The next step in strategic planning for an organization is to select the projects that will help implement and support achievement of organization goals through outsourcing. Many techniques may be used to continuously improve operations and therefore achieve operational savings. One technique utilizes financial management and process measurement to quantify the cost of work flow processes. Activity based costing (ABC) helps to determine where the best bang for the buck can be garnered by using an outsourcing partner. At its basic level, tools permit the systems analyst to capture hourly human resource, facilities and machine cost data on all process activities that will be subsumed or somehow changed with the outsourcing agreement. Data is collected on how often that activity is performed each day and in what volumes. The ABC tool then sums the total dollar cost of performing the activities. Through subsequent analysis, the organization may determine there are some activities that are likely candidates for MIS to lower the overall costs in sufficient magnitude to justify outsourcing.
Morgan (2005) describes the applicability to MIS projects:
ABC may be used to model the scope of an IT project. Requirements gathering for an MIS project may include recording ABC data. Most process analysts or users themselves are readily able to complete a data entry form describing activities and the time they take to perform. In some organizations, hourly tasks are tracked on employee time cards which allocate costs to a job unit or specific project code, so cost data may already be available. Activities to be automated in an MIS are one way of forecasting tangible future Return On Investment for the arrangement.
Comparison of before and after activity costs give net savings data for activities the IT project will subsume or alter. (p. 54)
CIO Magazine (2003) reported that the majority of outsourcing technology projects was in the area of hosting Web sites, as illustrated in Figure 12. This will continue to evolve over the next decade as tools for global management become more widely used and companies gain expertise in managing distributed projects.
Figure 12. Most popular areas of outsourcing
• Web site hosting
• Network/communications services
• IT infrastructure
• Help desk
• Data center operations
• Other application development/maintenance
• Business process application development/
maintenance
• ERP application
development/maintenance
• PC management
• IT security services
• CRM application
Three Different Types of Outsourcing Relationships
Partner – paid against percentage of sales, or in equity sharing of total profitability, e.g. sharing 50% of profits from the supported line of business, while responsible for 100% of support costs.
Service Provider – Administer and operate MIS applications; may develop special custom software applications for the line of business;
contracts are flexible to respond to changing needs of the organization.
Vendor – Provides hardware, telecommunications, backup and recovery services of client-developed and managed applications. Fees are for specific services and billed, based on tiered levels of usage, size of database records, etc. Contracts usually escalate fees based on levels of usage of line item services.
Figure 13. Three types of outsourcing relationships
Once activity costs for a candidate outsourcing project have been quantified, ABC models can be leveraged to determine the performance of an outsourcer in terms of cost savings for a selected workflow process. In addition, the metrics used to capture the cost of labor or machine time, as well as the cost of handling selected volumes of transactions, like Web site portal sales for a catalog business, can help point to circumstances where an application service provider will provide satisfactory levels of service at a much lower cost than hosting the portal in-house. In other cases, the outsourced MIS project may be indicated because the customers are located elsewhere. Everyone thought the dot-com craze was an economic disaster. But, in fact, the rapid rise of profit seekers and venture capitalists hoping to tap into international marketplaces without buying an airline ticket and wearing out the leather soles on their feet, found they could establish a store on the Internet highway. Proposals were constructed on an assumption that everyone who passed in cyberspace might stop for a browse, an inquiry, and a buy. However, the costs of establishing a business line in-house and then competing heavily on price soon caused the “dot-com” bubble to burst for many entrepreneurs. Costs like communications, maintaining inventory, and shipping as well as costs of billing, collections, and infrastructure eroded profitability.
Many people lost their Web designer and developer jobs when it was discovered that online stores are still burdened with shipping costs, all the headaches of logistics and customer service, poor supplier throughout and stiff, rapid compe-tition. They could not, in general, sustain the costs of inventories and staffing when shoppers abandoned their online store and went elsewhere for the buy.
