The Business of Software Seminar Outsourcing

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The Business of Software SeminarOutsourcing
Elya Sheinin
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Outsourcing

• Definition and examples
• Reasons
• Drawbacks
• Hidden Costs
• Offshore outsourcing

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Definition

• The concept of taking internal companys
  functions and paying an outside firm to handle
  them. Outsourcing is done to save money (whether
  its true or not), improve quality, or free
  company resources for other activities

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Examples

• IT outsourcing giving all or most of companys
  IT activities to a vendor specialized in this
  area.
• Marketing and Sales
• Human Resources cleaning services, part-time
  jobs, etc.
• Manufacturing
• Calling centers

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Reasons for outsource

• Reducing costs of companys activities
• IT, for instance, is one of the most expansive
  parts of organization to establish and maintain
• Vendor with many clients can operate at a scale a
  single enterprise cannot
• Large vendors can use more powerful equipment
  than can individual clients

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Reasons for outsource (cont.)

• Improved performance of IT
• Expertise of in-house IT department often
  lags(????) behind todays technology
• Vendors often have employees specialize in areas
  clients typically encounter only once

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Drawbacks

• Hard to find the right vendor
• Theres a risk of loosing control over companys
  intellectual property(????? ?????)
• Loosing skilled professionals
• Hidden costs

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Hidden Costs

• Choosing the right vendor
• Searching for the vendor probably the most
  important stage of outsourcing
• This stages cost should be 3 of total
  outsourcing contract
• Defining companys demands

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Hidden Costs (cont.)

• Making the contract
• Dont be vague but stay flexible
• Flexibility means flexible clauses, not omitting
  clauses or have a vague ones
• Including evolution clauses which apply both to
  technology and to the price and the scope of the
  outsourcing contract
• Reversibility clauses An option to rebuy
  premises and equipment from the vendor, or to
  hire employees from the vendor

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Hidden Costs (cont.)

• Making the contract example
• A large European chemical company ensured that
  its IT function would be up-to-date by including
  two clauses in the contract. The first required
  the vendor to spend a certain amount each year on
  technology improvement, with the details left
  open. The second stated that the vendor must use
  emerging and state-of-the-art technologies.
  However, the clauses couldnt provide shelter
  from the cost of bargaining with the vendor about
  specific implementations.

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Hidden Costs (cont.)

• Determining transition cost if needed
• Switching in-house activities to a vendor
  presents probably the most elusive hidden cost.
  Most companies dont realize how much theyve
  spent until the transition is complete.
• The more complex outsourced activity, the more
  harder and longer the transition
• The more longer the transition, the cost of
  outsource is increasing
• Idiosyncratic(?????) activities should stay
  in-house
• Having experience with outsourcing can decrease
  transition cost
• Average time of transition is about a year

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Hidden Costs (cont.)

• Managing the effort (the largest hidden cost)
• The costs average 300,000 per year,
  approximately 8 of yearly contract
• Monitoring vendors activities and progress
• Bargaining with the vendor
• Negotiating any needed contract changes
• Hard to determine, because its not something
  that paid to the vendor
• To reduce
• Make sure that both sides objectives are clearly
  understood
• Fostering good communication through discussion
  of potential problems
• Collaboration on problems solving

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Hidden Costs (cont.)

• Managing the effort (cont.)

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Hidden Costs (cont.)

• Managing the effort example
• A US oil company outsourced most of its IT
  infrastructure. The outsourcing fees were 7-8
  lower than internal IT costs before that.
  Nevertheless, the company viewed the outsourcing
  effort as barely satisfactory. The 5 year
  contract was 12 million per year. The management
  cost was estimated at almost 17 of that
  (comparing to the average 8). Instead of saving
  money on IT, the company spent more. The high
  costs stemmed from the companys attempt to
  manage 4 IT vendors simultaneously without
  anticipating any additional management costs.

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Transitioning after outsourcing

• Switching vendors or integrating back the IT
• Hard to quantify
• The trigger for this move can be ending contract
  with bad vendor, or reaching a point where IT
  activity can be managed internally

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Offshore outsourcing

• The current trend is to outsourcing to other
  countries, most often are India, China and East
  European countries.
• Lower labor costs are the primary driver
• Operating cost can be reduced up to 50

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Offshore Outsourcing (cont.)

• Although the advantages of offshore outsourcing
  are obvious, it brings more drawbacks into
  account
• Language barrier
• Different business methodologies
• Different time zones
• Can be either drawback or advantage
• Even harder transitioning

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Offshore Outsourcing (cont.)

• Offshore outsourcing causing growing number of IT
  professionals to be unemployed
• According to Bureau of Labor Statistics (U.S.)
  between 2003 and 2004 about 234,000 IT
  professionals were unemployed
• But theres a study showing that two thirds of
  the economic benefit from sending jobs offshore
  flowing back to the US economy, allowing
  companies to reinvest in more innovative
  businesses

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Bibliography

• The Hidden Costs of IT Outsourcing, Barthelemy,
  Jerome. MIT Sloan Review 42.3 (Spring 2001)
• Offshore Outsourcing Current and Future Effect
  On American IT Industry. Laura L Pfannenstein,
  Ray J Tsai, Information Systems Management, Fall
  2004