A Brief Introduction To Outsourcing Management Essay

One of the most common and highly used terms in business firm in last decade or so is outsourcing. Globalisation and new technological competitions have made the companies difficult to maintain range of expertise in skill in all areas to be a successful competitor. With the emergence of third world multinational companies the level of competition has become even more difficult and important issue. The best solution for this problem is outsourcing.

Definition:

Outsourcing is defined as contracting with a third service provider for the management and competition of a certain amount of work, for a specified length of time, cost, and level of service.

So why exactly does the companies outsource the projects? There are many advantages by outsourcing a project to another company some of the reasons being less cost, more effective and to reduce the training times for the employees. And another reason is that the company can concentrate more on other work as the task has been outsourced to other company.

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Reasons for outsourcing:

Tactical reasons:

Operating costs: In recent survey it shows that the operation costs of a company is reduced to nine per cent by outsourcing by outsourcing its project to other companies. This is the most compelling benefit for a company to outsource but of course this is a short term benefit.

Capital funding: outsourcing helps the company to increase the capital funding more available for the core areas. And it also reduces the investment of capital funds into no core business areas. The need to show the equity on capital investment in non-core areas is also reduced by outsourcing.

Resource needs: companies mainly outsource because of the unavailability of the resources internally. For example a new company want to establish its process to other countries its best to start with outsourcing as they will have ready availability of resources by outsourcing.

Cash infusion: companies often sell their resources for cash. For example if the provider has some requirements like manpower, Hardware resources, software resources and infrastructure resources the customer company can sell their resources to the provider

Management difficulties: if there are many projects for a company then its good option for them to outsource. Because of the difficulty to manage all the projects it is good if some part or the whole project is outsourced as it reduces the amount of management.

Strategic reasons:

World class capabilities: as outsourcing mainly deals with other company customer often have advantage of new technology, tools, infrastructure and technical expertise. Thus by outsourcing there is always a greater possibility of having world class service.

Reengineering benefits: outsourcing often helps the customer to reengineer the organisation and this is achieved by outsourcing to a world class company which helps in realizing the customer the need to reengineer.

Shred risk: by outsourcing the customer company will be in a less risky situation and the producer company will also be in the same state. So with shred risk productivity is increased.

Improving business focus: outsourcing will let the customer company to concentrate on “when to” issues rather than “how to” issues which will be taken care by the client or producer. (Johnson, 1997)

Types of outsourcing:

In general it outsourcing can be classified in to following types

System integration

Facility management

Contract programming

Software support

Network maintenance

Hardware maintenance

(SUZANNE RIVARD, 2008)

Other types of outsourcing based on mode of outsourcing are

Complete IS outsourcing: in this scenario the outsourcing is done to the service provider along with all the communication centre, computer and manpower related to IS.

Facilities management outsourcing: outsourced company plays a role in operating the resources of the outsourcing company to operate its complex IS data.

System integration outsourcing: A system integrator is hired to manage the installation and operation of the integrated systems. The overall responsibility for the quality and performance is maintained by the integrator.

Time sharing outsourcing: this often involves in buying time from the service provides for its resources which can be used by the service receiver in order to perform some task. This type of outsourcing is mainly in mainframes due to the cost of infrastructure.

(Grover, 1994)

Based on the extent of which a company relies on outsourcing it can be categorized in to four types

Total outsourcing: in this type all the staff, IT assets, and management responsibilities are outsourced to the service provides which represents 80 per cent of the IS budget.

Total insourcing: it involves insourcing of certain requirements such are machinery, manpower and technology which is hired for certain period of time.

Selective sourcing: often involves in sourcing selected functions with external providers while still providing certain per cent of IS budget. Vendor is responsible for delivering the result of the outsourced task and customer is responsible for insourced task.

De facto insourcing: uses its internal resources from other departments for serving the purpose.

(Lacity, 1996)

Decision factors of outsourcing

We have already seen what the uses of outsourcing are and now it is time we have to learn about the factors that are responsible for outsourcing. In 1994 Quinn and Hilmer identified factors such as core peripheral activates, supplier relationships, Technologies and cost should be considered as the factors that should be considered for outsourcing. In 2000 McIvor suggested a four staged framework for helping a company’s outsourcing decision. However it provides very basic information about the factors. A survey is conducted followed by the interviews for several managers in handling outsourcing decisions. This survey gave us some interesting answers for the questions raised in outsourcing decision. Outsourcing degree, impact of outsourcing, IS outsourcing drivers and strategic alignment.

APH:

APH (analytical hierarchy process) developed at Wharton school of business by Thomas Saaty, helps in decision making for complex problems in hierarchical structure. AHP employs both qualitative; a complex problem is decomposed into a hierarchical structure. Quantitative, a pair wise comparison to rate the decision elements. It has three steps the first step is to construct a hierarchy, in second step calculating weight of elements at each level, and in final step weight of each decision alternative is calculated.

