Outsourcing

Contents.

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1 Abstract

2 Introduction

3 Fundamentals

4 The Main Strategy

5 Sucessful Outsourcing

6 Conclusion

Outsourcing and how it can help IT Managers enhance their projects.

Abstract

With computer systems / projects and there implementations getting more complex

with every day that passes , the tendering of IT responsibilities to external

parties is becoming more and more attractive to the IT Managers of large

organisations. The common name for this type of operation is "Outsourcing". It

is the attempt of this paper to explain outsourcing , it's pro's and con's and

how it can help our friendly IT Manager enhance developments or implementations.

Introduction

Outsourcing can be defined as a contract service agreement in which an

organisation hires out all or part of its IT responsibilities to an external

company.

More and more companies are leaning towards outsourcing it could be said that

this may be caused by the growing complexity of IT and the changing business

needs of an organisation. As a result, an organisation may find that it is not

possible to have all its IT services supplied from within its own company. Given

this, an IT manager may decide to choose to seek assistance from an external

contractor/company to supply their services the organisation lacks. In addition,

the business competition has set the pace for an organisation to continue to

strive for internal efficiency. It also needs to look for a way to transfer non-

core activities or "in house" services and support activities to external

specialist organisations who can deliver quality services at a lower cost.

Fundamentals

In deciding whether to use outsourcing or not, the main objective of outsourcing

is based on the price of delivery of services by an external contractor/company.

Although price of delivery is a primary factor for outsourcing, other issues

should be considered e.g. price should be measured against the overall package

offered by the external contractor/company. Briefly if it's a good competitive

price in relation to the services rendered by the company and in respect to

their skills/competency and experience, and timely delivery. The organisation

also needs to consider outsourcing in light of its long term strategic

directions and its information needs.

Competition is a another area to be carefully considered. Competition opens up

opportunity for all potential suppliers to conduct business with the

organisation. Through the competitive process, it allows organisations/IT

managers to derive the best outcome. From the open and effective competition,

the organisation is then able to judge soundly in determining the best strategy

after it has taken into account of the competition and value for money principle.

IT managers can go through lengthy procedures to minimise problems with

outsourcing, but still things can go wrong and intended objectives may not get

achieved. To overcome such mistakes, it may be prudent to look at other

companies that have undertaken outsourcing and learn from their successes and

mistakes

Listed below are some of the major issues to be considered when using

outsourcing:

- An IT manager that undertakes outsourcing must be able to clearly identify its

long term IT strategic directions and long term information needs.

- Organisation must be able to clearly define its business objectives.

- To avoid unnecessary friction between the organisation and the external

service provider, it would be prudent to incorporate an "extraordinary events"

clause into any contract entered into. This clause should cover any

extraordinary changes in circumstance that should occur . This also allows a lot

of flexibility between the two parties.

- The IT manager should identify all the external and internal stakeholders and

the impact that the outsourcing may have on stakeholders.

- Learn from other companies, use their mistakes and successes to avoid

duplication and waste of manpower.

- The IT manager should communicate regularly with anyone in the organisation

who is affected by outsourcing, even if the affect is very small.

- The IT manager should make sure that the external service provider should know

exactly what is expected of them e.g. the exact services required.

- The IT manager should allow adequate time and the correct resources to the

problem at hand , this is to ensure the best possible outcome from the service

arrangement. - The IT manager should assign skilled staff to manage the

external contractor and to monitor closely the external contractors performance.

- The IT manager should monitor and assess the contractor to ensure quality of

the service not just price of the delivery of services.

The Main Strategy

In an organisation, the IT infrastructure components are comprised of a number

of technical and service areas. Before going through any outsourcing decision

process, the organisation needs first to assess its sourcing across the entire

IT infrastructure. Once this is done, the organisation can then determine the

best sourcing strategy against a number of perspectives.

In order to determine the optimum sourcing strategy, an organisation needs to

look at a number of perspectives or alternatives and then balance these

perspectives with the benefits and risks of outsourcing. With this information,

an organisation can derive a more structured methodology for a balanced view of

the IT infrastructure and its components.

It can be stated that there is no one approach to outsourcing. However, in

practice there are three common methods used by the practitioners. They include:

1 Outsourcing a significant proportion of the IT services and technical

areas. This approach has a lower co-ordination cost and also has a greater

organisational impact;

2 Assessing each IT service and technical area independently. A number of

vendors are used to match the needs of each outsourcing event. This approach

selects the best vendor and deal for each outsourcing arrangement. However, it

involves higher internal costs and synergy problem;

3 Selecting a prime contractor. The prime contractor can select and manage

all other vendors. This approach depends on the importance of learning curve and

therefore, it takes longer.

As part of the determination of outsourcing strategy, it is useful for the

organisation to incorporate any experience derived from other organisations that

have outsourced and other forms of outsourcing that the organisation has

undertaken. The organisation should also perform an initial investigation on the

potential vendors background. Furthermore, the organisation should examine

different kinds of outsourcing forms that the vendors are able to provide.

The organisation must identify all the internal and external stakeholders and

the impact that outsourcing may have on them and their objectives. The internal

stakeholders include IT staff, users and management and, the external

stakeholders include unions, customers, and existing suppliers (IT and non-IT).

The IT manager should also undertake cost benefit analysis of all internal costs

and external provisions. This provision include capital investment, ongoing

expenses and the commitment of time and resources. Once a cost baseline is

developed, an organisation can come up with a more objective cost analysis. It

can then assess the related components of the vendor's proposal against this

cost benefit analysis before making any decision regarding the outsourcing.

Successful Outsourcing

For an IT manager to successfully outsource its IT functions, there are a number

of factors that need to be addressed.

