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Outsourcing has become a very popular alternative for a
number of very valid reasons. Outsourcing initially emerged as a way
for companies to cut costs by having processes such as manufacturing
and assembly done in overseas locations where costs were much lower.
Lower wages and operating costs both contributed to these reduced
costs.
These lower costs were appealing because they greatly improved the
profit margins for the companies. However, outsourcing is now gaining
in popularity for a variety of other reasons. While cost reduction is
still a primary advantage, other elements such as access to industry
experts, a larger workforce and more flexible options are being
embraced as welcomed advantages offered by outsourcing.
Cost Reductions from Outsourcing
As previously mentioned reducing costs was the original purpose of
outsourcing and although outsourcing has since been demonstrated to
have other significant advantages, cost reduction still remains one of
the prime advantages.
Companies look to outsource tasks which would be more costly to
complete in-house. An example of this type of task would be a software
related task requiring specialized training. Companies who do not have
an on staff employee qualified to complete this task can benefit
financially by outsourcing this task.
There may be significant fees required to retain the services of an
industry expert on a contractual basis but the efficiency of this
individual will enable him to complete the task much more quickly than
it could have been done in-house. If the task were not outsourced an
in-house employee would have had to complete the task and may have
taken significantly longer costing the company more in the long run.
On Call Experts
In the previous section we discussed how having industry experts
available to complete outsourced tasks can result in a cost savings
for the company but having these experts on call also provides the
potential for new opportunities for the company. With experts waiting
in the wings to assist, the company is able to go after larger and
more specialized types of work. This is important because in doing
this the company can find themselves enjoying greater prosperity.
A Larger Workforce
Still another advantage to outsourcing is the benefit of enjoying a
larger workforce when necessary without the hassle of maintaining a
larger staff. Through outsourcing companies can bring in additional
employees on a contract basis during times of prosperity without
worrying about having to lay them off or keep them utilized when the
surge of work begins to wane. This is particularly relevant in
industries which enjoy peak seasons as well as off seasons.
Another advantage of having a larger workforce is the ability to
generate a larger profit. This is important because smaller companies
can find themselves in a position where they can compete with larger
companies for bigger jobs by outsourcing a portion of the workload.
More Flexibility
Finally, more flexibility is another considerable advantage to
outsourcing work. Even the most well planned projects may suddenly end
up behind schedule or under a time crunch due to minor errors, changes
in plans or other incidental activities.
Smaller companies who do not have the resources to compensate for
these inevitable mishaps may find themselves in serious trouble
without the ability to outsource work when necessary. These companies
can take advantage of outsourcing in times of trouble to help them
deal with problems without alienating clients or performing poorly on
a project.
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As the British government tries
to cut costs, Mark Kobayashi-Hillary warns that focusing on
reducing costs rather than thinking strategically will lead to
even greater problems
By: Mark Kobayashi-Hillary
How many years have we been talking about partnership in
outsourcing? Who can remember when it was common to bring in the
suppliers, harass them over the price of a contract and then to
give the deal to the lowest bidder?
Of course that still happens. Sometimes we dress it up in the
guise of third-party advisors, so it’s not the client who is
harassing the supplier directly, it’s the advisory firm, but
things have matured. It’s clear that in most IT deals today there
is more of a focus on best practice and a better appreciation of
accountability.
The disaster that is still playing out in the Gulf of Mexico is a
recent example of that. BP can easily claim that it was not their
employees who caused the rig explosion that is now causing an
ecological nightmare for the southern US. They can do that, but
why bother? They can’t shift the blame to their contractors
because the public doesn’t want to know who contracted whom to do
what. They just blame BP. After all BP contracted those people to
do a job, so if mistakes were made then that’s also the fault of
the contract owner.
But times are hard. We are living through an age of austerity that
means all the years of effort in shifting IT outsourcing from
being about cost reduction to part of an entire corporate strategy
are being forgotten. In fact, as the recession took hold, most
outsourcing programmes were put on ice because of the upfront
costs involved in change management.
So although a business school will teach you that outsourcing your
IT is all about thinking strategically and getting a technology
partner onboard for the long term, it seems that most
decision-makers are still emphasising the cost reduction that can
be achieved.
The British government is a very good case study. For the past
couple of years, the government has been exploring ways to make
technology work more effectively. The government designed a
G-Cloud and an App store system so it would be easy to develop
tools in one part of the government that could then be shared to
another. It wouldn’t matter which IT supplier is working for which
government department as they would all need to conform to a set
of rules about how the applications should work, in much the same
way as Apple vets applications before they can feature for sale in
the Apple app store.
Yet this week, the leaders of the British government have called
in the chief executives of the top twenty service suppliers –
including many IT firms. Their aim was stated publicly before the
executives were even ominously lined up against a government wall.
The government is asking them to immediately reduce their rates,
and then to review the existing contract.
Lawyers involved in outsourcing deals might ask how a customer –
even one as large as a national government – can just call in
their suppliers and attempt to tear up multi-year contracts
negotiated over many months. And the rest of us who advise on best
practice in industry can only tear out our hair as one of the
biggest IT customers in Europe behaves in a way that does nobody
any favours for the long term.
If the British (or any) government needs to make savings fast then
why not call these twenty executives into a room and ask what else
they can do that would help? I’m sure that increased partnership
and commissioning more work with these companies would save more
taxpayer funds than this hardball approach. But blood on the
tracks plays out well with the media so we can expect more trouble
ahead. |
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