Step 1: Main problem is divided into sub problems. And this should not exceed 7 because of the complexity. Top level of the hierarchy is goal of the outsourcing and the lowest level is the decision or choice alternatives. Elements in between the hierarchy are the factors and sub factors that are associated with the decision making.

Step2: this step involves three steps again

Paired comparison: Elements in first step are compared according to the given importance criteria. This is calculated with the formula n (n-1)/2 where n is the number of elements and the number used for comparisons are 1/9,1/8,1/7……..7,8,9. If the two sets of elements that are to be compared are represented by c1, c2, c3…cw and ci, cj…..can be represented by n*n matrix as

A= (aij), (i, j = 1, 2…n) and if aij = 1/a, and aij = 1 if i = j

Computing vector properties: when normalized the principal Eigen vectors become the vector properties and the formula for that is Aw= ¬max w, the largest Eigen value of A is ¬max w is the Eigen vector.

Measuring consistency: consistency is said to be achieved when aij*aik = aik

Step 3: weight at immediate next higher level elements is calculated. And the overall ranking is obtained by adding the results of the weight criteria multiplied by weight alternatives.

Rj = i=1n“ ci, Piji=1 (where RJ is used to rank alternatives)

This is a figure which represents the above scenario

(Gupta, 2009)

Planning stage

With increased competition and management challenges manager of the companies are concentrating more on the cost effective solutions which also increases performance and profits. Most of the outsourcing decisions are done by the senior management as the medium and low level management feels outsourcing is actually risking their jobs. Outsourcing varies from company to company and is decided by which part of the company it is outsourced. In some companies outsourcing is done my middle level companies and in some it is done by business process managers.

So what is the view of senior management when it comes to outsourcing? A decision which can cut costs, a process to reengineer the business, a method to meet with the competition, a method to enhance public perception, a process to outsource non-core business activities. And in the view of business process managers outsourcing is viewed in the following perspective. Reorganisation of business department, cutting business process costs, method to enhance performance, methods to learn new methodologies and technologies.

Forming an outsourcing team:

Once it is decided that outsourcing has to be done the follows a protocol which involves negotiations and approvals from the top level management. This is because in process of outsourcing there are some different resources which are crucial for process initiation. These resources typically include travelling costs, meeting costs, consulting costs, infrastructure costs, and personal resources. In some cases approvals for board committee is not needed at initial stages of outsourcing. In those cases it is advised to get the on board committee approval in order to avoid the negative reactions due to unexpected raise in costs.

Next step in outsourcing is selecting a project leader who is responsible for taking critical decisions like organising manpower form the same department, purchasing, human resources, tax, and risk management.

Internal evaluation:

Since the security is important in communication in both internal as well as external ways. So it is very important to form some security guidelines before moving in to the actual outsourcing. And it is also important to form some outsourcing objectives for the team as it helps the leader to review milestones reached at each point. Clear norms should be formed with the customers with respect to how the transfer of assets or manpower is done. In addition to this customer should also consider the impact that outsourcing is going to leave on the organisation either in technical terms or methodological terms. And customer should also analyse the benefit verses risk in order to have a clear ideal.

Benefit

Risk

Cost saving

Ability to concentrate on core business

Lacking expertise with new technologies by outsourcing every time.

Reengineering

Cost involved for every outsourcing

Varied skill resources

Compatibility problems

Reduction of training expenses

More time to learn new technologies

Greater flexibility

Difficulty in cost management.

Less flexible for new technology

Additional responsibility

Timetable:

It normally takes two to three months in order to begin the outsourcing process. This is due to selection of vendor, assets management, selection of team and vendor negotiation. Vendor will always look for faster deals. It is beneficial to prepare a timetable which contains all the time lines with respect to outsourcing.

Communicating with employees:

There are three ways to communicate outsourcing deal with the internal employees.

Keeping the deal confidential until the deal is signed off

Informing the employees that there is an idea of outsourcing and keeping rest of things like actual dates, vendor and other things confidential.

Informing everything to the employees from starting of idea.

Let’s see what are the benefits and risks in each type

Scenario 1: there are some benefits like employees will not be involved in negotiations. There is no fear of resignations by the employees with the decision of outsourcing. Avoid false alarms for the employees and avoiding leakage to media. And the risks involved are employees may think that they are not treated in a fair way. Creates distrust among the employees.

Scenario 2: in this type of communication employees will be in trust with management. Employees will not leave the company until they know what the full situation is. But this creates rumours between the employees. Employees may fell that they are not adequately informed about the situation and may force management to get involved in negotiations.

Scenario 3: this creates full trust for the employees. Helps management to understand the situation of employees and negotiate according to the situation. But there is more risk involved in this situation as some of the employees may leave the company especially those who are not in the team of outsourcing. And employees may demand more things or there is a risk of resignations. And as the deal is known to all pressure to close the deal will be high.

And there is an important point that always should be remembered and that is all the employees should be informed with the same information otherwise it may lead to rumours and company may end up with dropping the idea.

