Why should you outsource?

Outsourcing is obviously a means to get non-critical work done by talent outside your organizational pool. Companies outsource for different reasons—depending on individual requirements. Some outsource for cost savings, others to gain skills and resources lacking internally, still others outsource in the hope of gaining a strategic edge over the competition. We can, therefore, sum up five specific reasons that companies outsource:

• Financial;
• Technical capabilities;
• Market agility;
• Operational excellence; and
• Business expertise.

Factor 1: Financial
The financial area encompasses financial management and cost savings. Financial management includes economies of scale and IT management abilities that cannot be achieved internally by end-users attempting to expand their core competency without adding significant overheads to the IT infrastructure. Key issues in the decision to outsource also include predictability and cost savings compared to those that make additional internal investment and talent upgrades.

A case in point is Liberty Mutual Insurance outsourcing its software application development to DSQ Software. The project is for a period of five years and is valued at $100 million. Liberty Mutual is looking for a long-term relationship, as outsourcing would help reduce costs by 50%.

Factor 2: Technical capabilities
Technical capabilities allow a company to enhance existing procedures or adopt new procedures, formulate strategic direction, and react quickly to technical evolution.

Transportation.com is an affiliate of the $3-billion Kansas-based trucking company Yellow. Transportation.com hired Infosys in 1998 to write logistics management software. Dan Bentzinger, it’s chief technology officer, says he prefers working with Infosys over other larger US companies as it helped transportaion.com discover what it’s customers wanted, with Infosys designing the software accordingly. He feels Infosys is "good at implementing" ideas.

Factor 3: Market agility
Market agility includes the ability to expand core businesses rapidly and involves better information management for decision making and expansion to new geographic markets.

London-based EMI Records outsourced CRM solution and services from Talisma. EMI wanted to communicate with the fan following of its contracted artists, and used the package to boost customer database.

Factor 4: Operational excellence
Operational excellence in the form of increased service levels can be achieved when outsourcers use their asset base and human resources to meet specified IT objectives. The outsourcer provides access to new skills and technologies suited to business growth.

The ING Group, the global financial powerhouse headquartered in the Netherlands, believes in Indian IT expertize. It has signed outsourcing contracts with three Indian companies, TCS, NIIT and BFL Software, under which ING companies will outsource projects to these three firms only. ING has terminated all previously used labor and forwarded all projects to the Indian companies.

Factor 5: Business expertise
Business expertise includes development of effective solutions to end-user IT problems and knowledge of the end-user’s business.

EveryD.com is a new online community for Japanese housewives, providing everything from shopping to banking. EveryD paid it’s outsourcing service provider $9 million to set it all up—from devising the business plan to designing the portal to writing the software. According to EveryD.com’s CFO Shibata Iwao, though the provider selected was not the cheapest, it had expertize in e-banking and e-tailing at both the front and back ends.

Whatever the reason, outsourcing has become an acceptable operational alternative and is being embraced by companies in the US and Europe, also gaining in popularity in other parts of the world.

Why shouldn’t you outsource?

Not all companies have outsourced, some never will. There are even companies that have tried outsourcing, but have brought outsourced operations back in-house, as difficult and costly as this might have been. Poor outsourcer performance, loss of control and human resource issues are just some factors that inhibit outsourcing.

Let’s look at some specific reasons that outsourcers have either chosen not to or end an outsourcing contract and bring a function back in-house:

Inability to develop unique applications
Outsourcers don’t meet the constant evolutionary cycles provided by the rapid changes to distributive computing environments. As a result, end-users become averse to outsourcing applications development without a firm commitment from the outsourcers of meeting future technological requirements.

Lack of value-added cost measurements
End-users find that service level agreements and funding have to be constantly modified for additional scope of work effort, while initial contractual measurements are often ill-defined and require clarification.