Contents.
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.
|