Vendor selection:

There are many vendors who can complete the outsourcing task but it is very important step to choose one from that list who has very good experience, resources, and capability. There are many cases that vendor will know about the outsourcing. So in these cases the customer should consider all the available vendors and select according to the current requirement. There are many situations that there may be a vendor who has gained trust with the customer. In this type of scenario customer should keep in mind of all that available options for the current situation and have to take a decision on outsourcing.

So after deciding the vendor what is the first step in communication? Many of the customers might know how to communicate with the vendor at initial stages but some might not know how to start the initial communication. In that situation the following points are very important to

Look for industrial publications

Get in touch with other outsourcing customers

Obtain information from surveys

So after selection of pool of vendors it is very important to target some of the vendors and this is done by some steps which may include visiting vendor sites, talking to the vendors, checking previous experiences with vendors, taking a look at annual reports and review of surveys.

Next step includes set of questions that the customer needs to ask a vendor either it may be in a formal or informal way. And these questions include

Reputation: what is the reputation of vendor in the selected country or place where the customer wishes to outsource? What is the culture of the country and will it fit for the customer’s culture.

History of vendor: customer should have deeper look in to some areas like vendors history in business, market share, any disputes faced in the past and legal issues.

Financial condition: is the vendor financially stable? Is the vendor’s market share steady without any valleys? Are the any pending claims that could weaken vendor’s financial condition? And customer should also obtain a copy of recent financial statement.

Resource allocation: client should consider the availability of resources form the customer in required place where the outsourcing is done. Is there enough number of employees to meet the requirement in required location for client? These are common enquires that should be done.

Vendor’s vendor: this is another area where the client should be aware of. This is nothing but vendor may be relying on some other vendor for the supply of some services. So is that vendors capable of handling the current requirement?

Technical issues: is the vendor capable to meet the requirement for the current technology and can implement the requested technology. And also should consider whether there is room for current technology in use with client familiar to vendor. (Havely, 2007)

Other benefits: can the vendor provide other benefits like reengineering and can introduce to new technologies which can help the customer in feature? This is very important because there should be some benefit for the customer besides the actual work.

RFI and RFP:

These are the two terms which are help full in final stages of selection and narrowing down the vendors. RFI refers to Request For Information which is extremely useful in cases like when customer is not aware of vendors especially in different location form the vendors or overseas. In general if the customer has already outsourced to same vendor previously this can be eliminated as it delays the process. This is done in a confidential way because this may lead to leakage of information to employees and stakeholders. And this document differs with the requirement of the client.

RFP means Request For Proposal in this process customers will be issued with a form which is useful in screening the vendor selection. Vendors will be ranked on the basis of that form which evaluates the vendors and makes the selection process easy. (TENDERSZEAL RESOURCES, 2010)

Request form evaluation:

After RFP process it is customer’s job to evaluate the proposals and choose the best one according to the requirement. RFP document should be categorised in to three types like commercial, technical and organisational. Qualitative analysis and the report which is formed by splitting RFP document is combined together to get a full report on selected vendor. All the outsourcing team should agree the criteria which are applied in order to sort the bids. After looking at all the bids cross checking several times the documents are categorised in to rejects, doubtful and candidates. And a third party consultant is involved in evaluation to have a look at the rejects and doubtful forms. This process is again done in order to evaluate some more profiles.

All the above process is quantitative process and before moving to qualitative process there may be some doubts among the documents. All the doubts are documented clearly and are discussed in a meeting which will be arranged in later stage. This stage will put an end to qualification of responses. The next step is Qualitative analysis all the documents which are finalised in the above step are processed and given a score on the scale of 0 to 5 where 5 is the best.

Risk evaluation:

Final outcome of all the above process is list of candidates or vendors may be three or fewer than that are analysed. This analysis mainly deals with risk which is mostly carried out by risk analysis managers who are employed especially to analyses risks. If the company have no risk managers employed then they should consider the following steps to evaluate risk. They are

Is the company in kind of some financial crisis?

Is there a threat of bankruptcy?

Is there any change in pricing model due to outsourcing?

Are there any government rules in tax that restrict the performance of vendor?

Financial modelling:

Financial quotes of companies differ from vendor to vendor and this should be considered in the process of evaluation in order to chooses best vendor and the points that should be considered in this section are

Model of pricing from one vendor to other

Price level comparison

Payment methods and terms

Taxation changes or import costs.

Selecting the right candidate:

Once the final list is prepared it is preferred to review the list with business case and make the final decision. Final decision occurs in two phases in the first phase project manages or senior managers are informed to choose the outsourcing team. Each employee is given a score and the score is analysed and a project team is formed. A document is shown to all the team which contains quantitative analysis, qualitative analysis, risk chat, and financial comparisons. Next stage is board level management decision stage which involves review of all the documents including the above document which contains list of employees chosen for outsourcing team.

General mistakes made in vendor selection process include short of time for the decision. In general enough time should be given to employees to evaluate all the criteria’s. Most of the people think that the decision making process is just computer work entering some numbers and doing some mathematical calculations. All the levels of management should consider that the selection process is very important and crucial in decision making.