Outsourcing – I

This is the matrix for outsourcing.

Outsourcing Strategies for the applications: The rationale to choose

Little did the world envisioned outsourcing as an option when IBM in the 1970s was setting up IT bases in India for an infrastructure development. Today, it is an all prevailing in the flat world independent of the IT industry also, be it infrastructure, telecommunication, or even medical health care industry.

Making a decision to outsource or to build something in house is always a tough one to do. This decision is based on cost factors, organization goals, and adeptness of a resource to name some. The factors influencing the decisions for outsourcing for a project based on the application are given below.

The decision whether to use internal or external resources for a company must be made by:

• Prioritizing the needs and constraints of the organization as this would allow the organization to define the scope of outsourcing. If we can draw a matrix structure of the organization, such that the departments are at the vertical and the operational side is at the horizontal, we get a matrix that identifies within the boundary the need to outsource based on the needs and the constraints.
• Identifying and quantifying the appropriate measures for internal and external operations is the most necessary part of any outsourcing strategic activity. This allows the precursor for the organization to identify the various ongoing needs for different activities of work.
• Conducting a cost-benefit analysis of the internal and external alternatives gives the total insight of the outsourcing vs. in-house building activities.
• Overall strategy of the organization for core vs. strategic decisions allows the organization to identify the risk zone area of the result of outsourcing.

Reasons to use external resources are:
• To have access to technology, skills, knowledge not internally available
• To improve business process and enable organizational change
• To provide needed short-term services without adding to the ongoing operational costs
• To focus internal IT resources on core strategic plans and projects
• Cost effective strategy may be used
• Outside expert view will give a non-biased approach

Disadvantages for the use of external resources are:
• Time, management, governance might be an issue
• There might be a gap in the requirement analysis
• Customization might require much time

Reasons to use internal resources are:
• To retain skilled personnel who are able to respond directly to the agency needs
• To obtain needed services at overall costs
• To take the advantage of the employees unique insight into a project or the agency’s goals
• To have ownership and control over resource and personnel assets
• Better use of the requirement analysis and schedule

Disadvantages for the internal resources are:
• The resources might be one-sided
• The requirements might be constrained

Costs of outsourcing are:
• Contract management costs to the agency as there are always some hidden costs attached to the governance of the vendor
• Effective costs from lack of understanding of project objectives might be due to the mismatch of the assimilation of thoughts for the project goals
• Higher project costs as the organization may experience greater overall project costs due to the included cost of management which is hidden and the overhead costs
• Higher costs from inadequately defined requirements will rise to an escalation of the costs. We know that later the defect is ascertained, greater is the cost.

Costs of internal resources are:
• Opportunity costs of staff time as the staff is involved more in the work of outsourcing governance and depletion other than strategic thinking
• Ongoing costs for additional full time employees is a cost that is encountered by the organization for nourishing its full time employees
• An unpredictable cost as overtime occurs and as employees spend varying amounts of time month-to-month working on projects which is again a function of the skill level of the internal resources used. In this case, effective costs if in-house resources are not sufficient or skilled enough for this project.

· Some of the references are taken from Outsourcing Strategies http://www.dir.state.tx.us/oversight/outsourcing/Outsource.pdf

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