue
What come together with outsourcing are usually layoffs. Current employees may fear for their employment security as both outsourcing project and layoffs may take a step by step procedure. After initial steps, the fear definitely undermines current employees’ morale.
Critical Success Factors
- Setting outsourcing goals
Outsourcing must be taken care cautiously, systematically, and with clear goals. Companies that rush into outsourcing without comprehensive understanding what they need may eventually find themselves in a trap with an inappropriate vendor that worsens their IT function. Both strategic and tactical objectives on both departmental and organizational level are required to be established specifically. Through such a hierarchical set of objectives, both organization and department are able to find what they are pursuing for. Otherwise, you are probably deciding to jump into an obscure fog, and may be starting a relationship that is destined to fail. If needed, do not afraid of revising previous objectives by regular examining them.
- Organize a team in charge
While outsourcers start to look for vendors, a team should be organized to handle the outsourcing project. The team’s responsibility includes leadership, analysis, and decision making about the outsourcing. Both managerial and technical talent is required to join this team. If this outsourcer doesn’t have enough experienced staff, looking for outside consultants who have related experiences in the outsourcer’s outsourcing project helps. The size of the team depends on the size of the project, but smaller teams are generally more effective and efficient than larger teams. In the initial planning stage, the team can be small and then expand in size when analysis begins.
- Be prepared.
Since huge hidden costs are behind outsourcing projects, companies have to make outsourcing decisions very carefully. After assessing all potential options of outsourcing, companies also need to get prepared for those hidden costs that outsourcing may bring to them. The hidden costs include transition costs, loss of control, downtime loss, and so forth.
Since some companies may make a mistake in having no ability to either oversee the vendor or to fix the existing contract, once the vendor is unable to meet expected performance, the outsourcer will need a backup plan to make up the unexpected costs.
- Understand the vendor thoroughly
Vendors that offer different outsourcing services aggressively are trying to market and to pursue organizations to adopt outsourcing. Although the information that vendors provide is often useful, an outsourcer has to investigate those services by itself. Managers should take care not to be misled by what services other outsourcers are using or how much other outsourcers are paying for. After selecting some potential vendors, better pricing and service contracts can often be reached by dealing with the most two or three appropriate vendors and then get the best final offer.
- Entering into a sound contract
The emphasis of a sound contract should be on who wins a better deal. It should be on a mutual-beneficial, reasonable, and fair agreement. That also means managers have to consider every possible situation that should be covered in the contract. Both outsourcers and vendors also need to agree on how to solve disputes after the contract is signed. Such an agreement should specifically define who, what, when, and where of conflict resolution.
- Maintain a close connection with vendors
In order to maintain a stable and reliable relationship with vendors, an outsourcer should have a purely technical team combined with its vendor’s technicians. In the combined technical team, the outsourcer should treat all members equally in terms of accountability, supervision, and workload. Such a combined technical team is able to interact with the vendor all the time, and then keeps as close to the associated technology of the vendor as possible.
- Do not outsource everything
The outsourcer should not outsource everything to vendors. It should retain some in-house staff and equipment to prevent from locking into the vendor’s proprietary software and hardware by the use of aforementioned combined technical team.
- Ease remaining staffers’ fears
Outsourcers that lay off employees because of outsourcing should create a clear scheme of current employees’ career, offer more training opportunities, and keep caring about what they feel. Or, the outsourcer may lose its intelligences rapidly.
Conclusion
In my idea, IT outsourcing is an unstoppable technology trend. Because, first of all, since IT and telecommunication technology change at a tremendous speed, top management of most companies do not have a comprehensive enough knowledge base to make the most appropriate decisions on their IT and telecommunication function. Outsourcing can free them from those technical terms and protocols. Just like they do not want to put resources into low-relevant activities, such as cleaning offices, and then decide to outsource it to professionals. They would like to spend invaluable time on more value-added activities, such as their core businesses.
In addition, from the viewpoint of cost, outsourcing obviously decreases business expenditure in some ways, such as personnel expense and capital expenditure. On one hand, fewer headcount means fewer benefits on current employees and less burden of retiree in future. On the other hand, less depreciation of assets on financial reports is able to realize profits earlier and deduct those outsourcing expenses from income tax.
Furthermore, as technology progresses so quickly that most IT services can be easily and promptly delivered via telecommunication infrastructure. It seems that onshore outsourcing cannot satisfy some companies’ needs. Offshore outsourcing market is growing rapidly. Though some people argue that offshore outsourcing takes away jobs from domestic people, the long-term benefit it brings is to force domestic industry to upgrade. Since most of those IT and telecommunication jobs are routine and operation level ones, the related industries and work force are therefore pushed to invest in and study on research level jobs. In this way, the economy and the industry can grow much faster and shift to higher levels.
References:
Antonucci, Y. L., Lordi, F. C. & Tucker III, J. J. (1998). The Pros and Cons of IT Outsourcing. Journal of Accountancy, Vol. 185, P. 26-30.
Betts, M. (2001). Hidden Costs of IT Outsourcing. Computerworld, Sep/Oct 2001, Vol. 1, P. 6.
International Data Corporation. (2001). Worldwide and U.S. IS Outsourcing Services Forecast, 2002- 2007 (IDC document no. 28975), New York, NY: Author.
Jatras, T. (2001). Can India Retain Its Reign As Outsourcing King? forbes.com. Retrieved Dec. 20, 2003, from http://www.forbes.com/2001/02/28/0228global.html
Leung, L. (2003). Taking IT Offshore. Network World, Aug 25, 2003, Vol. 20, P. 57.
Meckbach, G. (1998). Pros Not the Whole Story: Watch out for the Cons. Computing Canada, Mar 23, 1998, Vol. 2, P. 25-26.
Outsourcing. (2000). Hyperdictionary.com. Retrieved Dec. 20, 2003, from http://www.hyperdictionary.com/search.aspx?define=outsourcing
Perkins, B. (2003). The Forgotten Side of Outsourcing. Computerworld, Sep 8, 2003, Vol. 37, P. 42.
Toscano, L. & Waddell, J. (2003). Business Transformation Outsourcing. Public Utilities Fortnightly, Summer 2003, Vol. 4, P. 30.