An organisation that has outsourced its IT functions to an external contractor,

should not abdicate itself from the responsibility from the activity that it has

outsourced. In other words, there is still a need for the organisation to retain

overall control of its IT services being outsourced. In addition, the

organisation needs to regularly monitor the external contractor to ensure that

they continue to deliver quality service and to perform at the required standard

as agreed in the contract arrangement. To be able to do this, the organisation

must ensure that it can maintain sufficient technically competent "in house"

staff to oversee the contract service agreement.

Before an organisation outsources its IT functions, it is very important that it

prepares a sound full cost estimate for all existing internal computer systems

so that it can determine whether the outsourcing is cost effective. Failure to

do so can be critical. The costing issue of Outsourcing is discussed in more

detail in the section headed "The Economics of Outsourcing"

For any successful outsourcing, a good solid contract is essential. The contract

should also allow for flexibility as it is difficult, in the life cycle of the

contract, to predict every circumstance or cover every eventuality. Successful

outsourcing should be based on partnership between the organisation and the

external contractor.

Outsourcing an organisation's IT functions without proper consultation with

employees can cause a lots of stress among IT staff and reduce their morale. The

result may be a loss of some key technical and specialist staff from the

organisation. A more open and timely communication with employees can minimise

this impact and uphold the staff morale. Organisation can allay the fears by

outlining career options and opportunities for its staff within and outside the

organisation and also by explaining the benefits of outsourcing to those

affected employees.

The Economics of Outsourcing.

There are many reasons a company may choose to outsource its software

development function. These couple of paragraphs address the two main reasons

for this action

1 The conception that outsourcing is cheaper 2 The expertise for

developing the required software product does not exist

within the company.

In the past, it was difficult to compare the cost of outsourcing a software

product against the cost of in- house development, mainly because there was no

functional sizing metric agreed upon prior to the start of the contract. As

function points grow in popularity and gain wider acceptance as an accurate

measure of software size, more firms will be better equipped to compare

outsourcing firms with in-house development teams. In all sophisticated

industries cost per unit (or average cost) is an important consideration, where

average cost is total cost divided by total output. The same concept can be

applied to software development using function points. Total development cost

divided by total function points is an average cost calculation. Once average

cost is determined, all prospective developers, in-house and outsource, can be

compared on an equal basis.

Just as important is the ability to adequately evaluate the delivered product,

considering several factors: size, quality, time to market, and so on. Using

functional metrics total delivered function points can be contractually agreed

upon prior to the start of the contract, assuming the company contracting the

software development has clearly defined the final product. This is a dramatic

change in the way software projects historically are managed. Any change in the

number of total delivered function points once the project begins will impact

the average cost calculation. Changes, additions, and even deletions to the

software become more expensive per unit as you move through the development life

cycle. Since the consumer of the custom built software wants to minimise unit

cost, it is therefore in their best interest to sufficiently define requirements

prior to the start of the project.

The ability to compare cycle time, or time to production, is also important.

Time to production is defined as total number of function points delivered

divided by elapsed calendar time. The least expensive developer also may be the

one whose delivery date is the latest out. The buyer of the software must decide

if quicker time to production is worth the extra expense.

The number of acceptable defects delivered per unit of size is another important

evaluation metric; with higher quality comes higher development costs. But

delivering software with numerous embedded defects will be expensive to maintain

and will cost more in the long run.

The considerations of outsourcing change dramatically when you view the

relationship from the perspective of the outsourcing firm. It is important to

the outsourcing firm that the average unit cost for software development be kept

to a minimum. Fixed-price contracts create an environment that pushes average

costs lower for subsequent projects.

Outsourcing firms have a great incentive to maintain a software library: reuse

of components in future projects. If this library is thoroughly tested, insuring

that it is nearly defect free, and documented so it can be easily understood, it

can be used with confidence to lower average costs over time.

Additionally, outsourcing firms have a great incentive to keep their staffs

trained in the latest software languages, tools, and techniques. As more

outsourcing projects are undertaken, the responsibility to keep staff

knowledgeable and up-to-date transfers from the in-house development team to the

outsourcing firm. The outsourcing firm assumes the risk of investing in the

technical staff - if their people are not trained on the latest software

technologies, they cannot remain competitive with other outsourcing firms who

have staffs with state-of-the-art skills. They willingly assume the risk with

the expectation that these training initiatives will lower future average costs.

Unfortunately, it is still the norm in the software development arena, and in

outsourcing cases in particular, for an organisation to be ignorant of the

average size and average cost of a software project. All other sophisticated

industries calculate and monitor their per unit average cost. As the software

industry continues to mature, not only will it be common practice to know

average costs in dollars per function point, it will be required.

Conclusion

Outsourcing should not be viewed as a solution in resolving problem service

areas within the organisations. If an internal service area is not performing

effectively and by transferring it to an external contractor could only magnify

the problem. Therefore, it is important that an organisation that undertakes

outsourcing must be able to clearly identify its long term IT strategic

directions and long term information needs. The IT manager is the prime

candidate to fulfill this role . Once the organisations have understood and

addressed its long term IT strategic directions, it can then go on to decide

which IT service areas should be outsourced. Organisations undertake outsourcing

of their IT service areas should do so based on the basis of costs and benefits

analysis and it is justified on cost effectiveness and must be based on sound

business decision.

References

Although many different books references and web sites were researched the

following Instsitute yielded a most comphrehesive supply of information. That

ultimately became the basis of this report. The author would strongly recommend

any party investigating Outsourcing to contact the below institute.

The Outsourcing Institute 45 Rockefeller Plaza, Suite 2000, New York, NY 10111