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Outsourcing

• Jawad Yousaf • June 2009• Welcome Class BBA

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Questions

• What is Outsourcing?

• Why to Outsource?

• How to Outsource?

AN Investigation Of Outsourcing

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What is Outsourcing?• Rendering of business processes i.e. HR,

Administration, Payroll, Supply Chain etc • Transfer of assets such as people, functions,

accessories etc.• “Fundamentally outsourcing is a contract in

which client relies on a supplier for a given service, instead of depending on internal provision” (BA Aubert, M patry, S.Rivard, 2001).

• “Information technology outsourcing describes a process whereby an organization decides to contract out or sell the firms’ IT assets , people and/or activities to a third party supplier, who in exchange provides and manages the assets and services for an agreed fee over an agreed time.” (Kern and Willcocks, 2002)

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• “Outsourcing is the process of transferring of IT/Business services and/or assets to outside supplier rather than done by company’s own employees”. (Jawad, 2009).

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Why Outsourcing?

1. Reduce and control operating cost.2. Free resources for other purposes.3. Resources not available internally.4. Improve company focus.5. Lack of expertise.6. Difficult to manage.7. Competitive pressures.8. Cheaper services.9. Headcount reduction.10. Save time11. Increase Efficiency.

Outsourcing Practices

1. Offshore2. Near shore3. Back sourcing4. Spin off5. Joint Ventures6. Value added outsourcing

Outsourcing Risks

1. Loss of control over outsource operations.2. Lack of innovation3. Risk of loosing customers4. Hidden Cost5. Information security risk6. Process discipline7. Vendor failure8. Government regulations9. Cultural differences10. Resistance11. Imitation12. Opportunistic behaviour of supplier

How to Reduce Risks

• Source Selectively• Don’t go for multiple suppliers• Sign short term contracts• Sign contracts completely• Manage relationship with suppliers• Include termination clause in contracts• Include penalty clause in contracts• Keep your staff in mind• Hire Domain experts• Don’t Outsource Core business/IT processes.• Follow outsourcing process (Models)

Outsourcing Process• All the loss could be ignored by using one of the

following Outsourcing life Cycle.• There are many well known life cycles presented by 1. Cullen et al (2005)2. Lacity and Willcocks (2001)3. Herley and Costa (2000)4. Jones and Klepper (1998)

• All the models highlights the importance of pre and post contract activities.

• Cullen et al (2001) presented the four phased outsourcing lifecycle i.e. engage, architect, operate, regenerate.

Supplier selection

• Not only life cycle but following capabilities in supplier also necessary for successful outsourcing.

1. Organizational Design2. Contract and planning3. Customer development4. Process re-engineering 5. Governance6. Leadership7. Domain expertise8. Behaviour management9. Programme management

TCS

• Oshiri et al (2005) found that Tata consultancy always ensures to follow the eight practices in their outsourcing deals.

Those practices are:-• Copy the organizational structure of client.• Implement knowledge transfer methodology• Implement knowledge retention methodology• Managed expertise of organizational and projects teams• Key focus on expertise development• Offers expertise search mechanism at project level• Implement expertise reusable methodology• Continuously asses the performance of reusable components

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Outsourcing Failure

Majority of outsourcing deals do not reach to an end successfully. The common reasons of failures are

• Poor definition• poor communication• unrealistic expectations• weak selection of supplier• poorly defined roles and responsibilities• poor contract management• lack of commitment from supplier• poor relationship management and ignorance to revise contracts after

some predefined intervals (Lacity and Willcocks 1997; Brandes, 1997).

Failures• Unfortunately many projects fail, there are cases where

organizations with all their determination and good intentions fail to achieve their outsourcing targets. More interestingly, over the time some of the failures repeat themselves with in the same organizations. How can we increase the success rate of IT outsourcing deals, trust is an important factor which can increase the success rate

How to Increase Trust

• Different studies found different factors in order to achieve trust following are the most important factors that are necessary to manage to increase the level of trust with in outsourcing relationship.

1. Contracts2. Security3. Interactions4. Behaviour.

Contracts

Contracts are the foundation of trust and are the basis of getting into any relationship.

• Short term contracts• Long-term contract increases uncertainty and provides

the chances of opportunistic behaviour.• Detailed contracts are more effective to reduce

ambiguity.

Interactions

Every contact with a customer is a step towards positive or negative impact on the relationship i.e. either increases or decreases trust

• Interactions reduce uncertainty• Help to improve and gain knowledge.• Interactions help to identify the best possible ways to

work effectively and efficiently.• enhances the customer satisfaction and instrumental in

identifying the psychological contract expectations. • Regular interactions gradually change the contractual

relationship into cooperative relationship. • avoid conflicts and enhance problem solving

Behaviour

Behaviour is an important factor in creation and maintenance of trust in any relationship.

• Co-operate as long as other party does, by avoiding conflict.

• Avoid taking actions, when there is conflict. • Practice forgiveness after provocation • Adopt practice of transparent behaviour, so the partner

can adopt your behaviour.

Punishing against non co-operation at any time decreases satisfaction and trust. Co-operation increases trust and trust contributes to the confidence in partners’ co-operation (Das and Tang, 1998).

SecurityIn an outsourcing deal client organization loses control over outsourced information and processes, which could be dangerous for client organization to remain in competition. In this scenario trust in outsourcing vendor capabilities regarding data security is necessary.

• Confidentiality• Integrity• Access Control• Availability

IT outsourcing providers with adequate security measures in place are more successful in creating relationships, which are based on trust, whereas preservation of CIA must be based on business security requirements (Khalfan, 2004).