Larger institutions such as eBay and Amazon had to find ways to charge for listing and selling items, for belonging to their Web site or through partner relationships, for a “fee”.
Step 7. Conducting Research into Types and Locations of Service Providers
It has become evident up to this point that outsourcing MIS is not necessarily a panacea to conducting those operations in house. However, the option of looking at different outsourcing models is worthy of examination, as it affords a degree of flexibility that is not gained when simply keeping the functions inside the organization’s walls.
Costs for staffing, training, and providing personnel benefits can far outweigh the direct cost of “sharing” resources from an outsource provider or partner.
However, depending on the nature and extent of strategic value or criticality of the work to be outsourced, there are a number of criteria to be used to select the correct “type” of service provider for the specific service we have decided to outsource. Considerations of legal arrangements, fees, and price escalation as well as where the outsourcer’s staff may be located are all factors to be considered.
Development of a decision model that best serves strategic needs is described in Chapter VII. Once the project objectives have been decided upon, the nature of the outsource relationship becomes important (see Figure 13). An outsource arrangement may require a partnership arrangement, or it may be that the MIS project can be managed in house, yet still use outsource service providers for aspects of the work, such as software development only. A third arrangement is to turn over complete operation to an outsource vendor, such as developing, maintaining, and managing the operations of a Web site for providing information on the company, or for order-taking and fulfillment.
In the first type of relationship, a partner is motivated and incentivized through equity partnership. In this type of arrangement the outsource partner shares in the potential rewards or savings from an outsource contract arrangement. The partner, who exceeds expectations or specifications such as net profit on sales, will also earn a percentage share of profits from the successfully executed arrangement. In the second type of arrangement, the outsource service provider may offer simple hosting of applications or Web services, or another business service. The outsource service provider may even provide complex hosting where parts of the MIS are managed by the service provider, and other business functions, such as order fulfillment and billing are handled by the client organization, in a distributed fashion. Custom dedicated hosting provides very specific services and functionality to the organization. The service provider will not only host and manage the services, but is also contracted to perform the software development of the MIS, load balancing and management to ensure that performance levels are maintained. The custom service provider may be contracted from time to time to develop additional capabilities or features as the need arises on an ad hoc, custom basis for the client (Applegate, 2003).
The third type of outsource arrangement is with an outsource vendor. This arrangement is simply providing a standard service that is the same or distinctly similar to that provided to numerous other clients. This is the lowest risk and often the simplest outsourcing contract. Typically, little knowledge is given up by the organization and the service levels reporting are fairly standardized in contract boilerplate language.
The next decision, once the scope and type of services or products have been decided upon, is to address the decision of where the outsourcers should be found. Different considerations are involved whether we elect to go overseas or stay local. Globalization in laws governing international transactions, Web sales, authentication and digital commerce means sovereign to issues and legal enforcment of international contracts have become less of a risky business.
Nations like Ireland saw the jobs potential for a nation of technologically savvy citizens that could compete for jobs across national borders. Ireland invested in post secondary technology education for their citizenry. The outsourcers are in virtually every corner of the globe now. India also anticipated the software development boom, and invested millions to advance the presence of telecom-munications networks that would support global commerce and comtelecom-munications between outsource providers and client organizations.
The strategic importance of telecommunication is even greater in the software and other information processing industries, where the product itself is information. Low cost telecommunication has been a major contributor to the software export success of nations such as India and Ireland. (Press, 1993, p. 66)
Figure 13. Where is outsourcing going? (Source: Computerworld, September 15, 2003)
Where is Outsourcing Going?
India –> 38%
China –> 6%
Mexico –> 5%
Ireland –> 5%
Canada –> 5%
Malaysia –> 4%
Philippines –> 4%
Russia –> 4%
Singapore –> 4%
Legal and contractual aspects of overseas outsourcing are covered in Chapter V on managing metrics. However, global outsourcing is only one model for an organization to evaluate when addressing tactical decisions to lower costs or seek outside expertise for provisioning services.