Outsourcing: Different reasons, types and sins

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Outsourcing? Different reasons for outsourcing?

Outsourcing:-

• Outsourcing can be defined as the procurement of products or services from an external vendor, supplier, or manufacturer.
• Analogous to Procurement Management.
• Strategic approach
• Beginning of Outsourcing phenomenon started in 1989 mainly when Kodak outsourced and increased its profit.
• Outsourcing expanded to include BPO other than just I.T. i.e. accounting, HRM, R&D etc)
• Outsourcing to other country gives advantage of labor arbitrage i.e. cheap labour.
• Can be organization-level decision or project-level decision.
• Although low cost is one advantage for outsourcing and offshoring, the objective should be to increase flexibility and quality.

Types of Outsourcing:-
1. Full Insourcing:-

•     Products & services would be retained internally.
•     Project team is responsible for all the project's processes and scope. 

2. Selective Outsourcing:-

•     Best approach
•     Provides greater flexibility to choose which project processes deliverable should be outsourced and which should be kept internal

3. Full Outsourcing:-
    An organization or project acquires all products or services from external sources.
    We would have a virtual organization or project.

Offshore Outsourcing Myths:-
1. IT offshoring is a new phenomenon:- In 1980's, when production of computer chips was transferred to Asia.
2. Offshoring is the one strategy a company should pursue to reduce software development costs:- Using computer aided software engineering tools can improve productivity and reduce development time.
3. IT work that's shipped overseas will stay there:- offshoring will become less attractive because work is repetitive and boring, so it will be automated in future.
4. Offshoring will result in significant unemployment in technology sector:- It creates new global markets for products and services.
5. IT wages will fall across the board because of foreign competition
6. It will become less necessary to teach programming and other technical skills to college students because these skills won't be in such high demand in the US anymore.
7. By hiring programmers overseas, companies can lower development costs by 80% or more:- But additional costs must be incurred such as vendor searches, negotiation, contract development, severance pay for downsized domestic employees, as well as reduced productivity due to morale issues and completion of knowledge transfer to vendor.
8. Quality is lower in offshore IT operations:- almost same errors found in both program made in India and USA.
9. Only routine and mechanical IT tasks are candidates for offshore outsourcing.
10. It's always best to outsource IT work to developing countries with a large, low cost labour pool of programmers. 

Seven Sins of Outsourcing:-
1. Outsourcing activities that shouldn't be outsourced:- 

• Outsourcing results in an automatic reduction of cost and an increase in performance. 
• However this view is non realistic and many organizations outsource to mimic their competitors or success stories in trade journal. 
• A loss of control and the risk of the vendor going out of business can have grave consequences for the company.

2. Selecting the wrong vendor:-
Good vendor should be selected according to two organizations' cultures, as well as a commitment to continuous improvement, flexibility and a long term relationship.

3. Writing a Poor Contract:-
Well-written contract should be precise, complete, provide incentives for the right behavior, balanced and flexible.

4. Overlooking Personnel Issues:-

• Can have negative impact on employees loyalty and sense of job security. Leads to reduced productivity, dysfunctional behaviors, or a mass exodus of employees. Organizations must retain and motivate key employees.

5. Losing control over the Outsourced activity

6. Overlooking the hidden costs of Outsourcing:- hidden costs includes searching for vendors, negotiating and writing the contract, and managing the vendor relationships.

7. Failing to plan an Exit strategy